Many investors continue to struggle with the discrepancy between the risk/return profile of infrastructure assets and the level of management fees charged by fund managers utilizing the private equity fund model. Other investors also suggest there is a fundamental difference between the reasons investors look to gain exposure to infrastructure assets (such as for long-term, stable yield) and the profit-orientated aims of fund managers when raising an infrastructure fund.
According to Preqin data, the majority of unlisted infrastructure funds (83%) target a net IRR of between 10% and 20%. This is lower than the level of returns traditionally sought by fund managers operating private equity or real estate funds, and the potential for very high returns is also much lower in infrastructure; only 1% of infrastructure funds are targeting an IRR of over 25%. The majority of infrastructure investors therefore believe management fees should reflect this lower risk/return profile.
In terms of the management fee charged during the investment period for funds currently raising capital and vintage 2010/2011 funds closed, 62% of funds in this category have a management fee of 2%, just under a fifth have a fee of 1.75-1.99%, and 15% have a fee of less than 1.5%. This shows that, despite investor pressure, the majority of fund managers that are currently raising or have recently closed an infrastructure fund continue to use the 2/20 private equity fee structure.
The issue is further highlighted by looking at the average management fee charged by infrastructure fund managers by vintage year. The median fee during and immediately following the financial crisis in 2009 and 2010 was below 2%, but has risen back up to 2% for funds of a 2011 vintage and those funds still raising capital that have yet to begin investing.
However, it should be noted that 38% of managers of the most recent funds are charging a management fee of less than 2%. This shows that the industry is reacting to LP pressure, with prominent private equity firms like KKR and Blackstone (now StonePeak Infrastructure Partners) publicly lowering their management fees to attract investor capital. Many fund managers also have structures in place to reduce the management fee charged in different circumstances, such as in return for a higher level of commitment from the LP.