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Infrastructure Institutional Investor Trends for 2017 Survey
C o n t e n t sInfrastructure Landscape ...................................................... 2
Ten Largest Infrastructure Fund ......................................... 4
Infrastructure Institutional Investor Survey ................. 5
Profile of Respondents .................................................... 6
Plans for Infrastructure Investing ........................... 9
Sectors, Industries and Geographies of Interest .... 12
Targeted Returns and Fees ........................................... 16
Portfolio Benchmarks ................................................... 19
Investment Structures .................................................. 20
Terms and Conditions .................................................... 22
Political Arena ............................................................... 23
Reasons for Not Investing............................................ 24
Infrastructure Investment Concerns ...................... 25
Key Trends ................................................................................ 27
Conclusion ............................................................................... 29
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© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
On an ongoing basis, Probitas Partners offers research and investment tools for the alternative investment market to aid its institutional investor and general partner clients. Probitas Partners compiles data from various trade and other sources and then vets and enhances that data via its team’s broad knowledge of the market.
n. [from Latin probitas: good, proper, honest.] adherence to the highest principles, ideals and character.
probity ¯ ¯˘
Chart I Global Infrastructure Fundraising 2004–2017
USD
in b
illio
ns
90
80
70
60
50
40
30
20
10
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD June 2017
Source: Probitas Partners; PREQIN, Infrastructure Investor, Private Equity AnalystNote: Does not include infrastructure funds-of-funds
2
18
40
2519
42
78
24
5
Number of Final ClosesCapital Raised
11
21
3532
28
60
Num
ber o
f Fun
ds w
ith F
inal
Clo
ses50
40
30
20
10
0
While fundraising in the first half of 2017 was down from last year’s record pace, 2017 is still likely to beat the fundraising totals for every year except 2016.
Infrastructure Landscape � Fundraising soared in 2016, driven by massive closes
for the two largest infrastructure funds ever raised, Brookfield III and GIP III. Together these two funds accounted for 32% of the money for closed-end funds last year (Chart I). While fundraising in the first half of 2017 was down from last year’s record pace, 2017 is still likely to beat the fundraising totals for every year except 2016.
� Last year global funds like Brookfield and GIP dominated the market. For the first half of this year, fundraising was very balanced between North American, European and Global funds (Chart II). Fundraising for other emerging markets surged in 2017 driven by the large closing of Actis’ Fund V.
� Brownfield/greenfield funds (targeting brownfield investing with some ability to invest in greenfield or value-added projects that are not core brownfield) continue to comprise the largest sector of the market, with 49% of capital raised (Chart III). Interest in pure core brownfield closed-end funds remains weak. Many investors targeting these strategies invest directly in projects or through open-end funds or separate accounts.
� Interest in infrastructure debt funds remains relatively weak, as does interest in funds solely focused on renewable projects.
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Brownfield/Greenfield
Brownfield
Greenfield
Opportunistic
Debt
Renewable Energy
Secondaries
Chart III Infrastructure Fundraising, YTD 2017 by Strategy(in terms of capital raised in USD)
Source: Probitas Partners; PREQIN, Infrastructure Investor, Private Equity AnalystNote: Does not include infrastructure funds-of-funds
Chart II Infrastructure Fundraising, YTD 2017 by Region(in terms of capital raised in USD)
Source: Probitas Partners; PREQIN, Infrastructure Investor, Private Equity AnalystNote: Does not include infrastructure funds-of-funds
North America
Global
Europe
Asia
Latin America
Other Emerging Markets
31%
2%
28%
27%
9%
3%
49%
8%
15%
10%
4%
11%3%
3
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Table I Ten Largest Infrastructure Funds, August 2017
Rank Fund Name Firm Name Location Year Amount (MM)
1 Global Infrastructure Partners II Global Infrastructure Partners New York 2016 USD 15,800
2 Brookfield Infrastructure Fund III Brookfield Asset Management Toronto 2016 USD 14,000
3 Global Infrastructure Partners II Global Infrastructure Partners New York 2013 USD 8,250
4 Brookfield Infrastructure Fund II Brookfield Asset Management Toronto 2013 USD 7,000
5 GS Infrastructure Partners I GS Infrastructure Investment Group New York 2006 USD 6,500
6 Macquarie European Infrastructure Fund II Macquarie Infrastructure and Real Assets Sydney; London 2006 EUR 4,635
7 Global Infrastructure Partners I Global Infrastructure Partners New York 2008 USD 5,640
8 ArcLight Energy Partners Fund VI Arclight Capital Partners Boston 2015 USD 5,575
9 Energy Capital Partners III Energy Capital Partners Short Hills, NJ 2014 USD 5,095
10 Macquarie European Infrastructure Fund V Macquarie Infrastructure and Real Assets Sydney; London 2006 EUR 4,000
10 EQT Infrastructure Fund III EQT Funds Management Stockholm 2017 EUR 4,000
Source: Probitas Partners
Ten Largest Infrastructure Funds � The ten largest closed-end infrastructure funds raised to
date are listed in Table I. Brookfield and GIP hold the top four positions, and another GIP fund is ranked seventh.
