As I prepare to leave sunny San Diego for the more mixed London clime, I find myself taking stock of themes from the series of manager meetings and updates leading up to the trip.

Based on performance thus far, managers that we rated over the last few years have provided proof of thesis for our UK and European clients. While there were certainly challenges during the Global Financial Crisis (GFC), since then we have seen a re-affirmation of the investment case. Early adopters have generally benefited from their quicker uptake. Looking forward, despite a more crowded and competitive market, we continue to find nimble managers who can deliver their mandate.

From a holistic view, the next few years should continue to be “good vintage” for the space. We expect private infrastructure to continue to offer the opportunity for relatively high cash flow, diversification benefits versus equities, and a favourable risk profile relative to corporate bonds. Investors are no longer as limited within the capital stack for infrastructure deals, since the retreat of European banks has left a void. The scene is improving on a net basis as well; since the GFC, the pendulum on fund terms is swinging back towards investors (LPs).

There is also a general “cleaning house” going on. I’m seeing managers scrub open-end fund fees and mechanics, and more closed-end fund GPs moving further away from the 2&20 profit splits legacy of private equity. The most common word passing LPs’ lips seems to be co-investments – and I think that the managers (GPs) got the messagebut the delivery is often a work in progress. For what appears to be a rather stodgy asset class at first glance, it has been fairly dynamic of late.

Against that backdrop, I have six ideas that I would focus current allocations on:

1. Mid-market deals Headline-grabbing auction deals grab your attention, but the risk/return profile can be complicated by pricing. It is not unusual for such deals to become “cost of capital shoot outs.” Mid-sized transactions or those that require specialist skills may offer a more attractive risk-adjusted return – with the right manager.
2. Boutique managers The fallout from the GFC and regulatory restrictions on banks is still sending a stream of boutique managers to the market. Evaluating these managers is more complex, but their niche focus and strong alignment potential can offer a portfolio fit.
3. North American energy The North American energy market continues to undergo profound changes due to shale oil/gas, even as the “fracking” controversy continues. Nevertheless, there is demand for new build infrastructure, as well as opportunities to buy existing assets (with contracted cash flows) that do not have the “sheen” associated with the next new thing.
4. European infrastructure debt Infrastructure debt may offer the yield, tenure and risk profile well matched to investor goals for the asset class. The retreat of many European banks from the space may signal good timing for institutional investors to consider opting in.
5. Clean energy continues to be a focus area for GPs and LPs, and is one of the more visible cases of the potential for a compelling double bottom line in infrastructure. Yet, there has been a re-set on regulatory risk, with many feed-in-tariff and subsidy programs up for change. Timing, policy awareness, and investment discipline are key.
6. Emerging markets: Even with the recent cooling off, emerging markets tend to have very significant supply-demand gaps for infrastructure. However, finding institutional quality projects and managers is difficult. Nevertheless, for investors with a well-constructed anchor portfolio, emerging markets may offer the potential for greater diversification and higher returns long term.

So for those who have already started, as well as those who have yet to start, new additions in private infrastructure may offer a compelling fit for your portfolio. However, it is critical to be very selective.

Tamara Larsen, Senior Research Analyst, Real Estate & Infrastructure, Alternative Investments