PREQIN SPECIAL REPORT: ALTERNATIVE METHODS OF INVESTING IN INFRASTRUCTURE MAY 2017 alternative assets. intelligent data.
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DOWNLOAD DATA PACK: www.preqin.com/aminf17 FOREWORD As a relatively new asset class, the infrastructure market continues to develop, and as such, institutional investors that have built up experience and sophistication through investment in unlisted vehicles are now searching for alternative ways to increase their exposure and the benefits infrastructure can bring to their portfolios. The demand for alternative structures has been driven by many factors. Raising institutional capital has become more of a challenge in an environment where the largest players are dominant, and alternative structures may help entice investors that are seeking more control over the deal process and more customizable fee structures. Furthermore, infrastructure s ability to generate consistent returns over the long term and recent high distributions also presents problems for investors that have significant amounts of capital to deploy. With some investors limited in options due to the scale required to invest, alternative methods provide another avenue through which to put new capital to work. Although co-investments and separate accounts are less established routes for accessing the infrastructure asset class than for private equity and real estate, investors, particularly the largest institutions, are looking to leverage the experience gained in those asset classes and are seeking the same structures in their infrastructure portfolios. There are significant hurdles for both LPs and GPs to overcome if these models are to become as successful as they have been in the private equity market. Rising costs, human and financial, required for due diligence and the monitoring of assets, as well as inherent time pressures, can all impact the LP/GP relationship and the success of the co-investment, whereas separate accounts require sizeable capital commitments to be viable for both LPs and GPs, making them less suitable for smaller institutions. Preqin s Infrastructure Online contains detailed information on 69 separate accounts and also reveals the appetite of institutional investors for co-investments, separate accounts and joint ventures. We hope you find this report useful, and welcome any feedback you may have. For more information, please visit www.preqin.com or contact info@preqin.com. p4 p6 p7 Investor Appetite for Alternative Structures Fund Manager Activity Outlook for Alternative Structures DATA SOURCE: Preqin s Infrastructure Online is the leading source of intelligence on the infrastructure industry. This constantly updated resource includes details for all aspects of the asset class, including infrastructure deals, fund managers, strategic investors and trade buyers, net-to-investor fund performance, fundraising information, institutional investor profiles and more. For more information, please visit: www.preqin.com/infrastructure All rights reserved. The entire contents of Preqin Special Report: Alternative Methods of Investing in Infrastructure, May 2017 are the Copyright of Preqin Ltd. No part of this publication or any information contained in it may be copied, transmitted by any electronic means, or stored in any electronic or other data storage medium, or printed or published in any document, report or publication, without the express prior written approval of Preqin Ltd. The information presented in Preqin Special Report: Alternative Methods of Investing in Infrastructure, May 2017 is for information purposes only and does not constitute and should not be construed as a solicitation or other offer, or recommendation to acquire or dispose of any investment or to engage in any other transaction, or as advice of any nature whatsoever. If the reader seeks advice rather than information then he should seek an independent financial advisor and hereby agrees that he will not hold Preqin Ltd. responsible in law or equity for any decisions of whatever nature the reader makes or refrains from making following its use of Preqin Special Report: Alternative Methods of Investing in Infrastructure, May 2017. While reasonable efforts have been made to obtain information from sources that are believed to be accurate, and to confirm the accuracy of such information wherever possible, Preqin Ltd. does not make any representation or warranty that the information or opinions contained in Preqin Special Report: Alternative Methods of Investing in Infrastructure, May 2017 are accurate, reliable, up-to-date or complete. Although every reasonable effort has been made to ensure the accuracy of this publication Preqin Ltd. does not accept any responsibility for any errors or omissions within Preqin Special Report: Alternative Methods of Investing in Infrastructure, May 2017 or for any expense or other loss alleged to have arisen in any way with a reader s use of this publication. 3