� All these funds focus on developed market investing and they tend to target core and value-added brownfield projects with the flexibility to invest opportunistically in greenfield transactions.
� Most of these funds are denominated in U.S. dollars, even if they invest globally.
� Blackstone Group LP recently announced a $40 billion effort that is not detailed here as it has just launched.
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Infrastructure Institutional Investor Survey
Probitas Partners annually conducts an online survey of institutional investors to gauge their interest in and perspectives on infrastructure. This year’s survey was taken in mid-2017 and responses were received from 40 senior investment executives.
Highlights of Survey Findings
� What do investors fear at this point? A continual flood of money and the top of the market cycle: Investors are often concerned that too much money coming into the market will hurt their returns. That is the number one fear of investors this year, as it was last year. Notably, the number of investors who fear that we are at the top or nearing the top of the infrastructure investing market cycle more than doubled over the last year, moving from 28% of survey respondents to 62%.
� Core brownfield and infrastructure debt funds are under continued pricing pressure: Returns on both core brownfield projects and infrastructure debt have come under increasing pressure due to market forces impacting those strategies. In reaction, institutional investors continue to apply downward pressure on the fees and carried interest they are willing to pay for these strategies in a fund format.
� Even as fundraising and dry powder soar, investors’ appetite remains strong: Both fundraising and dry powder for infrastructure have soared over the
last 18 months. Investors are increasingly worried that we are nearing the top of a market cycle. However, few investors are seeking to decrease their allocations to the sector; 78% of respondents say that their appetite for infrastructure will either remain the same or increase over the next 12 months and only 6% say their appetite would decrease.
� Interest in long-duration funds remains low — but may be shifting: Though interest in open-end structures or long-dated funds with terms greater than 15 years is still low, there has been some movement away from 10-year maturity funds by investors more experienced in infrastructure investing.
� On the political front, little impact is expected from U.S. administration’s infrastructure pronouncements or from Brexit: There are, however, some differences in perceptions on these issues between U.S. and European investors.
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© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart V Respondents Categorized by Firm Headquarters“My firm is headquartered:”
United States
Canada
Western Europe ex-UK
United Kingdom
Japan
Asia ex-Japan
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
Chart IV Respondents Categorized by Investor Type“I represent a:”
Public Pension/Superannuation Plan
Consultant/Advisor
Insurance Company
Fund-of-Funds Manager
Asset Manager
Corporate Pension/Superannuation Plan
Endowment or Foundation
Trust Bank
Bank
Other
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
18%
15%
2%
13%
20%
8%
9%
5%
5%
5%
48%
5%
14%
10%
20%
3%
Profile of Respondents
� A wide variety of types of institutions responded to the survey, though public pension plans, consultants, insurance companies, and funds-of-funds made up 66% of the respondents (Chart IV).
� North Americans made up just over 50% of the respondents, though there was significant participation from Europe and Asia as well (Chart V).
