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Institutional investors eager to invest in infrastructure

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GLOBAL - Institutional investors are showing a strong appetite for infrastructure, with almost three-quarters seeking to make further investments in the asset class within the next 12 months, a new survey has revealed.

According to Preqin, institutional investors are more eager to invest in infrastructure this year than in 2010, when most cited management fees, carry structures, liquidity, limited partners (LP)/general partners (GP) interaction and hurdle rate as the main barriers for such investments.

But Preqin said the current infrastructure fundraising market remained highly competitive, although the same issues continue to curb investor appetite and capital raising.

One of the main issues for institutional investors remains interaction with GPs, according to Preqin's survey.

In total, 51% of respondents 'disagreed' or 'strongly disagreed' that the interests of investors and fund managers were properly aligned, while 49% believed interests were aligned.

The results show an improvement since last year, when 72% of respondents disagreed that interests between the two parties were suitably aligned.

One investor said: "While there have been many cases of misalignment, mostly leading to poor performance, most successful raisings now consider the ILPA principles and can create an acceptable level of alignment."

In addition, many investors believe fund managers' management fees are way too high compared with the risk/return profile infrastructure assets provide.

Other investors also suggest there is a fundamental difference between the reasons investors look to gain exposure to infrastructure assets (such as for long-term, stable yield) and the profit-orientated aims of fund managers when raising an infrastructure fund.

According to Preqin, the majority of unlisted infrastructure funds (83%) target a net internal rate of return (IRR) of between 10% and 20%, which is lower than the level of returns traditionally sought by fund managers operating private equity or real estate funds, and the potential for very high returns is also much lower in this asset class.

Preqin also notes only 1% of infrastructure funds target an IRR of 25%.

Most institutional investors believe management fees should reflect this lower risk/return profile. 

Nonetheless, the financial crisis led to cuts in management fees, and Preqin stressed that 38% of fund managers of the most recent funds were now charging a fee of less than 2%.

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