PREQIN SPECIAL REPORT: ALTERNATIVE METHODS OF INVESTING IN INFRASTRUCTURE INVESTOR APPETITE FOR ALTERNATIVE STRUCTURES INVESTOR APPETITE FOR CO-INVESTMENTS Of all investor types, sovereign wealth funds have the greatest preference for co-investments: all sovereign wealth funds are open to investing through this structure (Fig. 1). Insurance companies and asset managers are also significant users of the co-investment model. These investor types often have large amounts of investable capital to put to work and sizeable investment teams which make co-investments an attractive route to market. Larger investors are more likely to utilize the co-investment model to gain exposure to the asset class. Sixty-eight percent of institutional investors with $10bn or more in AUM co-invest or consider co-investing in infrastructure, as compared with 41% of investors with less than $1bn in AUM (Fig. 2). Larger investors in infrastructure often have greater human resource and expertise in the asset class, and are eager to re-invest high distributions from their existing investments. They are also sometimes able to leverage their relationships with existing fund managers to negotiate attractive fee structures for future commitments based on a coinvestment structure. The majority (52%) of investors surveyed plan to maintain their existing allocation to co-investments in 2017, while 41% expect their allocation to either slightly or significantly increase (Fig. 3). INVESTOR APPETITE FOR SEPARATE ACCOUNTS There is considerable variance in appetite for separate accounts among institutional investors. Eighty-three percent of sovereign wealth funds have infrastructure exposure via separate accounts, the largest proportion of any investor type (Fig. 4). The vast sums of capital that many sovereign wealth funds have at their disposal, as well as their tolerance for illiquidity and their longterm investment horizon, make these institutions particularly suited to this investment model. Additionally, sovereign wealth funds often have a specific mandate within their infrastructure investment strategy that requires them to support key domestic infrastructure projects. Fund managers can therefore structure separate accounts around these mandates and tailor the exposure to accommodate the needs of the sovereign wealth fund. Other investors such as endowment plans and family offices, which typically have smaller assets under management (AUM) and smaller investment teams, are less likely to consider this route to market. The likelihood of an institutional investor investing in infrastructure via a separate account is closely linked to its size. As shown in Fig. 5, 58% of investors with $10bn or more in AUM invest, or consider Fig. 1: Institutional Investor Appetite for Unlisted Infrastructure Co-Investments by Investor Type Proportion of Investors 9 % 2 Sovereign Wealth Fund 52% 8% 2 47% 42% 34% 17% 32% 33% 41% 34% Insurance Company Asset Manager Public Pension Fund Family Office Investor Type 22% 22% 2 18% 6% 13% Endowment Plan 72% 67% Private Sector Pension Fund Foundation Co-Invest Considering Co-Investing Do Not Co-Invest Fig. 2: Institutional Investor Appetite for Co-Investments by Assets under Management Proportion of Investors 9 % 2 26% 15% 59% 35% 14% 58% 32% Less than $1bn $1-9.9bn $10bn or More Co-Invest Considering Co-Investing Do Not Co-Invest Assets under Management 4 Preqin Ltd. 2017 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/aminf17 investing, through this route to market, compared with just 21% of investors with less than $1bn in AUM. Investors with large amounts of capital at their disposal are well suited to the separate account model, which typically requires a sizeable capital commitment to be an effective structure for both the LP and GP. As shown in Fig. 6, the majority (65%) of investors surveyed towards the end of 2016 expected to maintain their existing allocation to infrastructure separate accounts, and 28% planned to either slightly or significantly increase their allocation over 2017, illustrating the increased appetite for this method. Fig. 3: Investors Allocation Plans for Co-Investments in 2017 Compared to 2016 52% 3% 4% 15% Significantly Increase 26% Slightly Increase Stay the Same Slightly Decrease Significantly Decrease Fig. 4: Institutional Investor Appetite for Unlisted Infrastructure Separate Accounts by Investor Type Proportion of Investors 9 % 2 83% 17% Sovereign Wealth Fund 54% 13% 33% Asset Manager 36% 29% 25% 19% 18% 15% 3% 4% 11% 6% 15% 15% 49% Public Pension Fund 56% 69% Insurance Company Foundation 78% 78% 74% Private Sector Pension Fund Endowment Plan Family Office Invest Considering Investing Do Not Invest Source: Preqin Investor Interviews, November 2016 Investor Type Fig. 5: Institutional Investor Appetite for Unlisted Infrastructure Separate Accounts by Assets under Management Proportion of Investors 9 % 2 12% 9% 29% 8% 63% 41% 17% 42% Less than $1bn $1-9.9bn $10bn or More Invest Considering Investing Do Not Invest Assets under Management Fig. 6: Investors Allocation Plans for Separate Accounts in 2017 Compared to 2016 65% 7% 14% 14% Significantly Increase Slightly Increase Stay the Same Slightly Decrease Significantly Decrease Source: Preqin Investor Interviews, November 2016 5
