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 is an argument that remains open for debate. However, increasing investor concerns over the risk/return profile of the of the infrastructure asset class and the high fees charged by fund managers applying the private equity fund model to infrastructure funds is resulting in some investors looking at alternative routes to market. Preqin’s Infrastructure Online is currently tracking over 580 investors that consider direct infrastructure investments, which represents 28% of all active investors in the space.
Direct investors in the infrastructure asset class have an average $72bn in total assets under management. 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 assets under management of $39bn, which is 46% 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, due to a lack of resources, this strategy is simply not feasible.
Therefore, it is perhaps 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 away from unlisted funds and towards direct investment strategies. These investors consider direct investments to be more favourable to portfolios as it allows greater control over assets, as well as meaning 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 now commit capital exclusively to direct investments, having moved away from making fund commitments. European institutional investors are following suit, with the UK-based Universities Superannuation Scheme (USS) recently amending its investment strategy to solely target direct infrastructure investments – a recent example being the purchase of a 8.65% stake in Heathrow Airport (formerly BAA) for GBP 392mn.