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Preqin Research Report Fig.

2: Management Fee Charged During Investment Period, Funds


a resolution. In this month’s feature, we examine these in Market and Vintage 2009/2010 YTD Funds Closed
Finding Some Common Ground: Fees, issues, and suggest what can be done to overcome them.
Fund Structure and Leverage (1) 50% 45%
Fees 45%

Proportion of Funds
As shown in Fig. 1, management fees and carry 40%
35%
In a recent Preqin survey, 70% of institutional investors structures represent the most pressing issues facing 30% 25%
stated plans to make further unlisted infrastructure fund the industry in the eyes of investors questioned by 25%
20%
commitments in the coming 12 months, up from 40% Preqin. Many investors believe infrastructure fees should 15% 10% 10%
10% 5% 5%
in October 2009. This increased investor confidence is emulate the risk/return profile of an infrastructure asset, 5%
shown in recent fundraising figures, with 15 infrastructure characterized by a lower level of risk rewarded with a 0%

1.25-1.49%

1.50-1.74%

1.75-1.99%

2.00-2.24%

2.25-2.49%
< 1.25%
funds reaching a final close so far in 2010, raising an lower and more stable level of return. However, in contrast
aggregate $18.7bn. This is already more than double the to investor sentiment, many infrastructure fund managers
$7.8bn raised in the whole of 2009. remain reliant on the 2/20 private equity fee structure.
Source: Preqin Management Fee
However, these investors also highlighted several key As shown in Fig. 2, 50% of infrastructure funds currently
issues that need to be addressed in order to ensure raising capital or those closed with a 2009/2010 vintage
continued growth within the infrastructure industry. The charge a 2%+ management fee during the investment
$18.7bn raised thus far in 2010 is still only just over half period, showing there is a clear discrepancy between
the $33.9bn raised in 2008, meaning there is still a long what investors expect and what many fund managers are
way to go for the industry to reach pre-financial crisis currently willing to accept in terms of fees.
levels. Although this is partly due to lack of available
funds for new investments, there are other limiting In contrast, 50% of infrastructure fund managers Infrastructure Online is the most comprehensive resource
factors causing investors to hold back from making new are beginning to address this issue by charging a available to infrastructure professionals today. It is a vital
commitments. management fee lower than 2%. This shows that the source of information whether you’re a GP, LP, fund of
industry is reacting to LP pressure with prominent funds, placement agent, lawyer, consultant or advisor.
In order for the asset class to continue to grow, both LPs private equity firms like KKR and Blackstone publicly Information is available across the following main areas:
and GPs need to understand the roadblocks currently lowering their management fee and carry to show their
limiting investor activity, and then work together to find commitment to a mutually acceptable alignment of > Investors
interests in their infrastructure vehicles. > Fund Terms
> Fundraising
Fig. 1: Investor Views on the Key Issues Facing the Infrastructure
Preqin’s August edition of Infrastructure Spotlight featured > Performance
Preqin Hedge provides the most comprehensive institutional
Industry investor
an interview with Henri Piganeau, a member of the > Fundinformation
Managersto hedge fund industry professionals available
today. Whether you are a fund manager, third-party marketer, prime
> Deals
broker, consultant or advisor, Preqin Hedge is a vital information
35%
service for you. Our unique products include information on:
30% 29% For more information and to arrange a demo please visit:
> Institutional Investors Available as:
Proportion of Respondents

25% > Funds of Hedge Funds


22%
OUT NOW www.preqin.com/infrastructure
20% 20% > Advisors > Hard Copy Publications
20%
> Online Database Services
15% The 2010 Preqin > Consultancy and Research Support
Infrastructure Review > Tailored Data Downloads
10% 9% Join
oin our group on Follow us on:
For more information and to register for a demo, please visit:
5% More information available at:
www.preqin.com/hedge
www.preqin.com/infrastructurereview
0%
Fees Asset Fund Availability Benchmarks Search for Preqin www.twitter.com/preqin
Source: Preqin Valuations Structure of Debt

