How to Make Smarter Infrastructure Investment Decisions
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.
Implementing legal entity structures
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.
Addressing complex accounting data
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.
Responding to the demands of institutional investors
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.
Delivering greater transparency
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.
The role of advanced data management systems
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:
- Integrate and consolidate data: A robust system should integrate data from multiple sources and consolidate it into a single platform. This integration ensures all relevant information is accessible and can be analyzed comprehensively.
- Automate routine tasks: Automating routine accounting and reporting tasks can significantly reduce the operational burden on fund managers. Automation can also improve data accuracy by minimizing the risk of human error.
- Accelerate analytic prowess: Leveraging advanced analytics can provide deeper insights into investment performance, risk management, and compliance. These insights can help fund managers make more informed decisions and respond proactively to investor demands and regulatory changes.
- Promote scalability: As infrastructure funds continue to grow, your data management system must be scalable to handle increasing volumes of data and more complex stakeholder and reporting requirements. A scalable system can adapt to the evolving needs of the fund and its investors.
- Foster security and compliance: Ensuring the security of sensitive financial data is paramount. A robust data management system should include advanced security features to protect against data breaches and ensure compliance with regulatory standards.
Implementing change
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:
- Assess your current systems and processes: Conduct a thorough assessment of existing data management and operational systems to identify areas of inefficiency and potential risks. This assessment should include an evaluation of the current legal entity structures and their impact on accounting and reporting processes.
- Invest in upgrades: Advanced data management and analytics platforms can streamline operations and enhance reporting capabilities. Fund managers should consider investing in technologies that offer scalability, automation, and integration capabilities.
- Enhance expertise: Building expertise in tax law, regulatory compliance, and data analytics is crucial to manage the complexities of infrastructure funds. Ongoing training and development can help staff stay updated on the latest regulatory changes and technological advancements. Working with a partner can also offer the opportunity to add a diverse range of expertise or break your dependency on hiring the right talent.
- Support stakeholder engagement: Proactive engagement with investors and regulators can help you better understand expectations and requirements. Regular communication and transparent reporting builds trust and improves investor relations.
- Develop a comprehensive data strategy: A well-defined data strategy should outline how data will be collected, managed, and analyzed to support decision-making and compliance. This strategy should align with your overall fund goals and address investor’s specific needs.
- Monitor and adapt: Fund managers will want to continually monitor and review their data management and operational processes. Being adaptable and responsive to changes can help maintain compliance and meet investor expectations.
A multifaceted approach
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.
Sources:
- 1.Have Public Market Returns Permanently Eclipsed Private Market Returns?, Cambridge Associates, April 2024
- 2.Infrastructure: An Evolving Asset Class, Goldman Sachs, 2023
Authored By
Rochelle Glazman
Rochelle is responsible for enabling go-to-market and growth strategies across sales, marketing, product, and client engagement. Before taking on this role, Rochelle was a Senior Pre-Sales Consultant, engaging with clients and prospects across the financial services industry. Prior to joining Arcesium, Rochelle spent over five years at BlackRock Aladdin servicing institutional asset managers and leading several implementation projects across North and South America. She graduated from Vanderbilt University with a degree in economics.
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