How to Make Smarter Infrastructure Investment Decisions
June 24, 2024
Read Time: 7 minutes
Innovation & Tech
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Rochelle GlazmanHead of Product Marketing
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In a landscape of muted returns from traditional markets, investments in the private markets present an attractive alternative. Research shows global private equity and venture returns delivered nearly double the equivalent public market performance over three-, five-, and ten-year periods.1 The private markets offer diversification benefits and the prospect of compelling risk-adjusted returns over the long haul — key ingredients for constructing well-balanced portfolios primed for the future.
Infrastructure funds have grown increasingly attractive to global investors due to their potential for stable and long-term returns. Multiple factors are propelling the shift, including the public sector’s need for improved infrastructure and the private sector’s search for stable returns. Goldman Sachs research reports that private infrastructure AUM surpassed $1 trillion and is expected to increase to more than $3 trillion by 2035.2 BlackRock’s acquisition of GIP and General Atlantic’s Actis deal — two recent examples —also highlight the push on infrastructure investing.
Managing infrastructure investments, however, presents unique challenges.
This article explores the intricacies of scaling portfolio and data management for infrastructure investments, focusing on the need for tax efficient legal entity structures, the complexity of accounting data, investor demands, regulatory pressures, and the role of advanced data management systems.
Infrastructure funds often attract global investors, necessitating a one-size-fits-all legal entity structure to ensure tax efficiency and regulatory compliance for investors and fund managers. The funds typically have substantial capital, ranging up to $20 billion+, and make significant investments. Their lower transaction volumes also allow wiggle room for a complicated, tax-efficient structure. However, the complexity can be operationally burdensome, with some funds using dozens of legal entities, including masters, blockers, and feeders.
A tax-efficient structure that also complies with numerous regulations requires a deep understanding of the multi-jurisdictional tax laws and regulatory frameworks. Fund managers must balance these requirements to optimize the investment experience.
The intricate legal structures of infrastructure funds contribute to the complexity of accounting data. Data ingress and egress can become cumbersome, making it challenging to maintain accurate and efficient records. Each legal entity within the fund must be accounted for separately, adding layers of complexity to the financial reporting process.
For instance, the need to track and consolidate data across multiple entities can lead to inefficiencies and errors. Large-scale investments and institutional investors’ high expectations exacerbate the challenge. Ensuring accurate and reliable accounting data can help minimize discrepancies and affects of financial and regulatory implications.
Increasingly, infrastructure funds are attracting institutional investors, such as pension funds, insurance companies, and sovereign wealth funds, who are accustomed to transparent and timely reporting to assess the performance and risks of their investments. The complexity of meeting these demands compound when fund managers launch multiple funds and attract repeat investors who request unified reporting across their investments.
Institutional investors typically require comprehensive reports that include detailed financial statements, investment performance metrics, risk assessments, and compliance documentation. Providing precise information across multiple funds and entities requires robust data management systems capable of consolidating and analyzing vast amounts of data.
The regulatory landscape for infrastructure investments is becoming increasingly stringent. Regulatory bodies, such as the Securities and Exchange Commission (SEC) and the Institutional Limited Partners Association (ILPA), are advocating for greater transparency and detail in financial reporting. Recent amendments to Form PF and the SEC’s updated marketing rule underscore the pace of change. Even the vacated private fund advisor rule highlights the types of issues regulators believe are important, even if not officially codified.
Compliance with regulations requires fund managers to implement flexible, comprehensive reporting systems that can provide the required level of detail and transparency. This often involves upgrading existing data management and accounting systems to handle more complex reporting requirements. Failure to comply with regulatory standards can result in significant penalties and damage to a fund's reputation.
Given the complexity and demands of managing infrastructure funds, managers have a growing need for advanced data management systems. These systems can help streamline operations, enhance data accuracy, and improve reporting capabilities.
Key components of an effective data management system include the ability to:
The convergence of increasing investor demands, regulatory pressures, and the operational burden of complex legal structures is pushing private markets fund managers to implement significant changes in data management, operations, and technology. To achieve this transformation, managers should consider the following steps:
Scaling portfolio and data management for infrastructure investments requires firms to address the complexities of legal entity structures, accounting data, investor demands, and regulatory pressures. By leveraging advanced data management systems and implementing robust operational processes, fund managers can streamline operations, enhance transparency, and meet the evolving needs of their investors. As the investment landscape continues to evolve, embracing changes will be critical for the success and sustainability of infrastructure funds.
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