USS also eyes direct deals. The fund wants to get closer to its infrastructure investments, which have typically been in core utilities and transport assets, Merchant says. “Going forward, we are employing a direct investment approach rather than investing through infrastructure funds,” he says. “We are a financial investor that takes its responsibilities very seriously, which generally includes a requirement for board representation. Our preferred approach is to work with like-minded investors – be they pension funds or infrastructure funds – who are aligned with us in how they think about the asset.”

Seneviratne says that direct investing is one of CalSTRS’ long-term aspirations. But the fund will learn from managers it invests with before making that step, he says.

Flawed fees

Himbury says pooled infrastructure funds are not necessarily more expensive than direct investments. IFM’s fee of 45 basis points is cheaper than what other managers covered in the OECD report charge. The report finds that some managers set fees similar to private equity managers – but do not perform as well on average. The OECD found that managers typically charged a management fee of 1 to 2 per cent of assets under management, plus a performance fee that is usually 10 to 20 per cent of returns in excess of an 8 to 12 per cent “hurdle”.

Such costs can spur funds to employ their own investment staff to acquire and manage infrastructure assets. But these funds need to weigh manager fees against the cost of building and maintaining in-house expertise, the ongoing cost of managing an infrastructure asset over the long term, and the fees and costs associated with the transaction itself. Himbury says that much of the alpha of an infrastructure investment is achieved through the ongoing management of an asset, which takes considerable capacity and experience.

Preqin’s report states that fund manager fees have come under pressure – particularly in light of the difficult fundraising environment of the last couple of years. In 2011, the number of deals made by unlisted funds fell to its lowest level since the financial crisis, declining by 49 per cent to $31.8 billion. “The balance of power between investors and fund managers when negotiating terms and conditions has shifted towards the investors somewhat in recent years,” the report’s author, Iain Jones, says. “This means fund managers will have to ensure that their terms – especially those relating to management fees and carry structure – satisfy investors if they are to be successful in this increasingly competitive fundraising market.”