Infrastructure funds getting fees wrong-survey
* Investors find private equity model inappropriate
* Want fees, carry to reflect long-term investment horizon
* More looking to invest in the asset class
By Greg Roumeliotis, European Infrastructure Correspondent
AMSTERDAM, Aug 16 (Reuters) - Managers of unlisted infrastructure funds should not be applying the private equity model in the fees they charge, a survey of 65 institutional investors by market research firm Preqin has found.
With the lifetime of infrastructure assets averaging several decades, there is heated debate between investors and infrastructure fund managers over whether the management fees and fund carry structure of private equity are appropriate.
Carried interest is typically the 20 percent that private equity executives take from the profit made on their funds, after compensating their investors, which can be huge if the funds perform well. Fees are usually 2 percent.
Some 73 percent of the investors surveyed by Preqin disagreed or strongly disagreed that the interests of investors and fund managers are properly aligned, arguing that the long-term characteristics of infrastructure do not match the ten-year term of a traditional private equity fund.
"The fee structure is set up for an asset class capable of returning 20 percent but expected infrastructure returns are much lower than that," one respondent in the survey was quoted by Preqin as saying.
Unlisted infrastructure fundraising is slowly recovering, with the amount of capital raised by infrastructure funds, which invest in assets such as roads, airports and power grids, was almost as much in the first half of 2010 as it was in the whole of 2009, according to data by placement agent Probitas Partners. [ID:nLDE66F1M1]
Global infrastructure fundraising dried up in 2009 as institutional investors, such as pension funds and insurance firms, moved into more liquid assets, while increased competition has exerted pressure on fund terms and fees.
Investors believe that the private equity model will continue to be used but must be adapted to fit the needs and demands of both fund managers and investors, Preqin said.
"Management fees should likely resemble what is seen in real estate as you move from core to opportunistic infrastructure. For core investments, the hurdle rate should be a moving target," another interviewee was cited by Preqin as saying.
The survey also found fundraising sentiment picking up, with 70 percent of respondents intending to invest in infrastructure over the next 12 months, an increase from the 40 percent that stated an intention to invest in a Preqin survey in October 2009.
(Editing by David Cowell)
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