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.”

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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.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

New research from Deloitte shows that while commercial real-estate deal flow and liquidity are going strong, the longer-term impacts of legislative, regulatory, and accounting reform remains uncertain.

(August 19, 2011) — Research by Deloitte shows that commercial real estate deal flow and liquidity are going strong despite a sluggish economy.

The firm’s “Commercial Real Estate Outlook: Top Five Issues in 2011” report reveals that capital availability, price discovery, and improved fundamentals — driven by alternative financing sources and loan restructuring — are fueling commercial real estate (CRE) recovery.

“This is a positive year for commercial real estate so far. The uncertainty impacting the overall economy and other industries has had less of an effect on the real estate industry,” said Bob O’Brien, vice chairman and real estate sector leader at Deloitte. “It’s important to remember that commercial real estate was the first sector to be hit hard by the downturn so it is further along in rebounding than other businesses. At the same time, the wall of debt maturity that will come due between now and 2015 still may present short and longer term challenges for the remainder of this year and into 2012.”

The study found that the impact of financial regulations on commercial real estate is uncertain. The report stated: “Commercial real estate players are evaluating the potential impact of proposed legislation, regulation and accounting rules on the market while wrestling with uncertainty about how legislation such as the Dodd-Frank Act will be implemented. Other key issues include the Volker Rule, risk retention, lease accounting standards and covered bonds.”

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Furthermore, the study noted that global commercial real estate is likely to fuel investments, despite natural disasters in Japan and political turmoil in the Middle East.

In signs of a rebound of commercial real estate, the head of one of Canada’s most active global investors revealed earlier this year that it is eyeing US commercial property. David Denison, chief executive of the Canada Pension Plan Investment Board (CPPIB), which oversees about $140 billion in assets for Canada’s national pension plan, told the Wall Street Journal that he has witnessed a spike in the availability of commercial real estate in the US, and that he expected that trend to continue.

Largely due to a number of major recent purchases, the fund reported in February that its infrastructure holdings had ballooned over the previous nine months to become 6.8% of the fund’s total assets with a total value of $9.5 billion, up from 4.6% of assets worth $5.8 billion as of last March 31. Meanwhile, real estate assets had grown to $9.2-billion in value representing 6.6% of the fund’s holdings, an increase from $7 billion or 5.5% of total assets last year.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742