Despite infrastructure fundraising showing signs of growth, achieving a successful fundraise is more difficult than ever in such a competitive market. Preqin examines which funds are more likely to achieve their target size and the key factors for fundraising success.
As Q3 2014 draws to a close, the unlisted infrastructure market appears to show slight signs of improvement, with the USD25bn raised by 26 funds reaching a final close this year so far exceeding the capital raised from Q1 to Q3 2013, when USD23bn was raised by 41 funds closing. Additionally, unlisted infrastructure funds are increasingly exceeding their target sizes, with 61% of funds closed so far in 2014 reaching a final close above their target, and a considerable 42% raising 125% or more of their target size; in comparison, 38% of funds exceeded their target size in 2013.
Despite the improving market implied by strong fundraising figures, there is evidence of a possible two-tier market, with the number of funds reaching a final close from Q1 to Q3 2014 almost halving in comparison to the same period in 2013, indicating that capital is increasingly concentrated among a smaller selection of managers. With a crowded market of 151 funds targeting aggregate capital commitments of USD94bn, many of these managers raising funds may struggle to attract sufficient capital to reach a final close. What factors impact a manager’s chances of success?
Fundraising momentum
Encouragingly, the average time taken for funds to reach a final close has declined in the last two years from a peak of 25 months in 2012 to 20 months for funds closed in 2014 so far. However, this is still a far cry from 2007 when the average time taken for a fund to close was just 12 months.
Gaining momentum in the market appears to be key to achieving a successful final close on or above target, with the length of time taken to reach a first close often impacting final close sizes. For funds reaching a final close in 2013 to 2014, the vast majority (72%) of funds which took less than six months to reach a first close reached a final close at or above their target size. On the other hand, funds which took six months or more to reach a first close were considerably less likely to reach a final close on or above target, with 63% closing below target. Fund managers that are able to attract sufficient capital to reach a first close quickly are able to gain increasing fundraising momentum by demonstrating to future investors the viability of the fund, and may be able to put capital to work, giving subsequent investors a clear picture of the types of assets they will be gaining exposure to.
Fund focus and manager experience
The geographic focus of unlisted infrastructure funds appears to correlate strongly with whether it will close on, above or below target. Funds focused on North America are the most likely to close on or above target, with 71% of North America-focused funds closed in 2013 to 2014 so far doing so. In comparison, Europe- and Asia-focused funds are less likely to close on or above target, with 52% and 50% of funds doing so respectively. Funds focused on countries outside of North America, Europe and Asia are considerably less likely to attract sufficient capital to reach a final close, with 75% of such funds closed between 2013 and 2014 closing below target. As a result, investor appetite appears greatest for North America-focused funds, with managers raising Europe- or Asia-focused funds likely to find it more difficult to attract sufficient investor capital to reach their target.
Manager experience is also playing an increasingly important role in the funds investors choose. Over half (54%) of funds raised by first- or second-time managers reaching a final close in 2013 or 2014 did so below target. In comparison, 70% of funds raised by more experienced managers in this time period closed above target, demonstrating the increasing draw of manager experience to investors. With a relative lack of experienced managers in infrastructure compared to other asset classes, capital is increasingly concentrated among a handful of managers, demonstrated by the decreasing number of funds reaching a final close.
Factors for success
In light of the evidence for a two-tier market, what can managers do to increase their chances of attracting sufficient investor capital to close on or above target? As part of Preqin’s recent investor survey for the Preqin Investor Outlook: Infrastructure, H2 2014, investors were asked what they viewed as the most important factor to consider when looking for a fund manager. A manager’s past performance and the fund strategy were both rated as the most important factor by 30% of respondents. Although this again demonstrates the weight that investors place on a manager’s track record, it also shows that less experienced teams which are able to effectively communicate a compelling strategy to investors can be successful.
As key industry players, placement agents are well placed to understand the factors that can lead to the success, or failure, of a fundraise, and provide a unique insight into the industry. When infrastructure placement agents were asked by Preqin what the key indicators are as to whether a fund will meet its fundraising target, a successful performance track record at firm level was stated by 81% of respondents, with 80% stating experience or expertise with a fund strategy, echoing the key factors investors look for in a manager. It is also interesting to note that reaching a successful first close was stated as key by 66% of respondents, with this milestone important for gaining fundraising momentum, as previously demonstrated
On the other hand, when infrastructure placement agents were asked what they believe to be the key indicators that a fund manager will be unsuccessful when fundraising, the top response was a lack of team experience, stated by 85% of respondents; lack of experience or expertise with a fund strategy was stated by 76%. It is therefore evident that both investors and placement agents place a great deal of importance on the experience possessed by a fund manager, as well as prior performance and expertise regarding the fund’s strategy.
Outlook
Despite the relatively positive fundraising environment for unlisted infrastructure funds, with increasing amounts of capital raised and funds spending less time on the road, there is growing evidence of a two-tier market, as capital becomes increasingly concentrated among a smaller selection of fund managers. Gaining fundraising momentum is vital; reaching a first close quickly often helps managers to attract sufficient capital to close on or above target. Additionally, a strong, demonstrable track record is very important, with both investors and placement agents stating this as a key quality. With such a crowded fundraising market, it is by no means certain that managers will be able to successfully raise capital, but with evidence of a clearly defined strategy; a strong team track record, whether investing through a prior fund or elsewhere; and the ability to communicate this to investors; there is sufficient investor appetite for fund managers to be very successful.
This is an excerpt from Infrastructure Spotlight – October 2014. To download the full report, click here
