2015 Preqin Global Infrastructure Report: Fund Manager Outlook

The 2015 Preqin Global Infrastructure Report - Fund Manager Outlook
2015 Preqin Global
Infrastructure
Report
Fund Manager
Outlook
ISBN: 978-1-907012-80-8
$175 / £95 / €115
www.preqin.com
alternative assets. intelligent data.
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The 2015 Preqin Global Infrastructure Report - Fund Manager Outlook
Foreword
Infrastructure continues to develop into an established and important asset class, but as ever more players enter the market,
the landscape is becoming ever more competitive. Understanding the views, concerns and future plans of infrastructure fund
managers provides a vital insight into the most important issues in the infrastructure market today. This report is an excerpt from
the 72-page 2015 Preqin Global Infrastructure Report and presents the results of a survey of 57 infrastructure fund managers
undertaken by Preqin in Q4 2014. We are also delighted to include an interview with Karl Kuchel from Macquarie Infrastructure
Partners, who shares his insight on the market.
Encouragingly, debt financing for infrastructure investments appears to be easier for fund managers to source, with 56% of
those surveyed stating that the availability of debt is better than 12 months ago. However, with many fund managers looking to
deploy greater amounts of capital in infrastructure opportunities, a consequence of this is increasing competition for assets, with
60% of fund managers believing that competition for investments has increased over the past 12 months.
In terms of institutional appetite for the asset class, 86% of fund managers believe that investor appetite for infrastructure
has increased over the past year, among public and private sector pension funds in particular. Nonetheless, as investors
increasingly target fund managers with a proven track record, competition for institutional capital remains high, with 75% of fund
managers believing there has been an increase or a significant increase in competition.
2015 Preqin Global Infrastructure Report: Fund Manager Outlook provides insight into the future investment activity of
infrastructure fund managers and their views on the current market. This report supplements the detailed information on these
firms available on Preqin Infrastructure Online, which contains extensive profiles for over 440 infrastructure fund managers,
featuring contact information for all key staff, investment criteria, past performance, investor relationships and much more. We
hope you find this report useful, and welcome any feedback you may have.
For more information, please visit www.preqin.com or contact [email protected].
Key Facts
56%

2
of managers believe the
availability of debt financing is
better than 12 months ago.
86%
of managers say investor
appetite has increased in the
last 12 months.
61%
of managers plan to offer more
co-investment opportunities to
investors in 2015.
60%
of managers are reviewing
more investment opportunities
than 12 months ago.
75%
of managers believe there is
more competition for investor
capital than 12 months ago.
34%
of managers believe regulation
will negatively affect the
infrastructure landscape in
2015.
© 2015 Preqin Ltd. / www.preqin.com
The 2015 Preqin Global Infrastructure Report - Fund Manager Outlook
A Review of the Infrastructure
Market in 2014
- Karl Kuchel, Senior Managing Director & COO,
Macquarie Infrastructure Partners
How has the North American
infrastructure market evolved in the
past year?
While Canada remains a mature
infrastructure investment market, there
are more opportunities in the US to
invest as acceptance and understanding
of private involvement in infrastructure
continues to increase. As such, we
expect to see increased market activity
in the North American infrastructure
market. Investment opportunities in the
US continue to be dominated by private
or take-private transactions, although
more public-private partnership (PPP)
opportunities are expected as public
agencies look to the private sector to
help deliver critical infrastructure. Our
investment pipeline in the US continues
to be dominated by private-to-private or
take-private transactions although more
PPP opportunities are expected.
How has the US PPP model developed?
An increasing number of US states
and other public sector participants are
considering ways in which they can
partner with the private sector to help meet
their infrastructure needs. Awareness of
the infrastructure gap in the US continues
to grow as does the realization that
governments alone will not be able to fund
all essential projects, which should lead
to additional private sector investment
opportunities.
