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.
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 infrastructure investors look to expand and develop their portfolios, there is a growing trend away from unlisted funds and towards direct investment strategies. These investors are turning to direct investments in order to gain closer control over the assets held in their portfolios, as well as to avoid paying expensive fund manager fees. It also allows assets to be held more easily over the long term rather than being restricted to the lifespan of an infrastructure fund. Many of the world’s most significant infrastructure investors now pursue direct investment opportunities, usually alongside other strategies, but in the case of OMERS and Ontario Teachers’ Pension Plan on an exclusive basis.
This trend towards direct investment has also resulted in greater institutional investor interaction. Even those investors with the necessary resources to go direct are looking at new and more sophisticated ways to club together and increase investment power. The recently launched Global Strategic Investment Alliance platform is a particular example of this, with OMERS eventually looking to pool $20bn in institutional capital for direct investment in mature, large-scale projects with a minimum asset value of $2bn, mainly in North America and West Europe. Other investors have gone down different routes to acquire assets directly, such as CPP Investment Board’s C$3.4bn buyout of listed fund Intoll in 2010, and a similar buyout of an 80% stake in Transfield Services Infrastructure Fund by Ratchaburi in June 2011. The UK government is also working towards a scheme to pool the capital of various UK public pension plans in order to promote further investment in infrastructure.
Despite this, in reality direct investment requires significant internal resources and capital available to invest, which is not an option for the vast majority of institutional investors. Seventy-eight percent of active infrastructure investors have less than 5% of total assets targeted at infrastructure opportunities, 25% with a target of less than 1%. Many of these smaller investors will continue to rely on third-party infrastructure fund managers to handle their investment mandates going forward. Those investors with the resources capable of sourcing, executing and managing direct investments internally will certainly continue along that path, but unlisted funds still have a key role to play, meaning fund managers must continue to adapt their fee and fund structures in order to attract investor capital.