Two recent reports by Towers Watson and Ernst & Young have identified similar criticisms of infrastructure as an asset class, and these include high entry and management fees, illiquidity, lack of transparency, and hurdle rates. Frontier Investment Consulting’s clients have about $12 billion in infrastructure [half of that in Australia], and Chris Trevillyan, who heads Frontier’s research, concurs with most of the reports’ criticisms and adds more. “There is a real issue with the dearth of attractive infrastructure fund managers in the marketplace, including structural issues with related party concerns, fees and inappropriate protection of investor rights,” he says.

Frontier has taken a strong position that fund manager base fees should ideally be enough to cover the basic costs of running the business, not including performance-based remuneration for staff or excessive base salaries. Performance fees should be applied to performance after other management fees (that is, the return received by investors). “There is an inclination to require as high a performance hurdle as possible,” he says, “however, this may encourage excessive risk taking and/or discourage a manager from exerting effort on an investment that has underperformed.”

The proportion of profits that investors are willing to share with managers has to be limited, Trevillyan says, “as ultimately it is the investors’ capital that is at risk. An absolute upper limit of a third of profits able to be earned by a manager is very high and we expect that it should normally be at a lower level than this. “In relation to catch-ups, it seems difficult to justify how this structure is beneficial to investors. It seems inappropriate that at often a moderate return level (for example, 8-12 per cent for private equity) this is where the manager is receiving the greatest share of performance,” he says.

The limited data available on infrastructure investing is a significant issue with the asset class. “Given the heterogeneous nature of infrastructure assets there will always be issues with trying to get standardised data,” he says. “But, relative to a sector such as property where you can obtain data on leasing activity at the suburb level of granularity, infrastructure has a long way to go. “Ultimately we believe clients should be building portfolios in the long-term interest of members, and that means making good investments at good prices. If illiquid assets are avoided simply because of a focus on a daily unit-pricing regime than this seems like a case of the tail wagging the dog and not acting in the long-term benefit of members.”

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