WW favours PPP over 'high fee' core infrastructure
UK - Consultancy firm Watson Wyatt has warned high fees on core infrastructure funds are not providing a fair deal for investors and suggested they will be of "little interest" to long-term institutional investors unless they adopt more attractive fee packages.
In a paper entitled 'Improving fees in infrastructure' Watson Wyatt claimed that while it is positive about the use of infrastructure in a diversified asset strategy for clients such as pension funds "the fee arrangements make us much less supportive of some vehicles in which clients can invest".
The firm noted it favours "cheap beta options", such as Public Private Partnership/Private Finance Initiative (PPP/PFI) strategies, but said it was also positive about higher-return added-value strategies which verge on private equity, even though these can charge very high fees.
The Watson Wyatt paper stressed the large number of funds in the middle space - the higher fee core infrastructure fund - will, despite their strategic attractiveness, "be of much less interest until we see a more attractive fee structure for our clients".
Issues raised by the paper include concerns over:Fees based on commitments rather than the invested capital; Management fees of 1-2%; Hurdle rates of around 8%; Carried interest (performance fees) of 20%; Use of full catch-up - after the minimum return has been achieved this allows the manager to receive a higher proportion of the distributions until excess positive performance is split 80:20 to the investor, and Additional fees and charges, such as transaction or financing fees.
Watson Wyatt claimed the management fees of 1-2% are high relative to traditional active equity or bond mandates, and suggested that they appear to be viewed by infrastructure managers as a "significant source of profits".
It therefore proposed the fees should reflect the actual running costs of the fund, while hurdle rates should reflect the specific strategy of the fund and the manager should only earn a performance fee is it is generating alpha.
Watson Wyatt admitted infrastructure is seen as a natural diversifier for institutional investors and as a result has sparked quite a lot of interest, but Jane Welsh, global head of private markets research at Watson Wyatt, warned: "The structures that currently predominate in this area are obviously a good deal for infrastructure managers, but not necessarily for their investors".
She added that while the firm believes in managers receiving fair compensation "these fee structures are currently too high for the value they deliver". And while she admitted fees are a complex area, Welsh warned they should not be "glossed over".
"Added rigour around fees is now leading many more managers to acknowledge that to win long-term institutional money they need to offer investors a fairer deal," said Welsh, adding many of the infrastructure funds which have been set up in response to recent demand "will be of very little interest to our clients until we see more attractive fee packages".
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