Sharp Rise in Infrastructure Inflows, and Asset Managers Notice

(July 3, 2013) -- Unlisted infrastructure funds raised 77% more capital during the first half of 2013 than the same period last year, according to Preqin data.

That is a $5.9 billion dollar increase year-on-year, from $8.2 billion to $14.5 billion.

In May 2013, Macquarie European Infrastructure Fund IV was the largest vehicle to reach a final close, raising $3.56 billion in investor capital.

A total of 10 infrastructure funds also reached an interim close during the second quarter of 2013, raising an aggregate $2.4 billion. There are now 144 unlisted infrastructure funds in the market, together targeting $93 billion in investor capital.

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Major asset managers are on board, too.

JP Morgan Asset Management has added seven new infrastructure specialists to its global real assets team in the last seven months alone, culminating July 3 with a new CIO. Matt LeBlanc, formerly a private equity energy specialist ArcLight Capital Partners, will be responsible for the firm's OECD infrastructure equity platform, worth roughly $8 billion.

In a recent paper, the asset management firm predicted portfolio allocations to real assets—particularly infrastructure—could rise from the 5% to 10% average today to 25% in the next decade, as institutional investors search for growth in less-explored assets. In light of the research, the firm said it plans to make "significant" investments of its own in infrastructure.

Japan's Pension Fund Association recently joined the growing infrastructure investment trend when it took a stake in a US gas-fired power plant—Michigan's Midland Cogeneration Venture. The pension fund also plans to spend $1.25 billion on 10 overseas infrastructure projects such as pipelines and harbors, CIO Daisuke Hamaguchi, said this week, the Wall Street Journal reported.

More institutional investors will be following Hamaguchi's model, according to Elliot Bradbrook, Preqin's infrastructure data manager.

"There is still substantial investor appetite for the asset class, and this will likely drive further fundraising success in 2013 for fund managers that can demonstrate a consistent track record and investment strategy," Bradbrook said.

(July 3, 2013) — Three of the world’s largest custodian banks could be in line for a downgrade as rating agency Moody’s has begun a review of their on-going profitability.

BNY Mellon, State Street, and Northern Trust are to undergo review, Moody’s announced on July 2, over concerns they are not earning enough revenue on their main business lines.

BNY Mellon, with $23.6 trillion, and State Street, with $25.4 trillion, claim spots in the top three custodian banks—in terms of assets—alongside JP Morgan. Northern Trust is slightly behind with $5 trillion. However, revenue on most of their business lines is small, Moody’s said.

“These profitability challenges are driven by the aggressive pricing of all three banks’ core custody products and services, such that their overall fee revenue is roughly similar to their total expenses,” Moody’s said in a statement.

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“Despite each of the banks’ significant market share, pricing in the core custody business is very competitive, resulting in narrow margins. This makes the banks reliant on revenue from ancillary services to add to profitability, but these revenue sources have come under pressure.”

Moody’s highlighted that net interest income had been constrained by low interest rates, foreign exchange revenue had been hurt by lower volatility and increased scrutiny of pricing, and securities lending revenue had declined due to lower demand.

Custodians have branched out in recent years and offered a league of other services to their investors in an effort to generate revenue while often giving their basic custody products for little or no fee.

“The review will consider if the banks are overly dependent on ancillary services to generate a healthy level of profitability,” Moody’s said.

The number of law suits faced by the two largest banks under review is also a concern for the ratings agency, it said. Each is fighting legal battles with large institutional investors about various actions.

Additionally, banking regulation Basel III is to apply to the institutions and could potentially demand a shake-up in their portfolio to satisfy capital requirements.

BNY Mellon’s role as a dominant clearing bank is also a concern for the ratings agency due to inherent operational risk and its capital ratio, which-in simple leverage terms-is “materially weaker than those of its peers”.

However, any downgrade would limited to one notch, Moody’s said, due to the overall strength of the banks’ businesses, which included significant asset management franchises.

State Street and Northern Trust declined to comment; BNY Mellon had not returned requests for comment by the time of going to press.