European investors are tiptoeing back into infrastructure, but this time taking far more precautionary steps to first test the waters, according to consultants and pension fund executives.
With fundraising on the rise again following a drought year in 2009, institutions are pushing for better control over the levels of returns, fees and leverage as they look to add to their infrastructure holdings.
“While (pension fund executives) are learning from previous experience, fund structures (particularly) in respect of duration and compensation models have advanced little from the pre-credit-crunch era and often create a significant mismatch of interest between the investor and manager,” according to Fraser Booth, portfolio manager in the private capital division at the £28 billion ($42 billion) Universities Superannuation Scheme, Liverpool, England. The fund, which already has a 9% allocation to private equity and infrastructure, is developing a co-investment and direct investment strategy in infrastructure.
“Investors and managers alike are searching for a way forward,” Mr. Booth said.
In 2009, fundraising globally totaled €5.4 billion ($6.6 billion), down from as much as €23.1 billion the previous year, according to data from London-based alternative investment research firm Preqin. However, in the first half of 2010, infrastructure funds already have raised €9.2 billion, a 70% increase from the total for all of last year.
“We're stepping through an incredible time in the development of infrastructure as an asset class in Europe,” said Peter Doherty, founder and managing director of CP2 Ltd., Sydney, an Australian infrastructure manager with about A$2 billion (US$1.7 billion) in assets under management, including for some of the biggest pension funds in Europe. “We're moving through the end of what I call the gold-rush stage, in which investors thought infrastructure was this fantastic low-risk asset that produced high returns. We're now entering a period in which expectations are much more realistic.”
The focus is on safer risk/return characteristics compared with pre-crisis infrastructure investments, consultants said. “A number of clients who initially were expecting (an internal rate of return of) about 15% ... now accept a target IRR of 8% to 10%,” said Duncan Hale, senior investment consultant at Towers Watson & Co. in London. “Targeted investments are less aggressive in terms of capital growth and much more focused on yield generation. I think investors are getting back to the core characteristics of infrastructure in terms of stable cash flows and moving further away from the private equity model.”