� 40% of respondents were very experienced, being active investors in the sector for five years or more, and with another 25% being consultants or advisors who have clients with various levels of experience (Chart VI).
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart VI Plans for Infrastructure Investing“As far as infrastructure investing is concerned, my firm (choose all that apply):”
Has had an active infrastructure investing program for more than five years
Is a consultant with clients in many stages
Has had an active infrastructure investing program for more than one year but less than five years
Opportunistically considers infrastructure investments
Is considering making an allocation to infrastructure investing
Has just begun a program to make infrastructure investments
Does not make infrastructure investments and has no current plans to do so
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 5 10 15 20 25 30 35 40 45
40
15
13
10
8
25
3
40% of respondents were more experienced, being an active investor in the sector for five years or more
7
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart VII Drivers for Sector Target Focus“My sector investment focus over the next twelve months is driven by:”
I have no particular sector focus but simply pursue the best funds available in the market
My firm’s need to diversify its alternative investment portfolio
A desire to more closely match the duration of my assets with the duration of my liabilities
A desire to maintain established relationships with fund managers returning to market this year
A focus on alternative investment sectors I believe will outperform others in this vintage year
My need to deploy significant amounts of capital allocated to alternative investments
A desire to invest in assets with inflation-hedging characteristics
A desire to target funds that will provide access to co-investments
I strictly invest in direct infrastructure transactions
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 5 10 15 20 25
21
12
5
3
3
10
5
10
10
21
� Drivers of investor interest in infrastructure have become increasingly scattered over the last two years (Chart VII). In 2015, the largest driver was that respondents simply targeted the best funds available in the market (41%), down significantly this year to only 21%.
� In 2015, 13% of respondents said they were targeting funds that would provide access to co-investments, a response that was important to only 5% of participants this year. A desire to closely match the duration of assets increased from 3% in 2015 to 12% this year.
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart VIII Categorizing Infrastructure“Within our portfolio, infrastructure investments are or will be placed in (choose all that apply):”
Perc
enta
ge o
f Res
pond
ents
(%)
70
60
50
40
30
20
10
0
Separate Allocation
Real Assets
Private Equity
GeneralAlternatives
Inflation-Hedged
Real Estate
Consultant/Advisor
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 SurveyNote: “Experienced Investors” constitutes those investors who have been active in the sector for five years or more
1314
2722
4742
6056
Experienced InvestorsOverall Respondents
138
00
73
Plans for Infrastructure Investing
� In our first infrastructure survey in 2007, only 26% of respondents had separate infrastructure allocations, while 40% were making infrastructure investments out of their private equity allocations. As the sector has matured over the last decade, there has been a marked shift to investing out of separate dedicated infrastructure allocations or real asset allocations that include infrastructure along with other real assets; investment through private equity allocations has fallen dramatically (Chart VIII).
� Over the last three years, real assets allocations increased in popularity, moving from 22% in 2014 to 42% this year. (In a number of instances, separate infrastructure allocations are part of larger real assets allocations.)
� North Americans are much more likely to include infrastructure as part of a real assets allocation, with 60% saying they do. Respondents outside North America are much less likely to do so, with only 19% doing so.
� In 2007, 11% of respondents made infrastructure investments from real estate allocations, a number that has gone to zero over the last two years.
� Consultants and advisors are listed in the chart as a separate category, as most of them have a number of clients that individually determine their allocations.
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© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart IX Appetite for Infrastructure“Compared to last year, I believe that my firm’s appetite for infrastructure investments for the next twelve months will:”
Remain basically the same
Increased from last year
Continue to be opportunistic based upon market conditions and market opportunities
Decreased from last year
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 10 20 30 40 50 60
2553
3925
6
1018
616
Last Year’s SurveyThis Year’s Survey
2
� After 2016’s huge fundraising year and the relatively strong start to 2017, a majority of investors felt that their appetite for infrastructure would remain the same over the next 12 months. The number of respondents expecting their appetite would either increase or decrease both declined (Chart IX).
