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 continues to be a contentious topic. However, increasing investor concerns over the risk/return profile 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 of $70bn in total assets under management (AUM), with the average AUM of non-direct investors 46% lower, at $38bn. This stems from the fact that expenditures associated with investing directly in infrastructure can be high; direct investors often require high levels of capital in order to secure an asset and must have a team of experienced infrastructure investment professionals in order to manage and maintain any investments. As a result, for many smaller institutional investors with fewer resources, this strategy is simply not feasible.
Therefore, it is not surprising that the unlisted infrastructure fund model has become the primary route to market for many investors over the past decade, with the expertise of a fund manager a vital tool in accessing the asset class. However, as many of the larger and more sophisticated investors look to expand and diversify their investment portfolio, there is a growing trend away from unlisted funds towards direct investment strategies. These investors consider direct investments to be more favourable to blind pool funds as it allows greater control over assets, as well as avoiding paying manager fees. Moreover, direct project equity allows for assets to be held for longer periods of time 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 an 89.80% stake in Sydney Airport Rail Link.