Fresh from raising $750 million for investments in infrastructure across the emerging markets, London-based private equity firm Actis is thinking of dropping the word “infrastructure” from its future infrastructure funds, according to Actis senior partner Paul Fletcher.
“There is a big labeling issue here. Infrastructure has had a torrid 12 months as a label and I think it is going to be an unhelpful fundraising label for the emerging markets going forward,” Fletcher told InfrastructureInvestor in an interview.
Infrastructure has had a torrid 12 months as a label and I think it is going to be an unhelpful fundraising label for the emerging markets going forward
“I doubt whether we will come back to the market with something that is labeled ‘infrastructure,’” he added.
The difficulty of the “infrastructure” label is illustrated in many institutional investors’ allocation schemes to the asset class. Many bundle the asset class together with private equity, while others invest in it from a real estate or real assets allocation. Some have begun to carve-out specific allocations for infrastructure alone.
But the differing risk-return profiles for different infrastructure investment strategies, such as developed-market infrastructure versus emerging markets infrastructure, again make it difficult for investors to assign a uniform definition to the asset class as a separate allocation.
Fletcher said Actis’ current investment vehicle for emerging markets infrastructure, the $750 million Actis Infrastructure II Fund, is focused on power assets. So it is possible that the next fund might make use of that as a label. “I don’t know what we’ll call it but I think you’ll find us centering on ‘power’ as a core investment theme,” he said.
Emerging markets infrastructure is not all about power. Fletcher believes that transport is at least as big an opportunity as power. But “power generates big capital needs and can support quite significant funds”, he added.
And emerging markets in general will continue to attract investor interest. Jonathon Bond, Actis’ head of fundraising and investor relations, estimates that emerging markets-focused private equity funds account for about 9 percent of investors’ overall allocation to private equity. Bond believes that figure could go up to as much as 12 percent.
This growth would occur at the same time as many institutional investors cut back on their overall allocations to private equity. “We think that over the next three or four years there’s likely to be a 20 to 25 per cent reduction in the size of the global private equity market, against the peak or the boom. A lot of people are reducing their allocations as they realize it’s not as alternative as they thought,” he said.
Despite its labeling problems, infrastructure continues to attract investor interest. But more education is needed if limited partners and advisors are to fully appreciate the opportunities available.
We'd say that generally advisors are behind the curve on emerging markets infrastructure
“We’d say that generally advisors are behind the curve on emerging markets infrastructure. I think this is partly due to internal resources – historically advisors have not had experts dedicated to focusing on this area,” Bond said.
“However, in the last six months we have detected a change in approach. Some key advisors have now built out their infrastructure teams and I think this has been done in anticipation of more capital going into emerging markets,” he added.