© 2010 Preqin Ltd. / www.preqin.com


Preqin Research Report Fig. 4: Investor Views on the Future of the Private Equity Fund
Model in Infrastructure Investment
Finding Some Common Ground: Fees, Like this report?
Fund Structures and Leverage (2)
You can sign up to receive Infrastructure Spotlight, Preqin’s monthly
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management team of the Cube Infrastructure Fund which
recently closed on €1.1bn. Mr. Piganeau highlighted Visit: www.preqin.com/spotlight
the importance of Cube’s management fee structure in
attracting investors: “It depends on the size of the ticket Email: info@preqin.com
of each investor and the recognition that if you manage
one investor with a €100mn investment it is easier London: +44 (0)20 7065 5100 New York: +1 212 808 3008
than managing 50 with €2mn invested each – so it is a
reduction by size of ticket.”
Source: Preqin
Going forward fund managers will need to make
concessions in order to attract investor commitments. This
will include reducing the management fee and/or creating
special structures to match investor expectations. As Mr. also to vendors’ unrealistically high asset valuations and
Piganeau stated, the successful fundraising of the Cube the continued reliance on debt to finance infrastructure
Infrastructure Fund relied on LP and GP cooperation: projects.
“There are 22 investors, and they and their lawyers all
have different requests. We came to a fair compromise.” Infrastructure investments traditionally require a Infrastructure Online is the most comprehensive resource
significant level of debt financing, but the ongoing impact available to infrastructure professionals today. It is a vital
Asset Valuations and the Availability of Debt of the financial crisis means banks are now less willing source of information whether you’re a GP, LP, fund of
42% of investors surveyed believe both asset valuations or able to allocate this amount of debt. One surveyed funds, placement agent, lawyer, consultant or advisor.
and the availability of bank debt are a problem in the investor commented: “Maximum debt levels should not Information is available across the following main areas:
current environment. As shown in Fig. 3, 2010 deal flow exceed 35% of total value. It is ridiculous that so many
is significantly down on previous years, which is in part infrastructure deals use such high levels of leverage.” > Investors
due to the relatively sluggish fundraising market, but In order to combat this, fund managers must be willing > Fund Terms
to increase the equity-to-debt ratio associated with > Fundraising
infrastructure deals and vendors need to address their > Performance
Preqin Hedge provides the most comprehensive institutional
Fig. 3: Number of Deals Completed by Unlisted Infrastructure Fund
price aspirations. investor
> Fundinformation
Managersto hedge fund industry professionals available
Managers, 2004 - 2010 YTD today. Whether you are a fund manager, third-party marketer, prime
> Deals
broker, consultant or advisor, Preqin Hedge is a vital information
Fund manager industry knowledge is also vital to service for you. Our unique products include information on:
250
217
229 overcoming these issues. Knowledge of a specific For more information and to arrange a demo please visit:
207
infrastructure industry will ensure fund managers are able > Institutional Investors Available as:
200
> Funds of Hedge Funds
162 to source appropriately priced assets and counteract the www.preqin.com/infrastructure
> Advisors > Hard Copy Publications
Number of Deals

150 risks associated with high proportions of leverage. > Online Database Services
113 > Consultancy and Research Support
100 93 > Tailored Data Downloads
Fund Structure Join
oin our group on Follow us on:
63
Fig. 4 shows that the majority of infrastructure investors For more information and to register for a demo, please visit:
50
(52%) believe the private equity fund model will continue www.preqin.com/hedge
0 to be utilized in the infrastructure asset class over the
2004 2005 2006 2007 2008 2009 2010 long term. However, these investors are concerned that Search for Preqin www.twitter.com/preqin
YTD
Source: Preqin the existing model does not correlate with the long-term

© 2010 Preqin Ltd. / www.preqin.com


Preqin Research Report Fig. 5: Median, Maximum and Minimum Net IRRs for Infrastructure
Funds of Vintages 1993-2007
Finding Some Common Ground: Fees, fees and highly leveraged strategies may be justifiable, it
Fund Structures and Leverage (3) 50 will become increasingly necessary to communicate the
40 reasons for this in order to appease investor concerns in
30 what remains to be an extremely challenging fundraising
nature of infrastructure assets and is more suited to the 20
market.
Maximum Net
investment life of a private equity company. Building IRR (%)
10

