Many in the market will be watching to see if Blackstone can reach the $40 billion target for its first, open-ended infrastructure fund. Meanwhile, Global Infrastructure Partners is expected to reach its hard-cap of $20 billion in September, with Brookfield also eyeing a similar amount for its fourth global infrastructure fund.
These examples are part of a broader trend that has seen fund sizes in infrastructure rise significantly over the past 10 years. In 2009, the average fund size stood at $465 million, according to Infrastructure Investor data; last year, the average was $1.2 billion; and during the first seven months of 2019, it rose to $1.9 billion. There is certainly wind in the sails of the larger fund managers. The push into alternative assets since the global financial crisis has benefited infrastructure, and the asset class’s relative newness has increased its attraction for LPs.
“Infrastructure funds didn’t really hit the market until 2004 to 2005,” says Kelly DePonte, managing director at Probitas Partners. “In real estate and private equity, you had peaks and troughs around the financial crisis, but few infrastructure funds were impacted by this because most were still in their infancy at that point. As a result, you’ve seen steady growth of the industry from a low base.”
Large infrastructure funds also benefit from the need for big institutional investors to limit the number of relationships they manage. “LPs with large sums to deploy are making fewer, larger investments, so that clearly benefits funds that can take on big cheques,” says DePonte.
It took around three decades for private equity firms to breach the $20 billion fund mark, yet Global Infrastructure Partners will probably manage it in 13 years. It’s a trajectory Anish Butani, director of private markets at bfinance, sees continuing. “If you look at where infrastructure sits within institutional portfolios, it’s in the real assets category and is adjacent to real estate,” he says. “We should look at real estate as a harbinger of things to come for infrastructure.”
Tip of the iceberg
While real estate funds have not closed at much greater levels than infrastructure vehicles, allocations at many institutions are higher for real estate. “Investors’ exposure to infrastructure is really only the tip of the iceberg when compared with real estate exposure,” adds Butani. “Yet it will continue growing.” New funds will spring up to capture demand, but there are fewer infrastructure funds – so the larger players may mop up much of this new capital.
On the demand side, too, there are growing opportunities. “Infrastructure is critical to societal and economic needs,” says Butani. “We all know the McKinsey figures – that between 2017 and 2035, we’re facing a $5.5 trillion spending gap globally. Few governments are running at a surplus, so there is a real need for the private sector to play an important role. The outlook for infrastructure is undeniably strong.”
One of the other drivers for mega-funds may be more open-ended structures. “You already see a lot of open-ended structures in real estate, but few so far in infrastructure,” adds Butani. “There’s currently a mismatch between the long-term nature of infrastructure and the closed-ended funds we see today. If the industry can find ways of offering liquidity to investors, it’s inevitable that more long-term, perpetual infrastructure funds will emerge.”
For that to happen, firms will need to convince investors. In a Probitas survey, the 10-year closed-ended fund emerged as the structure of choice for LPs. “Many people have come across to infrastructure from private equity,” says DePonte. “They are used to closed-ended structures and many prefer them because the finite life forces investors to re-do due diligence on a firm every five years or so. There isn’t that trigger in open-ended vehicles.”
The other potential brake on the growth of mega-funds is direct investment. Although there will always be a need for funds to manage complex assets, investors may invest directly in operational assets with long-term contracts, such as toll roads. They could also be buyers for closed-ended funds’ assets. And while Blackstone’s $40 billion target would smash records, up to half the capital will be provided by one investor – the Saudi Arabian Public Investment Fund.
Nevertheless, the infrastructure fund market looks set to grow, buoyed by appetite for long-term, stable returns and a need for investment. We may not have to wait long before the $20 billion mark is breached.