� The amount that respondents intend to deploy over the next 12 months is varied; those differences in size often impact investors strategy and investment plans (Chart X). Respondents who did not have a specific
allocation are either consultants or those who only invest in the sector opportunistically.
� Nearly every respondent to the survey either actively or opportunistically invests in closed-end infrastructure funds. There is also strong interest in co-investments (Chart XI).
� Infrastructure funds-of-funds are the least favored strategy, with only 3% of respondents targeting them.
Nearly every respondent to the survey either actively or opportunistically invests in closed-end infrastructure funds
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart X Infrastructure Allocations“Over the next year, my allocation to infrastructure commitments will be (in USD):”
Perc
enta
ge o
f Res
pond
ents
(%)
30
25
20
15
10
5
0
<$50 MM $50– $100 MM
$100– $250 MM
$250–$500 MM
$500 MM– $1.5 B
>$1.5 B No SpecificAllocation
Other
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
6
1719
25
0
3
1416
Chart XI Interest in Investment Structures“My firm’s interest in various investment structures is:”
Perc
enta
ge o
f Res
pond
ents
(%)
100
80
60
40
20
0
Closed-End Infrastructure
Funds
Open-End Infrastructure
Funds
Infrastructure Fund-of-Funds
Infrastructure Co-Investments
Infrastructure Separate Accounts
Direct Infrastructure Transactions
Publicly Traded
Infrastructure Vehicles
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
Do Not InvestActively Interested Invest Only Opportunistically
34
44
22
30
67
60
31
9
80
14
6
72
11
17
88
9
34
23
43
3
3
11
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XII Interest in Fund Strategies“My firm’s interest in various fund strategies is:”
Perc
enta
ge o
f Res
pond
ents
(%)
100
80
60
40
20
0
Core Brownfield Funds
Value-Added Funds
Greenfield Funds
Opportunistic Funds
Open-End Funds
Infrastructure Debt Funds
Infrastructure Separate Accounts
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
39
48
13
42
32
26
42
19
39
29
61
10
38
28
34
36
61
20
7
73
Do Not InvestInvest OpportunisticallyActively Targeting
3
Sectors, Industries and Geographies of Interest
� For the first time since we began our surveys a decade ago, value-added brownfield funds constitute the largest sector of investor interest, moving ahead of core brownfield funds (Chart XII).
� Though interest in greenfield and open-end funds still trails brownfield funds, interest has increased in the last year; greenfield funds went from 19% to 32% and open-end funds moved from 11% to 28%.
� Respondents perceptions regarding the attractiveness of industry sectors was similar to last year, with the biggest difference being a decline in interest in water and waste management (Chart XIII).
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart XIII Infrastructure Industry Sectors of Interest“My firm seeks to invest in the following sectors (choose all that apply):”
Energy and Power
Transportation
Renewable Energy
Telecom
Water and Waste Management
Opportunistic without Sector Focus
Social Services
Diversified Funds Only
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 10 20 30 40 50 60 70 80
7467
00
Last Year’s SurveyThis Year’s Survey
6767
6764
5861
7058
5853
4944
3728
13
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XIV Geographic Focus“My firm invests in infrastructure funds with investment mandates focused on (choose all that apply):”
Perc
enta
ge o
f Res
pond
ents
(%)
90
80
70
60
50
40
30
20
10
0
Global North America
Western Europe
Developed Markets
Asia Australia Emerging Markets
Eastern Europe
LatinAmerica
Sub-Saharan Africa
Middle East/North Africa
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
81 8175
3933
28
1714
116 6
B r a z i l- 1 . 5 %
A u s t r a l i a- 0 . 8 %
� Investors are most focused on the developed markets of North America and Europe, as well as on global funds that tend to focus on OECD countries (Chart XIV).
Interest in certain specific emerging markets increased slightly this year.
