The infrastructure industry has grown rapidly over the last decade, in part due to the success unlisted fund managers have had in meeting the portfolio expectations of their investors. However, the asset class is not completely insulated from risk and Preqin’s survey of nearly 130 institutional infrastructure investors and 30 unlisted infrastructure fund managers in June 2017 shows that there are some challenges on the horizon.
Investor Satisfaction Hits 3-Year High
Encouragingly, institutional investors’ general perception of the infrastructure industry has become more positive in the last six months, with 89% of respondents having either a positive or neutral view of the asset class, and 94% feeling that their infrastructure investments have met or exceeded expectations in the last year. Investors continue to see strong risk-adjusted returns from their portfolios and remain committed to the asset class, with over half (53%) of investors planning to commit more capital to infrastructure investments in the next 12 months than in the past year, an increase of 15 percentage points from results seen in December 2016.
Where Will Commitments Go?
The infrastructure fundraising environment remains fiercely competitive, with 178 unlisted vehicles in market. However, there is good news for fund managers seeking to raise North America-focused core energy funds: 50%, 37% and 35% of institutional investors cited that region, strategy and industry respectively as presenting the best opportunities in the current market.
Valuations are the Dominant Theme
The infrastructure fundraising market has been strong in recent years, providing fund managers with a record amount of capital ready to deploy. With a limited supply of investable assets, competition has increased resulting in asset prices climbing higher – 70% of fund managers identified valuations of assets as the key challenge facing the infrastructure industry, followed by 37% identifying deal flow as a key challenge. These are filtering through to institutional investors: 59% of investors identified valuations as a key issue for the infrastructure asset class, with deal flow as their second biggest concern. A further 60% of investors feel that asset prices are expensive, and two-fifths are finding it harder to find attractive investment opportunities compared to a year ago.
How to Stand Out
With the established branded firms attracting the larger ticket sizes, all other managers must be able to display a unique value proposition to institutional investors if they want to stand out from the crowd and secure capital commitments. The largest proportion (45%) of surveyed managers reported that their network was the most important factor in differentiating themselves from other managers. An extensive network of industry contacts, including placement agents, gatekeepers and investors, can have a significant impact on the number of opportunities available to fund managers. One surveyed manager explained that demonstrating “value add through active asset management” may help to attract investors.
What Does the Future Hold?
Two-thirds of institutional investors expect their infrastructure portfolios to perform about the same in the next 12 months as in the past 12 months, although slightly more of those surveyed believe that their portfolios will perform worse (18%) rather than better (15%) in the same period.
Despite these concerns, investor appetite is strong: almost all (96%) of investors surveyed plan to maintain or increase their allocation to the asset class over the longer term. The fact that only 4% are likely to reduce allocations in the long term is indicative of investors’ confidence in the ability of the asset class in achieving portfolio objectives.