PREQIN SPECIAL REPORT: ALTERNATIVE METHODS OF INVESTING IN INFRASTRUCTURE FUND MANAGER ACTIVITY From 2014 to 2016, the number of infrastructure funds to reach a final close has remained relatively constant, while the aggregate capital secured by these funds has increased (Fig. 7). This concentration of capital among a relatively small number of firms is reflected in the sentiment of fund managers: 82% of fund managers surveyed by Preqin in December 2016 had seen either a slight or significant increase in competition for institutional capital compared with 12 months prior. 15% of fund managers believe offering alternative structures is the most important way to differentiate themselves Beyond this, managers are recognizing the importance of incentivizing investors to commit capital to their funds, with many now offering co-investment rights as a reason to commit to a fund before a first close has been held. Forty percent of managers surveyed planned to offer more co-investments in 2017 compared to 2016, Fig. 7: Annual Unlisted Infrastructure Fundraising, 2009-2017 YTD (As at April 2017) 100 90 80 70 60 50 40 20 10 0 11 53 33 57 26 72 29 90 48 while 27% of managers surveyed planned to offer more separate accounts (Fig. 8). Through providing separate accounts, fund managers benefit from closer relationships and large commitments from the world s biggest investors. As shown in Fig. 9, fund managers saw valuations and deal flow as the biggest challenges facing the infrastructure industry in 2017. Fund managers plans to increase their co-investment offerings may be an effort to gain greater access to 71 72 42 44 65 63 17 No. of Funds Closed Aggregate Capital Raised ($bn) 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD Year of Final Close attractive assets by having extra capital to pursue larger deals. This could deliver outsized returns for investors, as seen in the private equity asset class: of private equity LPs surveyed in September 2015 reported that their private equity coinvestments had outperformed their fund investments, with 46% witnessing returns over 5% greater than those of standard private equity investments. Fig. 8: Fund Managers Plans to Offer Co-Investment Opportunities and Separate Accounts in 2017 Compared to 2016 Proportion of Respondents 9 % 2 58% 2% Co-Investments 27% 67% 6% Separate Accounts Offer More Offer the Same Amount Offer Fewer Source: Preqin Fund Manager Survey, December 2016 Fig. 9: Key Challenges Facing Unlisted Infrastructure Fund Managers in 2017 Valuations Deal Flow Regulation Ongoing Volatility/ Uncertainty in Global Markets Performance Fundraising Fee Pressure 19% 19% 18% 23% 23% 32% 53% 2 Proportion of Respondents Source: Preqin Fund Manager Survey, December 2016 6 Preqin Ltd. 2017 / www.preqin.com
DOWNLOAD DATA PACK: www.preqin.com/aminf17 OUTLOOK FOR ALTERNATIVE STRUCTURES Investor appetite for the asset class remains high, with 53% of investors surveyed planning to increase their allocations to infrastructure over the longer term. However, although there are many funds currently seeking capital (172 unlisted infrastructure funds, targeting $104bn), the larger institutional investors face the challenge of finding a manager that can put sizeable sums of capital to work. Moreover, as shown in Fig. 10, investors received record distributions from unlisted infrastructure funds in 2015 and are therefore likely to look to re-invest this cash in the asset class. This may account for the increase in demand for alternative structures as a means to commit substantial amounts of capital to increase infrastructure exposure. Fig. 10: Annual Capital Called-up and Distributed by Unlisted Infrastructure Funds, 2005 - H1 2016 Capital Called-up/Distributed ($bn) 70 60 50 40 20 10 0 9 4 2 2 2005 2006 20 5 2007 25 3 2008 17 5 2009 Capital Called-up ($bn) 28 9 2010 37 18 2011 29 20 2012 31 23 2013 38 31 2014 Capital Distributed ($bn) 60 60 2015 27 H1 2016 Fig. 11: Notable Infrastructure Separate Accounts Formed, 2013-2016 Separate Account Firm Investor CNP Assurances-Natixis Infrastructure Debt Account Cubico Sustainable Investments Separate Account Gulf Pacific Power QIC-CalPERS Separate Infrastructure Account HUK Coburg/Golding Capital Partners Separate Account Initial Equity Size (mn) Strategy Geographic Focus Mirova CNP Assurances 2,000 EUR Debt/Mezzanine Europe Cubico Sustainable Investments Harbert Management Corporation Ontario Teachers' Pension Plan 2,000 USD Primary Europe, Rest of World CalPERS 900 USD Primary North America QIC Global Infrastructure CalPERS 1,000 AUD Primary Asia-Pacific Golding Capital Partners HUK Coburg 600 EUR Primary Global Arcus Tivana Investment Vehicle II Arcus Infrastructure Partners Tivana Investments 500 EUR Primary Europe Golden State Matterhorn WSIB/GIP Separate Account UBS Global Asset Management Global Infrastructure Partners CalPERS 500 USD Primary Washington State Investment Board North America, Global 500 USD Primary Global DATA SOURCE: Access comprehensive information on over 500 infrastructure fund managers worldwide on Preqin s Infrastructure Online, including total capital raised in the last 10 years, estimated dry powder, number of portfolio companies, investment preferences, direct contact information for key decision makers and more. For more information, please visit: www.preqin.com/infrastructure 7
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