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart XV Interest in Emerging Markets“As far as my interest in emerging markets is concerned, my firm:”
Is less interested in the sector due to political, economic, or currency risk
Is interested in the sector because of its long-term growth potential
Is interested in the sector as a diversifier of risk
Is less interested in the sector because it is more focused on greenfield investments
Has a strategy or policy that does not allow for emerging markets exposure
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
6064
3017
610
32
Last Year’s SurveyThis Year’s Survey
0 20 40 60 80
03
32
� In general, however, overall interest in emerging markets remained weak (Chart XV); the number of investors who said that they were interested in emerging markets due to long-term growth potential declined significantly.
� Notably, those less interested in the sector due to political, economic, or currency risk doubled over the last two years, moving from 32% in 2015 to 64% this year.
The number of investors who said that they were interested in emerging markets due to long-term growth potential declined significantly.
15
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XVI Target Net IRRs“For the major sectors of closed-end infrastructure funds operating in developed markets, my firm’s target Net IRRs are as follows:”
Perc
enta
ge o
f Res
pond
ents
(%)
100
80
60
40
20
0
Core Brownfield Funds
Value-Added Funds
Greenfield Funds
Opportunistic Funds
Open-End Funds
Infrastructure Debt Funds
Infrastructure Separate Accounts
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
32
11
21
36
10%–12.5% 12.5%–15%<10% 15%–17.5% >20%17.5%–20%
41
18
14
27
29
71
40
48
4
44 18
82
23
7733
17
33
17
Targeted Returns and Fees
� Perceived risk drives investor’s return expectations, as detailed in Chart XVI:
� Expected returns among equity strategies clearly are the lowest for core brownfield funds (with 71% of respondents expecting Net IRRs of 10% or less), increasing across the spectrum to opportunistic funds whose return expectations are more in line with private equity funds.
� Open-end funds (which usually have heavy allocations to core brownfield projects) and debt funds have very similar return expectations to core brownfield funds.
� Non-North American respondents have significantly lower return expectations for core brownfield funds; 85% expect returns below 10% versus only 60% of North American respondents.
� Perceived risk and return expectations also drive management fee and carried interest expectations (Charts XVII and XVIII):
� Expected core brownfield fund management fees and carried interest declined again this year, with 92% of respondents expecting fees below 1.25% (44% expecting fees below 1.00%), while 56% of respondents expected carry to be less than 10%.
� For open-end funds and infrastructure debt funds, fees and carried interest are also under pressure and declined further this year. 60% of respondents expect open-end funds to charge management fees of less than 1.00% while 72% expect carried interest to be less than 10%. For debt funds, 73% of respondents are looking for management fees to be less than 1.00%, while 40% expect carried interest to be less than 5%.
� Fee and carried interest expectations for the other infrastructure equity strategies progressively trend higher along with anticipated returns.
16
Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart XVIII Targeted Carried Interest“For the major sectors of closed-end infrastructure funds operating in developed markets, my firm’s targets for carried interest are:”
Perc
enta
ge o
f Res
pond
ents
(%)
100
80
60
40
20
0
Core Brownfield Funds
Value-Added Funds
Greenfield Funds
Opportunistic Funds
Open-End Funds
Infrastructure Debt Funds
Infrastructure Separate Accounts
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
<5% 10%–15% 15%–20%5%–10% >20%
35
6
35
24
50
25
25
40
30
30
43
9
35
13
37
5
37
21
58
721
14
Chart XVII Targeted Annual Management Fees“For the major sectors of closed-end infrastructure funds operating in developed markets, my firm’s targeted management fees are:”
Perc
enta
ge o
f Res
pond
ents
(%)
100
80
60
40
20
0
Core Brownfield Funds
Value-Added Funds
Greenfield Funds
Opportunistic Funds
Open-End Funds
Infrastructure Debt Funds
Infrastructure Separate Accounts
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
<1% 1.25%–1.5% 1.5%–1.75%1%–1.25% >2%
7
60
3320
20
6050
25
25
44
48
55
20
25
50
644
44
9
73
18
13
43
31
13
17
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XIX Carried Interest Hurdle“For the major sectors of closed-end infrastructure funds operating in developed markets, my firm’s targets for carry hurdles are:”
Perc
enta
ge o
f Res
pond
ents
(%)
100
80
60
40
20
0
Core Brownfield Funds
Value-Added Funds
Greenfield Funds
Opportunistic Funds
Open-End Funds
Infrastructure Debt Funds
Infrastructure Separate Accounts
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
4%–8% 8%–10%<4%None
33
67
30
70 100
27
64
97
66
20
7
17
83
71
25
4
� Chart XIX shows the same pattern of expectations regarding carried interest hurdles.
