It always feels slightly disconcerting to find yourself celebrating when the world around you is starting to fall apart. But such is the case after fundraising for unlisted, closed-end infrastructure funds registered its best half-yearly performance, with a record $112.7 billion raised, equivalent to 75 percent of the total amount garnered last year.
Driven by the unprecedented close of four mega-funds – including the first dedicated to the energy transition – 2022 is on track to be infrastructure’s biggest fundraising year.
This is undoubtedly good news for the asset class, and a sign of its growing strength. But it’s also the product of an era of steady growth and inflation, known colloquially as The Great Moderation, that, as BlackRock states in its recent mid-year outlook, is over.
“Instead, we are braving a new world of heightened macro volatility [a] regime [that] has echoes of the early 1980s. We ultimately expect […] persistent inflation amid sharp and short swings in economic activity,” BlackRock predicts.
It’s easy to find reasons to worry these days. The US economy has contracted for a second quarter in a row, raising fears of a recession. Winter is coming in Europe with the threat of Russia shutting off gas supplies completely. There’s plenty of gloomy talk about a bear market. And corners of private markets are flashing red, with H1 fundraising for private equity slowing markedly.
Nevertheless, there is cause for optimism that infrastructure is relatively well positioned to weather the coming storm. While it’s dangerous to generalise the asset-class’s inflation-hedging abilities, there’s no doubt that parts of it will thrive in an inflationary environment. Core/PPP portfolios featuring built-in inflation protection are a case in point, with UK-listed fund HICL, for example, already experiencing a NAV uplift as a result.
The jury’s still out on whether high inflation will prove to be a defining moment for infrastructure, but early signs underline its success as a calling card. According to Invesco’s 2022 Global Sovereign Asset Management Study, the asset class saw the largest year-on-year increase in sovereign wealth fund allocations on the back of its inflation-hedging characteristics.
Of course, high inflation has brought with it rising interest rates, but so far there is reason to worry, not panic. It’s true that a “large and rapid rise in interest rates may spur a correction in the premium prices for core infrastructure assets,” Goldman Sachs Asset Management wrote in a June report. “However, we believe the risk of this scenario is low, given central banks continue to show caution in regards to supporting growth,” it added.
That’s not to say premiums won’t soften in the face of moderate rate rises. But as Goldman points out, “the ‘floor’ to infrastructure valuations is likely to remain elevated”, given the amount of dry powder out there and continued institutional appetite for the asset class. To which we’d add the twin engines of the energy transition and digital infrastructure, certain to keep dealflow competitive for many years to come.
Lower for longer wasn’t just about interest rates, though – discount-rate compression was also par for the course, leading to a lively debate on what was really driving infrastructure valuations. Still, while discount rates should rise as interest rates increase, don’t expect them to do so in lockstep.
All of which should help keep the asset class, including core assets, relatively palatable from a risk-return perspective, even as rising rates boost the attractiveness of traditional fixed-income products. The diversification benefits infrastructure brings to investor portfolios should further cement its appeal.
There’s no doubt next year looks challenging. But with Brookfield Asset Management and Global Infrastructure Partners in market with their $25 billion ‘gigafunds’ – and EQT said to be itchy to launch a successor to its €15.7 billion fifth flagship – market conditions would have to deteriorate significantly to halt the asset class’s momentum.
If the music does stop, though, 2022 will likely be remembered for one last fundraising blowout.