GP selection more important in PE than infra

LPs are increasingly looking for direct or co-investments in infrastructure, like in PE. 

Investors should be more wary of diversification of managers in their private equity portfolio than infrastructure, Komada Tomohiko, head of private equity investments at Japan’s Sumitomo Mitsui Trust Bank, said on a panel at PEI's Infrastructure Investor Global Investment Forum in Hong Kong this week.

“As far as we invest in core infrastructure, the underlying assets [have] pretty similar risk/return profiles, so manager diversification, relatively speaking, is less important than in private equity,” he explained.

Working on the LP side at the Japanese bank, Tomohiko adds that while happy with its infrastructure GPs, getting high returns is more difficult than in private equity so using direct or co-investment structures can be better.

“I don’t want to change our infrastructure managers, but I personally think that the room to deliver alpha for infrastructure managers is somewhat limited compared to private equity.”

He adds, “Some of the pensions have liquidity issues because now the Japanese government has decided to consolidate small pension [funds] into [larger] pension funds [like] in Australia. So those small pension funds cannot accept longer [term investments], but again this is part of alternative investments. So if the target return is lower than 4 percent or 5 percent, they will go to real estate, which is more familiar to them.”

Therefore, many LPs are considering direct or co-investments with infrastructure managers, a trend already apparent in the private equity arena.

Wendy Norris, director of infrastructure at Future Fund, agreed. “In the Australian market, we definitely take that direct mandate approach. We are able to understand the market and the depth of the market and we see a lot of opportunities in the marketplace, so we work with the managers that we think will be good at executing on delivering those investments for us.”

However, panelists noted that despite infrastructure risk being lower than private equity, assessing direct or co-investment opportunities in offshore markets is difficult.

“In the offshore markets it is not the same – it is much more difficult,” Norris added.

Her comment was echoed by Tomohiko, who said, “Europe or the US are a little bit [too] far from us to judge what is a good deal or what deal is appropriate for our clients or our balance sheet. So in that sense co-investing could be one approach but it is difficult to judge individual deals.”

Therefore, separate accounts with GPs are a way to mitigate this risk. “The ideal way [offshore] is separate accounts to set up with the right and good managers. It is not just for management fees, but to set up some flexible strategies.”