Lack of expertise deters investment in infrastructure
GLOBAL - Low investor expertise is one of the biggest barriers to increasing institutional investment in infrastructure, highlighting the need for a credible investor body for the industry, Bfinance clams.
Infrastructure is of growing interest to pension funds and other institutional investors because of its long-term predictable cash flows, but 60% of infrastructure managers surveyed by Bfinance said a lack of investor expertise was a barrier to attracting investment.
Vikram Aggarwal, senior associate at Bfinance, said this lack of expertise led to confusion among some investors over the different sub-sectors within the asset class, ranging from "fairly safe" social infrastructure projects with inflation-linked cash flows, such as hospitals, to more speculative investments, such as renewable energy projects, where there is a higher degree of operational risk.
"There is a wide variation in the types of infrastructure deals being done. It is referred to generically as infrastructure, but its not always understood by the investor what they are investing in," he said.
According to Bfinance research, the vast majority of institutional investors are seeking to gain access to infrastructure through pooled funds - only the largest investors can invest directly or through joint ventures - but Aggarwal said that most of these funds were blind pools where investors did not know what projects they would eventually be investing in.
"Infrastructure is in some ways like real estate in that they are both illiquid and quite opaque," he said.
The survey of 15 infrastructure funds based in the UK, France, US and Australia also highlighted the need for more transparency, with 54% of managers stating they did not publish estimated total expense ratios (total fund operating costs including management fees).
Aggarwal said infrastructure was a little behind real estate in terms of evolution in this area, partly because it doesn't have an investor body such as INREV, the European association for investors in non-listed real estate funds, to drive more disclosure.
"Such a body doesn't exist yet within infrastructure, but it could be the next step. There is recognition that its in everyone's interests to get institutional investors involved and to push for more transparency. But it needs one of the big pension funds to say this is the route we need to go down and to drive it forward. These assets often have 25-30 year concessions so the natural owners are pension funds," said Aggarwal.
The survey found that 67% of respondents expected annualised net target returns of 10-15% from infrastructure in the next three to five years. Given government infrastructure plans around the world, and with state spending limited, many managers believe there is an opportunity for the private sector to get involved.
Aggarwal said: "Theoretically there is the opportunity for good deals so some managers are bullish, and the 10-15% figure reflects this. But this is going into slightly higher risk projects, you can't expect to get that from core investments."
"The recent credit crunch has shown that the asset class is not entirely uncorrelated to the business cycle as investors are sometimes led to believe. Its specialised nature, frequent lack of transparency on fees and absence of a credible investor body to promote best industry practices act as hurdles for institutional investment despite the asset class's obvious attractions," Aggarwal concluded.
The survey also revealed that 60% of investors considered debt to be more difficult to access than equity, in the post-crisis environment, with 53% of respondents believing lenders have become more conservative.
Aggarwal said this was not totally unexpected, as the appetite for real estate and infrastructure related debt had fallen, and financing in general was difficult to access. However, he also noted that respondents suggested some of the better projects were still being financed at nearly the same loan-to-value ratios seen prior to the crisis.