The 100 largest institutional investors in infrastructure by committed capital invest in the asset class through a range of different routes to market. These institutions have invested an aggregate $212bn in infrastructure opportunities to date, via equity commitments to both unlisted and listed infrastructure funds and direct investment strategies. This represents a 4% increase on the aggregate total investments made by the top 100 investors in 2012.
Although unlisted funds remain the primary route to market for the majority of infrastructure investors worldwide, with 45% targeting unlisted vehicles, an increasing proportion of the largest institutions are now choosing to invest directly. In 2012, fee structures were a key issue within the infrastructure asset class, with some investors believing the lower risk/return infrastructure assets warranted a lower and more realistic fee structure. Fee structures have begun to improve for investors; the median management fee charged by 2012/13 vintage funds stands at 1.78%. Some funds have lowered fees to as low as 0.5% in an attempt to move away from the standard private equity model to provide more attractive opportunities. However, this is a continuing source of friction between GPs and LPs and in turn, there has been a growing tendency among larger LPs to invest directly in projects in order to avoid paying expensive fees while having more control over their investment portfolios. Sixty-three percent of the top 100 institutional investors invest in infrastructure through direct investments, making use of their more developed and expansive resources.
Direct investments are an unrealistic option for smaller investors with less available capital. In fact, of the LPs featured on Preqin’s Infrastructure Online database, outside of the top 100 institutional investors, only 15% invest in infrastructure through direct commitments. As a result, the majority of smaller LPs still rely on third-party fund managers to provide access to infrastructure assets. Large investors will also invest in infrastructure funds alongside other strategies, as long as these opportunities are cost effective and conducive to their investment strategy. Ninety percent of the top 100 institutional investors in infrastructure currently invest via unlisted funds and just 23% invest in listed vehicles.
The preference for the different routes to market appears to shift according to investor size, reflecting the thesis that larger firms have a greater preference, and ability, to invest directly. When the top institutional investors in infrastructure are split into thirds, 88% of the top 33 investors have a preference for investing directly, while 61% of the mid-range third invests directly and just 39% of the lower third make direct investments. In contrast, 94% of the entire group look to invest in unlisted funds, which emphasises the importance of the unlisted model even for the majority of the top investors in the market.