� Notably, a few respondents expect no carried interest hurdles at all for core brownfield, open-end and infrastructure debt funds.
18
Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart XX Portfolio Benchmarks“Regarding portfolio benchmarks for infrastructure, my firm uses (choose all that apply):”
An absolute return target
A benchmark based upon a publicly traded securities index
A benchmark based upon an inflation index
A proprietary internal benchmark
An actuarial return target
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 10 20 30 40 50 60
Last Year’s SurveyThis Year’s Survey
34
27
24
27
56
26
9
35
617
Interest in proprietary internal benchmarks and actuarial returns fell from last year
Portfolio Benchmarks
� A clear majority of respondents in this year’s survey favored absolute return targets, while interest in proprietary internal benchmarks and actuarial returns fell from last year (Chart XX).
� A few respondents use multiple benchmarks and as a result the percentage totals in the chart below for both years are greater than 100%.
19
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XXI Preferred Terms Structures, 2016“My firm prefers to invest in vehicles with the following duration:”
Standard 10-year private equity fund life structures
No particular preference
Hybrid 10-year structures that allow for asset liquidation or longer holds at the investor’s choice
Fund lives of 12 to 15 years
Evergreen or open-end structures
Fund lives of more than 15 years
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2016 SurveyNote: “Experienced Investors” constitutes those investors who have been active in the sector for five years or more
0 5 10 15 20 25 30 35 40
3633
1914
1919
1924
00
25
55
Experienced InvestorsOverall Respondents
Investment Structures
� Unlike the private equity market, there is a broader variety of terms available in infrastructure.
� In last year’s survey, there was not a tremendous difference in the preferences between overall respondents and experienced investors. The funds with 10-year average lives attracted a clear plurality of support (Chart XXI).
� This year’s survey attracted more respondents with longer experience in infrastructure, and these investors were much less interested in 10-year structures (Chart XXII). There was a noticeable shift towards funds with 12- to 15-year maturities among both overall and experienced investors, and experienced investors were more likely to have no structural preference, being more flexible in their approach to the market.
� As in our previous surveys, interest in open-end or evergreen structures or funds with maturities greater than 15 years remains quite low.
� Independent managers continued to prefer the sponsored vehicles, a result in line with our previous surveys (Chart XXIII).
20
Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart XXIII Independent vs. Sponsored Fund Structures“As far as terms and conditions are concerned, I would prefer to invest in funds that are (choose only one):”
Independent vehicles owned and run by the senior investment professionals
The question of sponsored or independent fund structures is not primary to my decision-making process
Sponsored vehicles owned by larger financial institutions that can bring institutional resources to bear
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 10 20 30 40 50 60 70
2826
1412
6258
Last Year’s SurveyThis Year’s Survey
Chart XXII Preferred Terms Structures, 2017“My firm prefers to invest in vehicles with the following duration:”
Standard 10-year private equity fund life structures
Fund lives of 12 to 15 years
No particular preference
Hybrid 10-year structures that allow for asset liquidation or longer holds at the investor’s choice
Fund lives of more than 15 years
Evergreen or open-ended structures
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 SurveyNote: “Experienced Investors” constitutes those investors who have been active in the sector for five years or more
0 5 10 15 20 25 30 35 40 45
337
3140
1933
613
00
37
80
Experienced InvestorsOverall Respondents
Funds with 10-year average lives attracted a clear plurality of support
21
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XXIV Terms and Conditions Focus“As far as terms and conditions are concerned, separate from due diligence issues, my firm is most focused on (choose no more than two):”
The overall level of management fees
Level of general partner’s financial commitment to the fund
Distribution of carry between senior investment professionals
Structure or inclusion of a key man provision
Contractual fund life
Carry distribution waterfalls
The overall level of carry
Sharing of carry and/or decision- making process with the sponsor
Structure or inclusion of a no-fault divorce clause
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 SurveyNote: “Experienced Investors” constitutes those investors who have been active in the sector for five years or more
0 10 20 30 40 50 60
5647
4753
2533
2840
1713
3147
714
2833
1427
37
Experienced InvestorsOverall Investors
Terms and Conditions
� The top two areas of focus on terms and conditions are management fee level and the amount of a general partner’s financial commitment to the fund (Chart XXIV).
