Infrastructure investment is still a relatively new and emerging concept for the majority of institutional investors. As a result, the most appropriate way for LPs to gain exposure to infrastructure assets remains open for debate. Increasing investor concerns over the risk/return profile of the infrastructure asset class, along with the high fees charged by fund managers applying the private equity fund model to infrastructure funds, is causing some investors to look at alternative routes to market. Preqin’s Infrastructure Online service is currently tracking over 720 investors that consider direct infrastructure investments, representing 30% of all active investors in the space.
Direct investors in the infrastructure asset class have an average of $66bn in total assets under management (AUM). This suggests that on average, the size of direct investors tends to be significantly greater than those investors primarily targeting unlisted fund commitments. In fact, non-direct investors have mean total AUM of $36bn, 45% lower than the average for active direct investors. This stems from the fact that expenditures associated with direct investments can be high; direct investors must have a team of experienced infrastructure investment professionals to manage the assets and need to invest higher levels of capital in order to secure an asset. However, for many smaller institutional investors with limited resources, this strategy is simply unfeasible.
It is, therefore, not at all surprising that the unlisted infrastructure fund model has, almost by default, become the primary route to market for most investors over the past decade. However, as many of the larger and more sophisticated investors look to expand and diversify their investment portfolios, there is a growing trend towards direct investment strategies. These investors consider direct investments to be more favourable than unlisted funds because it allows greater control over assets and means they avoid paying expensive fund manager fees. Moreover, direct project equity allows for assets to be held for longer periods of time rather than being restricted to the lifespan of an infrastructure fund.
Despite the barriers to entry, those with the resources to invest directly are more actively pursuing these investments. Canadian public pension funds such as OMERS and Ontario Teachers’ Pension Plan have moved away from making fund commitments and now commit capital exclusively to direct investments. European institutional investors are following suit, with UK-based Universities Superannuation Scheme (USS) recently amending its investment strategy to solely target direct infrastructure investments. A recent example is the purchase of a 50% stake in Portsmouth Marine Terminal (PMT), alongside Alinda Capital Partners.