Infrastructure fund managers globally secured only $4.7 billion in commitments in the first half of the year, or about one-fifth of their 2008 fundraising total, according to the latest fundraising data from Probitas Partners.
Of the $4.7 billion, approximately $1.3 billion was raised in the first quarter of 2009 and $3.4 billion in the second quarter, the data shows. This is slightly less than the 2005 full-year fundraising total, when $5.2 billion was raised globally, by Probitas' estimates.
While no estimates are available for the comparable half-year period for 2008, infrastructure funds had secured investor commitments of $21.5 billion through the end of September 2008, according to the data.
Infrastructure fundraising: down but not out
Infrastructure was not the only victim of declining LP commitments. Everything from buyout and venture capital to mezzanine and private equity real estate funds suffered precipitous drops in half-year fundraising totals, the data shows.
“Investors are holding back on commitments and I don’t think you can separate infrastructure from the illiquid alternatives. When you look at it, every market in the illiquid alternatives has been hurt, including, for example, distressed debt funds,” said Kelly DePonte, a partner at the San Francisco-based placement agent.
He singled out secondaries funds, or partnerships which buy existing interests in private equity funds from investors, as an exception to this trend. By Probitas’ estimates, those types of funds raised $16 billion in the first half of the year, versus $7.4 billion in all of 2008. Secondaries, though, are the most liquid funds, DePonte said – a further indication of the need for liquidity in the current market.
Investors are holding back on commitments and I don't think you can separate infrastructure from the illiquid alternatives
Infrastructure, by contrast is widely viewed as the most illiquid of the alternative asset classes and doesn’t have an appreciable secondary market for fund interests. Despite this, “when we talk to investors, investors are still interested in the sector,” DePonte said, adding that they view the sector more favourably than mega-buyouts, for example, but just don’t want to commit at this point.
So far this year, the largest fund closings of the year were the Fondi Italiani per le Infrastrutture, which held a final close on €1.9 billion in February and Macquarie Infrastructure Partners II, which held a second close on about $1.4 billion in March 2009, DePonte said.
Since then, fund closings have slowed down, partly due to the summer time, when few fund closings are announced, DePonte said. Some sponsors, such as the Bank of Ireland, ING Real Estate and Spanish bank Santander, have even halted fundraising altogether for certain infrastructure funds they manage.
Looking forward, DePonte predicts that infrastructure funds may match the $4.7 billion raised in the first half of 2009, but that depends on whether there are any more large fund closes announced later this year. It seems unlikely at this point, DePonte said: “I am not anticipating a surge of fundraising in the fourth quarter that is going to change the trendline tremendously.”
I am not anticipating a surge of fundraising in the fourth quarter
But DePonte is more optimistic about 2010. If public equity markets continue to recover, he believes that limited partners will be less pressured by the so-called “denominator effect,” where there is an unintended increase in the investment allocation to an illiquid asset class, such as infrastructure or private equity, created by the relatively further fall in values of other asset classes. Many pension and institutional investors have interests in public equity markets, which tubled precipitously late last year, and illiquid asset classes. Consequently, the denominator effect has been a key capital constraint for them throughout much of 2009.
“In the public markets, if we get a little bit more stability here, we’ll probably see a better market in 2010,” DePonte said.