%
Median Net IRR
flexibility into fund commitments is one way in which (%)
To view further analysis of the infrastructure survey results
0
liabilities and investment horizons can be matched – for 1993-1999 2005 2007
Minimum Net and the full interview with Henri Piganeau, please visit:
-10 IRR (%)
example giving investors the opportunity to maintain an
interest in underlying fund investments after a typical -20 www.preqin.com/docs/newsletters/INF/Preqin_Infra_
twelve year period. -30 Spotlight_Aug_2010.pdf
-40
What is clear is that concessions must be made by Source: Preqin Vintage

the fund manager in order to compensate for investor


demands. In the short term a reduction in fees would
represent the most obvious catalyst to ensure the is in line with what the majority of funds are currently
continued growth of the infrastructure sector via the targeting, with 76% of infrastructure vehicles targeting
use of the private equity style fund structure, although a net IRR of between 10% and 20%. As the industry
other funding models are also an option including direct matures, it will be possible to maintain reliable individual
investment and evergreen funds. year benchmark figures, which will make it far easier for
investors and advisors to objectively assess performance Infrastructure Online is the most comprehensive resource
Benchmarks results of various managers and of the overall industry. available to infrastructure professionals today. It is a vital
Infrastructure benchmarking continues to be an issue source of information whether you’re a GP, LP, fund of
due to the relative immaturity of the majority of funds Outlook funds, placement agent, lawyer, consultant or advisor.
in the asset class. Investors are naturally concerned Both investors and fund managers are certainly agreed on Information is available across the following main areas:
due to the lack of solid data to confirm the level of the huge growth potential within the infrastructure sector.
returns to be expected when making infrastructure fund Investor confidence is slowly returning following the lows > Investors
commitments. However, despite the immaturity of data for suffered in the immediate aftermath of the financial crisis, > Fund Terms
the more recent funds, Preqin can begin to analyse the there are a record number of funds on the road in which to > Fundraising
performance of older vehicles for an indication as to what invest and the need for global infrastructure development > Performance
Preqin Hedge provides the most comprehensive institutional
investors can expect from younger funds. In total, we hold has never been greater. investor
> Fund information
Managers to hedge fund industry professionals available
today. Whether you are a fund manager, third-party marketer, prime
performance data for 82 infrastructure vehicles with total > Deals
broker, consultant or advisor, Preqin Hedge is a vital information
capital commitments of over $100bn. However, although there has been a recent resurgence service for you. Our unique products include information on:
in the ability of infrastructure managers to raise capital For more information and to arrange a demo please visit:
Fig. 5 illustrates the median net IRRs since inception for from institutional investors, further development of the > Institutional Investors Available as:
> Funds of Hedge Funds
infrastructure funds of groups of older vintages, as well asset class is reliant on the resolution of the key issues www.preqin.com/infrastructure
> Advisors > Hard Copy Publications
as the current maximum and minimum net IRRs for more identified in this article, and this can only be achieved > Online Database Services
recent vintage years. As expected, median net IRRs for by greater cooperation between fund managers and > Consultancy and Research Support
the most recent vintages remain around the 0% mark, investors. With investors now wielding significantly more > Tailored Data Downloads
Join
oin our group on Follow us on:
but there is evidence that older funds have delivered power when negotiating the terms of new vehicles than in For more information and to register for a demo, please visit:
reasonable returns. Infrastructure funds with a vintage previous times, fund managers must ensure that the key www.preqin.com/hedge
1993-1999 have yielded a 9% median net IRR, which issues of fees, structure and debt are carefully considered
increases to 19.5% for funds of vintages 2000-2004. This when assembling PPMs. Although in some cases higher Search for Preqin www.twitter.com/preqin

© 2010 Preqin Ltd. / www.preqin.com