One challenge for the US PPP market is
that a number of states lack a programmatic
approach to project procurement and risk
allocation, which adds significant time
and cost to project development and
completion. However, we do see positive
developments in this area, including the
emergence of organizations, such as
the West Coast Infrastructure Exchange,
which focus on serving as ‘best practice
centers’ to establish guidelines to improve
the delivery of PPPs.
How much competition is there when
investing? How will this impact your
investment strategy in 2015?
There has always been strong overall
buyer interest in high-quality infrastructure
assets, although the identity and
characteristics of these buyers has varied
over time. There is currently strong interest
in high-yielding infrastructure assets given
the low interest-rate environment, as well
as demand for assets that perform well
in a rising interest-rate environment.
We expect institutional investor interest
to continue to increase in 2015 as they
recognize the role that infrastructure can
play in a well-diversified portfolio. While
we expect interest to increase, investors
differ in their ability to access and execute
transactions. Investors with deep sector
knowledge, industry relationships and
sourcing capabilities should be able to
access assets outside of full auction
processes, which can provide better riskadjusted returns.
Do you have any concerns about asset
pricing?
In general terms, assets at the core end of
the infrastructure risk spectrum remain fully
priced. The low interest rate environment
has investors looking increasingly at
these assets to deliver yield that is not
being delivered through their fixed income
portfolios. An experienced manager has
to be disciplined and must be able to add
value to its investment over time, through
mitigating business risks and driving
operational and other improvements over
time. Investors also need to consider how
these assets perform in a rising interest
rate environment and leverage needs to
be sized appropriately to provide sufficient
flexibility throughout the economic cycle. If
investors remain disciplined, they should
be able to avoid overpaying for assets
particularly those at the core end of the
spectrum.
Is it harder to put capital to work than a
couple of years ago?
We continued to deploy capital on a
disciplined basis in 2014, with investment
pace at a similar level to previous years.
Again, the key to successful deployment
is using strong relationships and sourcing
capabilities to increase deal flow and
make investments outside of competitive
auction processes. If an investor
or general partner does not have a
proprietary sourcing network or capability
then it will be more difficult for them to
deploy capital and achieve attractive
returns in the current market.
Given the essential nature of infrastructure,
these assets often have a high community
profile and are subject to approvals and
ongoing oversight by regulators and
government entities. This is not going to
change ─ investors need to understand
this complex environment in order to
successfully close transactions and
manage the assets after close. Investors
with extensive experience and a strong
track record managing infrastructure
assets definitely have an advantage
in securing the approvals needed for
acquisitions such as regulated utilities.
Which types of firms are you typically
competing with for assets? Is this
changing?
The type of firms we compete with varies
from sub-sector to sub-sector, as well as
based on the maturity of the asset in its
life cycle (for example, pre-construction,
expansion, steady state etc.) As I noted
earlier, there has always been strong
buyer interest for high quality assets
and we expect that to continue. Listed
strategics are particularly active in the
current market as they are looking to
capitalize on a combination of their share
price strength and low cost of debt to
pursue accretive acquisitions.
How has the availability and pricing of
debt changed in the past year?
Debt markets remain very favourable for
investment grade infrastructure assets. At
the moment, the pricing and tenor offered
by the bond market is very attractive
relative to traditional project finance
banks, and we have been proactively
extending maturities in the bond market
over the last 12 months.
Are there any infrastructure sectors
where you feel there are particularly
good opportunities?
Macquarie
Infrastructure
Partners
(MIP) seeks to develop a diversified
infrastructure portfolio for its investors
and so we are always looking for good
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The 2015 Preqin Global Infrastructure Report - Fund Manager Outlook
opportunities across all the sectors that we
follow ─ utilities and energy, transportation,
communications infrastructure and waste
management. As a long-term manager,
we have had the benefit of owning assets
through a number of economic cycles
and this directly informs the business
plan assumptions that we use for new
acquisitions. While infrastructure investor
interest has risen sharply in sectors such
as midstream energy and long-term
contracted power assets, we also continue
to pursue opportunities in other sectors
that have not performed as strongly
over the last few years, such as GDPcorrelated transportation assets. At the
end of the day, it is about finding assets
with the key infrastructure characteristics
that our investors want, that are priced to
provide attractive risk-adjusted returns.
