Infrastructure, buyouts see big jumps

Infrastructure was one of the fastest growing non-credit alternative investment asset classes, up nearly 72% to $10.8 billion in the 12 months ended Dec. 31, according to Pensions & Investments' annual survey of managers of U.S. institutional, tax-exempt assets.

Managers regained the ground they lost in 2012 when infrastructure assets dropped by 10.4% to $6.3 billion, after showing annual increases every year since P&I began tracking infrastructure as of year-end 2006.

Assets in buyouts managed for U.S. institutions also exhibited double-digit growth, up 14% to $7.7 billion. (The broader category of private equity slipped 6.3% to $40.5 billion from the year-earlier survey.)

Real estate equity also increased, by 3.4% to $293.99 billion for the year ended Dec. 31.

The 25 largest managers of equity real estate account for 86% of the total real estate equity assets reported in 2013, compared with 84% of all real estate equity assets the year before. The largest 25 fared a bit better than the entire group, with their combined real estate equity assets up 5% to $252 billion at year-end 2013.

Within the real estate equity category, domestic assets among the largest 25 managers grew 8% to $229.6 billion while international real estate fell 31% to $17.6 billion.

Meanwhile, the 25 largest real estate equity managers are finding success with timber. Overall, timber assets dropped 6% to $15.5 billion in 2013. But timber assets managed by the top 25 grew by 4% to $4.7 billion during the same time period.

By comparison, the NCREIF Property index rolling four-quarter total return was 10.98%, divided between 5.61% of income and appreciation of 5.16%. The NCREIF Timberland index rolling four-quarter return was 9.69%. The income portion was 2.8% and appreciation was 6.75%.

Real estate investment trust assets grew 6% to $64.7 billion; the total of the largest 25 managers of REIT assets for U.S. institutional clients was up 6% to $62.1 billion. The FTSE NAREIT All-Equity REITs index had a total return of 2.86% for the year ended Dec. 31.

P&I's data on the individual asset classes and strategies are based on assets managed internally for U.S. institutional tax-exempt investors as of Dec. 31.

Once again, J.P Morgan Asset Management topped the lists in both infrastructure and real estate equity. The firm's infrastructure assets grew nearly 5% to $2.6 billion during 2013. During the same period, the firm's total real estate equity assets were up 15% to nearly $30 billion. Most of those assets were domestic real estate, which grew 16% to $29.5 billion, while international real estate equity assets dropped by 23% to $431 million.

“International funds raised a long time ago (are) liquidating (as they come to the end of their lifecycle) and investors were not terribly interested” in international real estate, said Joseph Azelby, managing director at J.P. Morgan Asset Management in New York, where he is head of the firm's global real assets group.

“People have focused on their home markets and only recently have gotten excited about moving outside the U.S.,” Mr. Azelby added. “We couldn't sell anything outside the U.S. until ... (2014). Now we are starting to see the ice begin to thaw.”

Prudential Financial Inc., second on the list of the largest real estate equity managers, also experienced a drop in international real estate assets — down 27% to $1.2 billion — while the firm's total and domestic assets grew, up 4% to $23.3 billion and up 7% to $22.1 billion, respectively.

Prudential executives attribute much of the decrease in international real estate assets to the successful launch of a Mexican real estate investment trust in May 2013. An 87-property industrial portfolio in Mexico that had been managed by Prudential Financial's real estate arm, Prudential Real Estate Investors, was transferred to the REIT.

Kevin R. Smith, Newark, N.J.-based managing director and head of U.S. business at PREI, attributed the overall increase to a combination of asset appreciation and new investor commitments.

PREI is seeing continued strong investor interest across the real estate spectrum, including some evidence that “appetite for core real estate funds is slowing down with investors looking to move up the risk curve into core plus and value added real estate strategies,” he said, in an e-mailed response to questions.

TIAA-CREF again ranked third on the list of the largest real estate managers, with assets up 5.6%, to $21.3 billion. The money management firm was pushed down to fourth position on P&I's list of the top infrastructure managers, even though its infrastructure assets grew nearly 13% to $1.4 billion in 2013. The slide to fourth place was due to additions to the rankings in this year's survey of Brookfield Asset Management, with $2.1 billion in infrastructure, and Nuveen Investments, with about $1.7 billion in infrastructure assets.