� Experienced investors focused more on carried interest distribution waterfalls, no-fault divorce clauses, and key man provisions.
� There were some geographical differences between respondents. The number one area of focus for North American investors was the overall level of management fees (65%), while investors headquartered outside North America focused most on the level of a general partner’s financial commitment (50%).
22
Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Chart XXV Political Arena“In the political arena, I believe”
Perc
enta
ge o
f Res
pond
ents
(%)
100
80
60
40
20
0
The U.S. administration’s infrastructure plans will have a major positive impact on
the U.S. market
Brexit will have a negative impact on the UK
infrastructure market
Brexit will have a positive impact on the overall EU market
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
Strongly Disagree UncertainMinimal ImpactStrongly Agree
50
33
17
446
36
14
28
30
39
3
Political Arena
This year we asked a few questions about current political events and how they might impact private infrastructure investing (Chart XXV).
� Only 17% of respondents felt that the current U.S. administration’s infrastructure plans would have a major positive impact on the U.S. market, while 50% felt it would have minimal impact. Among respondents from the U.S., a slightly larger number of 22, felt that it would have a major positive impact; 61% felt that any impact would be minimal. Interestingly, among European respondents, no one felt that the current plans would have a major positive impact in the U.S.
� Only 14% of overall respondents felt that Brexit would negatively impact the UK market — though 33% of European respondents felt that there would be negative consequences. Only 6% of U.S. respondents felt that the UK would be negatively impacted.
� There was little support for the theory in any geography that EU infrastructure investing would benefit from Brexit.
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© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XXVI Reasons for Not Investing in Infrastructure“My firm is not interested in infrastructure because (choose all that apply):”
We find the return profile is unattractive
Our current portfolio allocation serves our needs
We may consider infrastructure investing at a later date after our program is more fully developed
The average duration is too long for our needs
We do not believe the market is currently developed enough to warrant a specific allocation
It is not within our investment mandate
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 10 20 30 40 50 60
Last Year’s SurveyThis Year’s Survey
5044
014
022
2213
025
2213
2213
Reasons for Not Investing
� Most of the respondents to the survey invest in infrastructure in some manner.
� For those that were not actively investing, most believed the return profile was unattractive, with a number of other concerns scattered among respondents (Chart XXVI).
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Table II What Keeps You Up at Night?Top Four Responses
2010 2017
Issue % Issue %
The lack of experienced fund managers in the sector
34%Too much new money coming into the sector affecting future returns
68%
Too much new money coming into the sector affecting future returns
31%The market feels like we are at or near the top of the cycle
62%
The amount of leverage that has been used by some of my fund managers
28%The amount of leverage that has been used by some of my fund managers
22%
Standard fee levels on brownfield-focused funds are eating away at my returns
23%The lack of operational capabilities on many fund managers teams
19%
Source: Probitas Partners’ Infrastructure Institutional Investor Trends Survey, 2010 & 2017
Last year the second largest fear was that the market felt like it was at or close to the top of the cycle...this year 62% of investors selected it compared to 28% last year.
Infrastructure Investment Concerns
� Table II below compares the top four concerns today to concerns from our 2010 survey, taken in the aftermath of the Great Financial Crisis (GFC), in order to provide long term-term perspective.