Are you seeing an increase in
institutional investor appetite for
infrastructure?
Are there any sectors you will be
avoiding in the coming years?
Institutional
investor
interest
in
infrastructure remains strong as they
increasingly see the benefits of the asset
class (for example, stable operating
cashflows, yield, inflation hedge) and
how it can add to the diversification of
their overall portfolio. Many investors are
either establishing a specific infrastructure
allocation or investing in infrastructure as
a subset of their real assets portfolio.
MIP’s infrastructure investment strategy
has been consistent over the last 10
years and now spans four vintages since
2003. We expect to continue with this
strategy. On avoiding particular sectors,
I would just note that we are naturally
cautious when there is a sharp surge in
interest from new market participants in a
particular sector, as this can often lead to
over-priced assets.
Macquarie Infrastructure & Real Assets
MIP is managed by Macquarie Infrastructure and Real Assets (MIRA), one of the largest, most experienced alternative
asset managers in the world. MIRA specializes in infrastructure, real estate, agriculture and other real assets via public
and private funds, co-investments, partnerships and separately managed accounts.
MIRA has over $45bn in equity under management, including a global portfolio of over 100 infrastructure investments in 27
countries. With 400+ professionals globally, MIRA is organized into regional investment teams of professionals who invest
in and manage local investments in real assets.
MIRA’s regional focus aids deal flow and execution and is fundamental to its philosophy of long-term asset management
in the real assets sector.
www.MIRAfunds.com
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The 2015 Preqin Global Infrastructure Report - Fund Manager Outlook
Fund Manager
Outlook for 2015
Infrastructure fund managers appear
to be bullish regarding the amount of
capital they intend to commit to the asset
class in the next 12 months, with 65% of
managers surveyed by Preqin planning
to deploy more capital in the asset class
in 2015 than they did in 2014, and a
considerable 27% planning to invest
significantly more capital (Fig. 1). Just
11% of managers plan to invest less
capital in infrastructure assets in the next
year.
Fig. 1: Amount of Capital Fund Managers Plan to Deploy in Infrastructure
Assets in 2015
11%
27%
More Capital than in 2014
25%
The increasing availability of financing
for infrastructure investments plays an
important part in managers’ future plans
for investment, with 56% of surveyed
fund managers stating that the availability
of debt is better than 12 months ago,
and just 4% stating that it is worse. The
overall consensus among fund managers
appears to be that banks will provide
the majority of their financing in 2015,
with 68% of respondents stating so, as
shown in Fig. 2. Twenty-seven percent
of respondents believe that institutional
investors will provide the majority of debt
financing, with a further 47% stating that
these lenders will provide a small amount
of financing. The infrastructure debt fund
market has grown in recent years and,
although it remains in its infancy, more
than two-thirds of respondents expect to
use debt funds as a source of capital to
some extent in 2015, though none expect
them to provide all funding.
Source: Preqin Fund Manager Survey, November 2014
Competition to Deploy Capital
Increasing appetite for the infrastructure
asset class and a much improved
debt market is leading to a much more
competitive landscape. A sizeable 60%
of fund managers believe competition
for assets has increased over the
past 12 months, with one stating
that “competition is severe”; no fund
managers responded that competition
had decreased. In particular, Fig. 3
reveals that 37% of managers believe
they are competing more frequently
with institutional investors for assets as
46%
Will Provide a
Small Amount of
Financing
40%
30%
31%
33%
4%
Will Provide
Little/No
Financing
Capital
Markets
0%
24%
Infrastructure
Debt Funds
10%
23%
Institutional
Investors
20%
Source: Preqin Fund Manager Survey, November 2014
25%
37%
80%
30%
Competing More
Frequently
70%
60%
No Change
50%
40%
60%
72%
61%
30%
Competing Less
Frequently
20%
10%
0%
4%
2%
11%
Trade/
Strategic
Investors
56%
47%
90%
Institutional
Investors
68%
50%
100%
Will Provide All
Financing
Will Provide
Majority of
Financing
more institutions look to access the asset
class directly, and 30% believe they are
competing more frequently with trade or
strategic investors. Competition between
managers is also strong, with a quarter
of fund managers stating that there
is more competition from this area. A
consequence of the growing competition
is that asset valuations have increased
considerably, and 44% of infrastructure
fund managers believe that it is more
difficult to source attractive investment
opportunities than it was a year ago,
while just 10% believe it is easier.
