Limited partners linking fees to strategy

Investors targeting infrastructure funds are increasingly in favour of differentiating fees according to investment strategies, closed-end funds rather than open funds, and creating separate infrastructure allocations. These are among the findings of a new survey from placement agent Probitas Partners.

A survey from San Francisco-based fund placement and advisory firm Probitas Partners has found that limited partners now have little support for the “2 and 20” private equity-type fund model for brownfield assets.

Respondents to the Infrastructure Institutional Investor Trends Survey said they supported differentiated pricing for infrastructure funds based on strategy and risk/return profile and would be willing to pay higher fees and carry for “more active strategies” including rehabilitated brownfield, greenfield and opportunistic.

The appetite for opportunistic approaches is also reflected in increasing demand to invest in these types of funds. The survey found that investors were “more heavily focused” on brownfield strategies and that there was “substantial interest” in the opportunistic end of the spectrum, where higher returns are expected. For the asset class as a whole, investors anticipated returns in the low- to mid-teens.

The survey noted that there was still interest in the private equity-style ten-year closed fund, but that no particular structure was totally dominant. Interest in evergreen or open-ended structures, however, has declined over the last year.

In terms of geography, there has been a “noticeable increase” in interest in Asia, although the strongest interest is still in funds with global, North American or European mandates.

When asked where they would place infrastructure in their portfolios, respondents to the survey were split equally between having a separate allocation specifically for infrastructure and having infrastructure as part of the private equity allocation. The survey found that those with separate allocations were likely to be more mature investors.
Probitas surveyed a wide range of investor groups, with funds of funds being the largest individual group, accounting for 25 percent of those canvassed. Geographically, 39 percent of respondents were based in North America, 27 percent in Western Europe, 14 percent in Japan, and 20 percent elsewhere.

The survey also provided updated global infrastructure fundraising figures through the third quarter of 2010. Having previously been estimated at $15.8 billion, the total for the first nine months of the year has now been nudged up to $16.1 billion. Although well off the 2007 peak, when more than $34 billion was raised, this year’s total may double last year’s $10.7 billion and is on course to surpass the $17.9 billion raised in 2006.