Last year, real estate fundraising was up, with more funds closing, said Brad Morrow, senior private markets consultant in the New York office of Towers Watson & Co.

Mr. Morrow said his firm has not witnessed a weakness in international real estate markets. Instead, he attributed the drop in international real estate assets to a timing issue. Managers of international real estate funds coming to the end of their cycle are selling properties and returning capital to clients and have not yet closed a new fund, Mr. Morrow said.

Managers expect infrastructure to continue to be a source of growth.

J.P. Morgan Asset Management's Mr. Azelby expects infrastructure will become “the fastest growing part of our platform in the next five years.”

“Investors have been studying the asset class for a number of years,” he said. “The pipeline of investors has never been as deep and as broad as it is now.”

Infrastructure allocations should increase to around 5% of total investor assets in the next decade, up from less than 1% today, he said.

Assets of fourth-ranked infrastructure manager TIAA-CREF grew 13% to $1.4 billion during the year, as a result of more capital invested in the asset class as well as successes with some of its investments and increased valuations, said Marietta Moshiashvili, managing director and head of direct equity originations for natural resources and infrastructure in New York.

TIAA-CREF has been steadily increasing its allocations to debt and equity infrastructure, said Lisa Ferraro, managing director and head of energy and infrastructure portfolio management. The firm has been investing $500 million to $750 million per year of client assets, which should grow over time, Ms. Ferraro said.

Towers Watson's Mr. Morrow said consultants saw increased interest and growth in infrastructure last year. Investors are attracted to the stable, long-term nature of the assets, he said, making the asset class “a good match for their (investors') portfolios with long-term liabilities.”

In the REIT category, Morgan Stanley Investment Management and Cohen & Steers Capital Management Inc. were first and second on the list for yet another year. Morgan Stanley REIT assets were flat at $8.3 billion and Cohen & Steers assets dropped by 7% to $6.4 billion.

“Returns in the space were flat-ish. Returns were more muted in 2013 than in previous years,” said Ted Bigman, managing director and head of global real estate securities and global infrastructure securities investing at Morgan Stanley in New York.

“We had one market from Jan. 1 until May 21, and then there was a QE (quantitative easing) taper tantrum and the U.S. REIT market performed poorly for the remainder of the year,” Mr. Bigman said. “The U.S. REIT market ended the year up 2.5%.”

Morgan Stanley's business “experienced a bit of churn in 2013,” with new mandates and some investors adding to their REIT accounts, while other investors reduced their REIT exposure, he said.

“We noticed that tax-exempt investors in the U.S. last year favored private real estate and largely ignored listed real estate,” Mr. Bigman said.

Jason Yablon, New York-based senior vice president and portfolio manager at Cohen & Steers, also noted last year's wild ride, with REITs performing extremely well until May 21 when REITs “dropped dramatically until late August. This was most likely caused by investors' over-reaction to the change in interest rates,” he said.

“This year, REIT stocks have rebounded pretty meaningfully,” Mr. Yablon said. “At the end of the day, the primary drivers of real estate stocks are the real estate fundamentals, which are pretty good. ... Jobs are being created, creating demand in commercial real estate in a world where supply is fairly muted.”

Topping P&I's list of buyout fund managers was TIAA-CREF with $3.7 billion down 7% from the year-earlier survey. Abbott Capital Management LLC was second with buyout assets up 6% to $1.7 billion, and New York Life Investments was in the third slot with buyout assets up 22% to $1 billion.

“Two of our (private equity) investment boutiques, GoldPoint Partners and Private Advisors, are active in the private equity buyout market, providing investors access to middle-market companies,” said Yie-Hsin Hung, co-president of New York Life Investment Management, in an e-mail. Asset growth in 2013 was due to the successful closing of its $340 million Private Advisors Small Company Buyout Fund V. The North American growth equity and buyout fund was oversubscribed relative to its $250 million fundraising target, she said.

New York Life also closed the $120 million Private Advisors Co-investment Fund III LP, exceeding its $100 million target.

Also, contributing to the increase in some managers' assets under management are valuations, which were up last year, said Sanjay R. Mansukhani, senior manager research consultant in the New York office of Towers Watson Investment Services Inc., a subsidiary of Towers Watson & Co.

What's more, not all companies in private equity portfolios have been liquidated, causing managers' assets under management to rise, he said.