Fig. 3: Fund Managers’ Views on Whether They Are
Competing More or Less Frequently with Different Groups
for Assets
Fund
Managers
0%
21%
70%
60%
Significantly Less Capital than
in 2014
38%
Proportion of Respondents
0%
13%
27%
80%
Banks
Proportion of Respondents
2%
5%
90%
Same Amount of Capital as in
2014
Less Capital than in 2014
Fig. 2: Fund Managers’ Views on the Importance of
Various Types of Lenders as Sources of Debt Financing for
Transactions in 2015
100%
Significantly More Capital than
in 2014
0%
Source: Preqin Fund Manager Survey, November 2014
5
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The 2015 Preqin Global Infrastructure Report - Fund Manager Outlook
100%
90%
31%
80%
70%
60%
24%
23%
More Appetite
for Infrastructure
49%
68%
68%
63%
No Change
50%
40%
63%
30%
Less Appetite for
Infrastructure
2%
2%
6%
2%
4%
Foundation
0%
Endowment Plan
0%
Family Office
32%
Sovereign
Wealth Fund
0%
74%
36%
32%
Insurance
Company
10%
Private Sector
Pension Fund
20%
75%
49%
Public
Pension Fund
Encouragingly, for those firms marketing
new funds, institutional appetite for
infrastructure appears to have increased
over the past 12 months, with 86% of
fund managers stating that they have
seen an increase in investor appetite.
Fig. 4 reveals that it is typically the
larger investors such as public and
private sector pension funds, insurance
companies and sovereign wealth funds
that are looking to put more capital
to work. In contrast, there does not
seem to be the same interest from the
typically smaller types of institutional
investor, with managers seeing less
growth in appetite from endowments and
foundations. However, across all investor
types, there is little sign of declining
appetite, indicating that confidence
in the asset class extends across the
investor community and suggesting that
fundraising in 2015 will remain strong.
One fund manager stated that “investor
appetite is increasing across all sectors,
from retail to institutional, driven by longterm low interest rates, desire for yield,
inflation fears and capital protection”.
Fig. 4: Fund Managers’ Views on Whether They Are Seeing More Appetite for
Infrastructure from Different Types of Investor
Proportion of Respondents
Investor Appetite for Infrastructure
Source: Preqin Fund Manager Survey, November 2014
Fig. 5: Fund Managers’ Views on the Competition for Investor Capital
Compared to 12 Months Ago
4%0%
Despite this strong investor appetite,
competition among managers for
investor capital remains high, with 75% of
managers believing that there has been
an increase or a significant increase in
competition for capital compared with
12 months ago, and just 4% stating
that there has been a decrease (Fig. 5).
Although fundraising remained relatively
strong in 2014, the number of funds to
close declined considerably as capital
became
increasingly
concentrated
among a smaller selection of managers.
Consequently, it remains very difficult
to stand out in a crowded fundraising
market.
