Unlisted Infrastructure Funds Hit Record Capital High

(October 31, 2013) — Unlisted infrastructure funds have hit a record high of $93 billion in capital available for investments as of October 2013, but completed deals are on the wane, according to a Preqin report.

Around 63% of institutional investors are expecting to increase their allocations to infrastructure in the next 12 months and 27% revealed plans to continue investments at the same amount, according to the report.

“The infrastructure asset class has grown significantly in recent years, with strong investor appetite for infrastructure investment driving substantial growth in fundraising,” said Elliot Bradbook, manager of infrastructure data at Preqin.

North America is expected to experience the largest proportion of investments at $42 billion, with European following second with $33 billion. Preqin projected $18 billion to be invested in Asia and other regions outside of North America and Europe.

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Most of the new money has found its way to the smaller players: available capital in smaller unlisted infrastructure funds with less than $500 million in assets increased to 21% year-to-date from 11% in 2009, the report found.

Larger funds saw less of the new inflows. Unlisted funds with $2 billion or more experienced a decline from 59% in 2007 to 40% in 2013 so far.

And the overall number of transactions was down too—Preqin stated 254 completed transactions had taken place in 2013 to date, a decrease from 405 in 2012 and 389 in 2011.

There are a number of roadblocks which need to be overcome for the levels of deal flow to reflect this surge in interest, according to the report.

“While this strong fundraising market has resulted in unlisted infrastructure fund managers having record levels of dry powder available to invest, there are ongoing issues impacting deal flow, such as high asset valuations caused by the higher levels of capital being raised and greater interest in the most desirable assets,” Bradbook continued.

“Fund managers may not be prepared to pay a higher price for assets that are not forecasted to provide significant levels of return.”

Despite their rising popularity, unlisted funds can make some investors nervous due to some managers’ poor fund governance.

“Unlisted funds need to be aware that if they want institutional capital, they’ll need to offer good governance from the start,” Charlotte Valeur, director of the Global Governance Group, told aiCIO last week.

“We are pushing for the unlisted fund space to give some level of transparency—even just one page detailing the board members, where meetings are held, and what was discussed—that would be a start.”

Opera Solutions has found an increasing trend of institutional investors adopting managed account platforms, with projections of the market growing to $100 billion in the next 18 months.

(October 31, 2013) — The managed account platform (MAP) market, including hedge funds and other absolute return strategies, is growing at a triple-digit rate among large institutional investors, according to a survey.

Opera Solutions quizzed 82 institutional investors and managers with more than $1.7 trillion in total assets and found around $72 billion in assets under management in MAPs. The market is projected to grow to $100 billion in the next 18 months.

The survey reported a new generation of MAPs had risen from the 2008 financial crisis: “An infrastructure for large allocators to invest in hedge funds in addition to the aggregation and distribution services.”

The shift is gaining traction even among corporate pensions, with a great preference to funds of hedge funds (FoHFs). The investors and managers surveyed invested an average of 27% to hedge funds, the report found—endowments allocated most heavily at 27% and corporate pensions measured at 7%.

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Forty-five percent of respondents invested through commingled accounts—both hedge funds and fund of funds—and 43% invested through transparent funds. Commingled funds attracted more endowments and pension consultants than public pensions and wealth management firms, which preferred transparent funds.

A majority of investors, 61%, said they enjoyed better transparency when investing through managed accounts. One endowment investor said MAPs allowed for an enhanced insight into managers’ alpha. Other popular advantages included custody and control of assets and better liquidity.

The largest disadvantage of MAPs was cost, the survey revealed. Almost half of the respondents said investing through managed accounts was too expensive—particularly for foundations, wealth management firms, and pension consultants.

Currently, MAP providers estimate the costs to be between 50 and 100 basis points (bps) of the assets per annum, the survey found. When asked what would be a reasonable price for investing, respondents said 17.5bps, or $1.75 million per billion of assets.

“This represents a large disconnect between the expectations of the institutional investors and the vendors,” the report said. “One of the key drivers of fees related to the service providers such as FoHFs is the number of hedge fund-focused professionals employed at a FoHF vs. another firm. This increases the FoHF’s perceived value proposition to clients.”

Opera Solutions estimated an initial investment cost of $5 million to $10 million to create a MAP, with an additional $2 million to $4 million per year to operate. “This magnitude of cost, along with the expertise necessary to create a MAP, will steer the typical investor away from a ‘build’ and more toward a ‘buy’ decision,” the report said.

Respondents then pointed to increased operational complexity and increased burden on internal staff as other big drawbacks to MAPs. The report found investors could be overwhelmed with the amount of data involved with investing in absolute return strategies.

The good news is that it’s not unmanageable: by encouraging a “proper separation of duties among man and machine,” investors can make use of operational systems that organize, analyze, and forecast data from which to draw conclusions, Opera Solutions claimed.

“The best approach to enforce discipline in a process is systemization,” the report said. “There is no increased complexity, just increased volume of data. The use of better-designed tools dominated by the Man + Machine philosophy can overcome this objection.”

Some respondents, 30%, attributed a negative selection bias to their hesitation or difficulty in investing through MAPs. These investors and managers found a lack of access to managers, particularly as top hedge fund managers do not participate in the strategy.

From the results of the survey, Opera Solutions concluded the asset-loading facet of the MAP structure would become commoditized, leading many operators to outsource their technologies. The high price of hedge funds and FoHFs could lead to a leveling of MAP fees in the next 24 months, the report said.