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. 1 alternative assets. intelligent data. 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 info@preqin.com. 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 3 alternative assets. intelligent data. 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 2015 Preqin Global Alternatives Reports PRIVATE EQUITY | HEDGE FUNDS | REAL ESTATE | INFRASTRUCTURE | PRIVATE DEBT The 2015 reports form the most comprehensive review of the alternatives investment industry ever undertaken: 2015 Preqin Global Infrastructure Report Read contributions from some of the industry’s leading figures. Understand the latest trends. 2015 Preqin Global Hedge Fund Report 2015 Preqin Global Real Estate Report alternative assets. intelligent data. Access analysis and statistics on fundraising, performance, deals, investors, fund managers and much more. For more information or to purchase your copies, please visit: ISBN: 978-1-907012-78-5 $175 / £95 / €115 www.preqin.com alternative assets. intelligent data. 2015 Preqin Global Private Equity & Venture Capital Report ISBN: 978-1-907012-77-8 $175 / £95 / €115 www.preqin.com alternative assets. intelligent data. alternative assets. intelligent data. www.preqin.com/reports alternative assets. intelligent data. 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 alternative assets. intelligent data. 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% For more information, please visit: www.preqin.com/infrastructure 0% 10% 20% 30% 40% 50% 60% Proportion of Respondents Source: Preqin Fund Manager Survey, November 2014 7 alternative assets. intelligent data. Source new investors for funds or deals Identify new investment opportunities Conduct competitor and market analysis Search for potential deal partners Develop new business Register for demo access to find out how Preqin’s Infrastructure Online can help your business: www.preqin.com/infrastructure alternative assets. intelligent data.
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