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Infrastructure Institutional Investor Trends for 2017 Survey

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Page 1: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

Infrastructure Institutional Investor Trends for 2017 Survey

Page 2: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure
Page 3: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

1

© 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 ¯ ¯˘

Page 4: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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.

2

Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners

Page 5: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 6: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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.

4

Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners

Page 7: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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.

5

© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey

Page 8: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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).

6

Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners

Page 9: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 10: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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.

8

Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners

Page 11: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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.

9

© 2017 Probitas Partners Infrastructure Institutional Investor Trends for 2017 Survey

Page 12: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

10

Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners

Page 13: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 14: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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).

12

Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners

Page 15: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 16: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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.

14

Infrastructure Institutional Investor Trends for 2017 Survey © 2017 Probitas Partners

Page 17: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 18: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 19: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 20: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 21: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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

Page 22: Infrastructure Institutional Investor Trends for 2017 Survey€¦ · Infrastructure Institutional Investor Trends for 2017 Survey 20 17 Probitas Partners Chart VIII Categorizing Infrastructure

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).

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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

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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%).

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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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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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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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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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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

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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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Infrastructure Institutional Investor Trends for 2017 Survey