Human beings’ basic needs are food, clothing and shelter according to Maslow’s Hierarchy. In a similar way, countries, whether they are mature and aging, developing or emerging require infrastructure in order to function and grow. Like most other asset classes, infrastructure suffered a dearth of dollars throughout the financial crises, but this alternative asset class is once again finding its way into the hearts and portfolios of institutional investors.

Since the financial crises of 2008 and 2009 unlisted infrastructure funds growth has been stagnant, as uncertainty has kept institutional investors from the table. However, 2011 was a year of growth, albeit with cautious optimism, as investor sentiment was on the rise. According to the latest infrastructure report from Preqin, infrastructure investment in both emerging and developed countries began to rise in 2011.

Fundraising for unlisted infrastructure vehicles reached its peak in 2007. According to the report, there was an 80% drop in aggregate capital raised between 2008 and 2009, when 17 funds reached a final close, raising only $7.4 billion in investment capital. As noted in the chart below, investors are slowly coming back to the infrastructure fold.

The climate for this asset class has improved considerably in the past 18 months. According to Preqin, an increasing number of infrastructure funds have reached or exceeded their initial fundraising targets, with 46% of the funds that closed in 2010 and the first half of 2011 achieving or exceeding their expectations. This is partly due to renewed investor interest and partly because managers have reset their fundraising goals to more closely align with investor interest.

According to the report, there currently are a record 128 funds currently on the road looking to raise an aggregate $92.1 billion, which represents 16% more funds that were actively seeking capital in January 2010. The increase in capital sought is only 2%, which further supports the belief that the funds are managing their investment expectations.

Deal Flow

While recent fundraising has increased, deal flow has been stagnant and a bit restricted since 2008. Deal flow has been restricted largely due to the reduction in available and affordable long-term debt financing and higher asset valuations, according to the report. The Preqin research shows that the number of deals completed each year has been relatively consistent since 2007. According to the report there were 250 transactions in 2008, which was the top; 238 in 2009 and dropping to 231 in 2010.

According to the report, in order to compensate for the more restrictive debt financing issues, Preqin has seen a decrease in the debt/equity ratio of infrastructure deals and an overall reduction in the size of those deals.

Reading the Investors’ Minds

According to the Preqin database, there are more than 1,150 institutional investors actively investing in unlisted infrastructure funds and in excess of 130 institutions interested in allocating to the asset class for the first time.

The Preqin June 2011 infrastructure investor survey shows 62% of investors planing to continue investing in unlisted infrastructure funds for the long term, while 22% intend to make direct infrastructure investments and 18% plan to make future co-investments. Of those institutional investors surveyed, 36% intended to increase their future allocations to infrastructure opportunities, while only 9% planned not to allocate in this area at all.

Furthermore, 40% of surveyed investors plan to commit to a minimum of one unlisted infrastructure fund, while 22% will allocate on an opportunistic basis in the 12 months following June 2011, according to Preqin. Direct infrastructure investing is growing as 6% of investors indicated that this would be their preferred route in the coming year.

While the outlook for fundraising is cautiously optimistic, there are ways in which managers can improve their chances of an allocation. According to the Preqin report, there are some LP/GP issues that continue to dog the asset class and managers wishing to improve their investor relations would do well to address issues such as fund terms and conditions. Managers who want a competitive edge should go to the fundraising table prepared to discuss management fees and carry structures, which have in the past been a bone of investor contention.