Survey: Fees Won't Dissuade Investors From Infrastructure

(August 19, 2011) — Research conducted by Preqin shows that 62% of infrastructure funds use private equity fund management fee structures in the face of investor demand for lower fees.

The research showed that just under two-thirds of infrastructure funds charge management fees of 2% on funds that are currently raising or that have closed in the recent past. This comes despite pressure for lower fees from investors, Preqin found, with more than half of respondents believing that management fees are too high.

“The outlook is generally good for the infrastructure asset class, with almost three-quarters of investors planning to make further fund commitments in the coming 12 months,” commented Elliot Bradbrook, the firm’s manager of infrastructure data. “The study suggests that there is a better alignment of interests between investors and fund managers and there has been a significant drop in the proportion of investors believing that interests need to be better aligned.”

Bradbrook cautioned, however, that there are still clearly issues, especially surrounding management fees. “Further development of the asset class will be dependent on the successful resolution of these issues and improved co-operation between fund managers and investors.”

Furthermore, the survey found that management fees continue to be one area where there is the most dissatisfaction. Yet, frustration with management fees has declined since 2010 when 72% believed them to be problematic.

In 2008, according to Preqin, the median average management fee dipped as low as 1.63%. This year, however, it has risen again to 2%, reflecting the same level as in 2007. Nevertheless, the data provider revealed that some managers — such as KKR and Blackstone (now StonePeak Infrastructure Partners) — have responded to investor pressure to reduce management fees in order to attract investor capital.

Last year, a study by IE Consulting showed a majority of pensions believe misalignment of interests with their private equity managers (GPs) had become more apparent during the crisis. While two-thirds of the schemes surveyed thought the crisis had caused fund managers to act at odds with limited partners’ interests, three-quarters of the pension funds felt their private equity managers had tried to blame the financial crisis for their own investment mistakes.

Additionally, 61% of respondents said they will or have already declined to invest in a new private equity fund vehicle launched by certain managers with whom they had previously invested, as a direct result of poor communication or lack of transparency during the crisis.