Appetite for both listed and un-listed infrastructure funds is gathering momentum, and this means inflows.
The positive traction has been partly enabled by the asset class’ strong fundamentals and resilience during the recent challenging macro conditions.
Alongside the favourable fundraising environment, managers of infrastructure funds are facing some operational and regulatory headwinds, developments which are prompting more firms to embrace outsourcing.
An asset class going from strength to strength
The market for listed and unlisted infrastructure today is a compelling one, evidenced by the industry’s rapid growth.
On the London Stock Exchange Group, for example, there are now over 30 listed infrastructure funds, with a combined market capitalisation of $31 billion. According to Preqin data, un-listed infrastructure is one of the fast growing alternative asset classes in the market, having accumulated $139 billion (at Q3 2022) last year, with assets under management (AUM) surging past the $1 trillion mark[1]. Preqin said that it expected infrastructure’s AUM to keep expanding at a compound annual growth rate (CAGR) of 13.3%[2].
So what is so enticing about infrastructure funds for investors?
Aside from its decent long-term return track record, infrastructure is often seen as an effective hedge against rising inflation and interest rate risk:
- Critical infrastructure providers such as water and electricity companies are subject to strict regulation in terms of how much profit they can earn off their assets, which ensures a steady cash flow stream and inflation-linked revenues[3].
- Additionally, these assets are also fairly well protected against losses during recessions, as people still need to pay for essential services like electricity[4]. As a result, infrastructure is currently a highly sought after asset class.
- The Green transition. As governments increasingly strive to achieve net zero carbon emissions, there is a growing need for heightened investment into green infrastructure, including renewable energy solutions, carbon capture, and electric vehicle charging facilities. [5]
- Increasing technological innovation is an excellent opportunity for infrastructure, as it will spur greater investment into digital infrastructure, such as data centres, high speed servers and fibre optic networks[6].
As such, the investment and capital raising environment for infrastructure funds is resoundingly positive. However, that does not mean to say the industry is not facing any challenges.
Rising costs and regulation take their toll
Operational costs for infrastructure funds are rapidly increasing due to several factors.
One is that institutional, and now retail, investors want their managers to report to them more regularly and in a digital format, which is leading to higher asset servicing costs. Shifting away from analogue processes and allocating resources into digitalisation and new technology to meet client reporting demands is a huge expense for fund managers.
Elsewhere, regulation is eating into fund managers’ margins, especially in the EU. For example, recently proposed revisions to the Alternative Investment Fund Managers Directive (AIFMD) – also known as AIFMD2 could saddle yet further costs on infrastructure funds.
Meanwhile, the EU’s Sustainable Finance Disclosure Regulation (SFDR) is forcing infrastructure funds to clearly demonstrate how they apply environment, social and governance (ESG) into their investment and risk management processes, an undertaking that is likely to prove quite complicated in some instances.
It is not just the EU which is imposing new rules on ESG. Other markets, including the UK and the US, are also in the process of developing their own ESG regulatory frameworks. Some experts have warned this could lead to regulatory arbitrage and duplication, layering even more costs on managers.
More infrastructure funds embrace outsourcing
Conscious of these mounting investor demands and regulatory requirements, listed and unlisted infrastructure funds are increasingly looking to outsource non-revenue generating activities to third parties, which can support them in areas such as corporate governance, fund administration and AIFMD Manco.
Through outsourcing, managers can obtain scalability and cost synergies, allowing them to concentrate all of their resources on identifying investment opportunities and attracting new capital.
Simon Gordon is a Senior Director with JTC’s Institutional Client Services (ICS) division, primarily involved in the provision of administration services for investment funds and corporate structures, especially London Stock Exchange listed funds, authorised open-ended funds and private funds. This includes advising on how JTC can help by providing AIFM management company services, Depositary and CREST registrar.
[1] Preqin – December 14, 2022 – Private infrastructure fund managers achieve record breaking fundraising levels in 2022 – Preqin Global Report 2023
[2] Preqin – December 14, 2022 – Private infrastructure fund managers achieve record breaking fundraising levels in 2022 – Preqin Global Report 2023
[3] Franklin Templeton – July 25, 2022 – Investing in infrastructure – why now?
[4] Franklin Templeton – July 25, 2022 -Investing in infrastructure – why now?
[5] EY – 2023 – A crossroad for infrastructure investments
[6] EY – 2023 – A crossroad for infrastructure investments
