Infrastructure managers should consider lower cost strategies to better capture the institutional investing sector, according to Watson Wyatt.
In a new paper entitled Improving fees in Infrastructure, the firm concluded that low-cost public private partnership (PPP) strategies or higher-return, value-added strategies, which are private equity-like, were preferable to the high fee core infrastructure funds that currently dominate the sector.
"The structures that currently predominate in this area are obviously a good deal for infrastructure managers, but not necessarily for their investors," Watson Wyatt head of portfolio construction and diversity Ross Barry said.
"While we strongly believe in fair compensation, these fee structures are currently too high for the value they deliver, particularly in a lower return environment."
The paper revealed many institutional investors were turning away from investing in infrastructure due to the prohibitive fees.
"Infrastructure recommends itself as a natural diversifier for institutional investors and as a result it has sparked quite a lot of interest. However, many of the infrastructure funds that have been set up in response to this demand will be of very little interest to our clients until we see more attractive fee packages," Barry said.
According to Barry, many managers are now realising that in order to win long-term institutional money they need to offer investors a better deal.
"In the recent past, too many investors have unwittingly paid away the vast majority of the outperformance in fees. This is a complex area, but it doesn't mean it should be glossed over," Barry said.
Fees based on commitments, incremental charges like transaction of financing fees, and hurdle rates are areas that managers should consider changing, according to Watson Wyatt.
