Asset AllocationFebruary 19, 2014

Investors: The Change We Want in Infrastructure Funds

<em>Fees, transparency, and alignment—investors will allocate to infrastructure, but not just under any conditions.</em>

Reported by Featured Author

(February 19, 2014) — Investors are pouring assets into infrastructure funds at the highest rate since the financial crisis began, but they are not 100% happy with the terms or the pace of changing them, research has found.

Some $38 billion was raised by infrastructure funds in 2013, the highest level since the $45 billion gathered in 2007, according to Preqin, but the data monitor found investors had lingering criticisms of their providers.

“Despite increasing satisfaction among investors with their fund manager relationships, more needs to be done to improve investor and fund manager relations,” Preqin’s annual global report on the asset class said. “In such a competitive market, those managers willing to improve the alignment of interests with investors will increase their likelihood of successfully raising capital.”

When asked about alignments of interest between them and their fund manager, almost two thirds of respondents, some 61%, said management fees were an issue. Preqin found that 63% of funds charged a 2% management fee outside of any other payment for performance.

A third of investors had an issue with the size of performance fees they were expected to pay, with 22% concerned with the structure of this levy.

“Investors are now largely unwilling to buy into the traditional 2/20 private equity fee structure when gaining exposure to lower risk/return infrastructure assets,” Preqin said, adding that and some fund managers were making concessions in this area in order to attract investor commitments.

A third of investors were concerned with the alignment of interests over transparency at fund level and 6% did not think the lock-up period was designed in their best interests.

Despite these concerns, more than two-thirds of investors—66%—told Preqin that they had seen no change from fund managers on terms over the past 12 months. Some 6% said there had been a slight change, but only in favour of the fund manager, while 28% said there had been a slight change in the investors’ favour.

Preqin said fund managers should be doing more to align their fees with what investors think is reasonable.

This month, a paper from custodian BNY Mellon showed investors were focussed on real assets—aside from real estate—to broaden and increase their alternatives portfolio.