Significant Increase in
Competition Compared with 12
Months Ago
12%
Increase in Competition
Compared with 12 Months Ago
21%
No Change
Decrease in Competition
Compared with 12 Months Ago
Significant Decrease in
Competition Compared with 12
Months Ago
63%
Source: Preqin Fund Manager Survey, November 2014
Fig. 6: Fund Managers’ Plans to Offer Alternative Structures to Investors in
2015
100%
90%
Proportion of Respondents
Fund managers are also frequently
adapting to the changing demands of
investors, with many planning to offer
institutions
infrastructure
exposure
through structures such as separate
accounts and co-investment rights,
rather than solely through pooled
funds. These can provide investors with
access to the skill in deal sourcing and
asset management provided by a fund
manager, along with greater control
over the direction of their capital and
the opportunity to gain more exposure
to assets they view as attractive. Fig. 6
reveals that 46% of managers plan to
offer more separate accounts over the
next 12 months, and a considerable
61% of fund managers are planning
to offer investors more co-investment
opportunities. However, as stated by
one fund manager, “a limited proportion
of investors can realistically undertake
80%
46%
70%
61%
Plan to Offer
More to Investors
60%
No Change
50%
40%
30%
Plan to Offer Less
to Investors
54%
34%
20%
10%
0%
0%
Separate Accounts
5%
Co-Investment Opportunities
Source: Preqin Fund Manager Survey, November 2014
6
© 2015 Preqin Ltd. / www.preqin.com
The 2015 Preqin Global Infrastructure Report - Fund Manager Outlook
separate accounts and co-investments,
as most do not have the team”.
With
increasing
demands
from
institutional investors for information
on their underlying holdings and fund
performance, many fund managers are
looking to grow the size of their investor
relations teams, particularly as they
realize the importance of strong backing
from existing investors when they come
back to market with a new fund. As a
result, 39% of managers plan to increase
the size of their investor relations team
over the next 12 months, while none
expect their team to shrink in size.
Fig. 7: Fund Managers’ Views on How Regulation Will Affect the Infrastructure
Landscape in 2015
16%
Change for the Better
34%
No Change
Change for the Worse
Regulation
Many infrastructure fund managers view
recently introduced regulation, such
as the AIFMD, negatively, with over a
third of managers (34%) stating that
they believe regulation will detrimentally
impact the infrastructure fund market in
2015 (Fig. 7). As stated by one manager,
“regulation such as AIFMD has the
effect of increasing cost, without any
discernible benefits to investors”. The
introduction of regulation has meant that
many managers are planning to increase
the size of their compliance teams, with
36% of respondents intending to do so.
When asked specifically if they were
compliant with AIFMD requirements
for marketing funds within Europe, a
relatively significant 50% of respondents
stated that their funds are already
compliant, with a further 16% stating that
they will be compliant by H1 2015 (Fig.
8). Many fund managers appear unsure
of local requirements of the AIFMD due
to significant variations between EU
states, and as such, 14% of managers
are waiting for final changes and
guidance from local regulatory schemes.
Just 5% of managers do not plan to be
compliant. When asked why they were
not marketing under the AIFMD, 52%
responded that they are uncertain of local
compliance requirements, and a further
30% said that they are not targeting EU
investors (Fig. 9).
Data Source:
Preqin’s Infrastructure Online
contains detailed profiles for over
440 fund managers, including total
capital raised in the last 10 years,
available dry powder, strategic and
geographic preferences and more.
50%
Source: Preqin Fund Manager Survey, November 2014
Fig. 8: Fund Managers’ Compliance with the AIFMD
Funds Are Already Compliant
50%
Funds Will Be Compliant by H1 2015
16%
Waiting for Final Changes and
Guidance from Local Regulatory
Scheme
14%
Will Not Market Within the EU
14%
Do Not Plan to Be Compliant
5%
0%
10%
20%
30%
40%
50%
60%
Proportion of Respondents
Source: Preqin Fund Manager Survey, November 2014
Fig. 9: Fund Managers’ Reasons for Not Complying with the AIFMD
Uncertain of Local Compliance
Requirements
52%
Not Targeting EU Investors
30%
Cost of Compliance
4%
Other
13%
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0%
10%
20%
30%
40%
50%
60%
Proportion of Respondents
Source: Preqin Fund Manager Survey, November 2014
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