Infrastructure Funds of Funds Characteristics - February 2013

by Stephen Yates

  • 26 Feb 2013
  • INF

The infrastructure funds of funds market remains a niche area of the unlisted infrastructure space. However, as the primary infrastructure fund market matures, an increasing number of infrastructure and real asset fund of funds vehicles have been launched. Infrastructure and real asset fund of funds managers currently make up almost 6% of the 374 infrastructure fund managers active in the market. In total, managers have closed 30 fund of funds vehicles, raising an aggregate $4.6bn, which amounts to 2% of the overall aggregate capital raised by all infrastructure and real asset funds to date. In addition, there are 11 infrastructure and real asset fund of funds currently in market seeking a further $2.5bn.

Fund of funds vehicles provide a way to access the infrastructure asset class for investors that may lack the resources necessary to construct a diversified infrastructure portfolio. Investors are able to establish a diversified infrastructure portfolio by spreading capital across numerous primary unlisted infrastructure funds, with a varied geographic and industry outlook. In addition, investors often utilize fund of funds vehicles when looking to commit capital in new areas of the infrastructure and real asset market, where they may lack experience, before investing directly in primary funds. However, the additional layer of fees required to invest in a fund of funds vehicle often acts as a deterrent from an investor perspective, with infrastructure returns traditionally lower than in private equity. This, combined with the growing ability of primary fund managers to satisfy smaller investor needs, means that fund of funds managers have found it more challenging to attract capital commitments.

The majority of infrastructure and real asset fund of funds managers target global investments, with 86% pursuing a multi-continental strategy. North America is the most preferred market for these firms – with 67% targeting North American funds compared to 57% that will invest in European opportunities. Twenty-nine percent of infrastructure and real asset fund of funds managers will consider exposure within Asia- and Rest of World-focused vehicles, showing that investment in emerging markets is growing significantly.

Europe continues to be the most prominent region for fund of funds managers to be situated, with Europe-based managers representing 57% of the overall universe. Twenty-four percent of Europe-based fund of funds managers are located in Germany, with Switzerland, France and the UK each home to 10% of fund of funds managers and the remainder located in Luxembourg. The remaining 43% of infrastructure funds of funds managers are based in North America.

The fund of funds market may become an increasingly attractive option for investors in coming years. Fund of funds vehicles provide a diversified route to the infrastructure market which, in the face of continued economic instability, is likely to become an increasing appealing concept to smaller investors with little previous experience within the infrastructure market.

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