� However, the most notable difference in this year’s survey is a comparison to last year’s results. Last year the second largest fear was that the market felt like it was at or close to the top of the cycle. It is still the second largest fear this year, but this year 62% of investors cited it compared to only 28% last year.
� Over the last eight years there has certainly been a degree of continuity in investor concerns, with the fear of too much new money coming into the sector and the amount of leverage being used by certain managers being constant concerns. What is striking about the comparison from 2010 to 2017 is the substantial majority of investors focused on the top two concerns in 2017.
� The complete list of responses for 2017 is included in Chart XXVII on the next page.
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© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Chart XXVII Infrastructure Investing Concerns“As an infrastructure investor, what keeps you up at night? (choose no more than two):”
Too much new money coming into the sector affecting future returns
The market feels like we are at or near the top of the cycle
The amount of leverage that has been used by some of my fund managers
The lack of operational capabilities on many fund manager teams
Standard fee levels on brownfield-focused funds are eating away at my returns
Government agencies seem to be dragging their feet in approving public-private partnership plans
The lack of experienced fund managers in the sector
The slow pace of investing by my fund managers
My ability to properly staff my fund investing program for proper due diligence
Competition with government stimulus money
The impact that sponsor turmoil may have on my portfolio
Senior professional turnover at fund manager
My ability to properly staff my direct or co-investing program for proper due diligence and investment oversight
Other
Percentage of Respondents (%)
Source: Probitas Partners’ Infrastructure Institutional Investor Trends for 2017 Survey
0 10 20 30 40 50 60 70
68
62
22
19
16
16
14
14
8
5
3
3
3
3
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Key TrendsBesides issues covered at a high level in the survey, our ongoing conversations with investors provide more insight on a few key trends:
� Core brownfield projects continue to be a prime focus of large direct investors: These projects tend to have the lowest equity risk profile in infrastructure (unless they are highly-leveraged), and many of them have long maturities attractive to investors seeking to match long-lived liabilities to manage portfolio risk. However, many of these projects are pursued outside fund structures by sophisticated investors who believe that returns on these investments are attractive on a direct basis, but cannot support the usual fee and carried interest of a fund structure. In addition, heavy competition for these core assets by direct investors continues to drive return expectations even lower.
� The most attractive structure is still the 10-year private equity fund, but there is a notable shift toward funds in the 12- to 15-year maturity range: That is especially true among experienced investors, who have been active in the market for five years or more, as they increasingly dislike mismatches in holding longer-lived value-add or core plus assets in a short-term structure. There remains little interest in evergreen or open-end structures, or in funds with maturities greater than 15 years.
� Infrastructure dry powder is rocketing — and is understated: Surging fundraising combined with challenges in deploying capital has led to a huge increase in dry powder (Chart XXVIII). In addition, these dry powder numbers do not reflect the money targeting the sector from direct investors, co-investors and open-end funds. In this regard, investor fears that too much money is chasing too few deals are likely understated.
Chart XXVIII Infrastructure Dry PowderClosed-end infrastructure funds
USD
in b
illio
ns
180
160
140
120
100
80
60
40
20
0
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 July2017
Source: PREQIN
92
79
90
106 106
67
137
65 65 64
38
11 15
4
152
27
© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
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Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners
Conclusion
� The survey results and the context provided by direct conversations with investors shows that there is a conflict in investors’ perceptions of the market. Investors are worried that there is too much money in the market, and they are concerned that we are approaching a market peak. Yet their stated intent is to retain their allocation levels, and the strong fundraising totals for the first half of 2017 verify that.
� The biggest overall portfolio issue facing many of these investors currently is “Where do I expect better returns?”. Even with the pressures facing all illiquid alternative assets, investors are not getting much comfort from their performance forecasts for the liquid markets and are seeing signs of danger everywhere. As long as this situation remains, interest in infrastructure, real estate, and private equity will remain strong.
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© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey
Probitas Funds Group, LLC Probitas Funds Group, LLC PFG-UK Ltd. Probitas Hong Kong Limited
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Infrastructure Institutional Investor Trends for 2017 Survey