Welcome to the age of consolidation

It’s been in the cards for a while, but the much talked about consolidation in infrastructure fundraising is in full swing, as evidenced by the latest quarterly figures from Infrastructure Investor Research & Analytics.

In the first quarter of 2016, unlisted infrastructure funds raised a total of $14.3 billion, the highest quarterly tally since 2010’s $16.2 billion and a welcome boost from the $10.8 billion raised during Q1 2015. What’s interesting about that figure, though, isn’t so much that it heralds a return to fundraising form, but rather what it tells about how these funds are currently being raised.

In Q1 2015, it took 20 funds to raise $10.8 billion. This first quarter? A mere 10. Throughout 2014 and 2015, seven and eight funds respectively managed to close above $2 billion. This first quarter? All of the top four funds closed breezed past the $2 billion mark. 

Unlisted funds are raising so much money these days that hard-caps are becoming the new caps and targets are regularly smashed. In fact, pretty much all of the top four funds closed in Q1 2016 sailed past their targets or hit their hard-caps.

And that’s just the first quarter. At some point this year, Global Infrastructure Partners and Brookfield will have raised close to $30 billion between them, driving home the painfully obvious: a select group of managers with a track record are raising ever larger sums of money, as infrastructure continues its ascent to the mainstream of institutional investment.

The more interesting bit, though, is how this concentration will affect investment dynamics. We see two trends worth revisiting. First, managers in need of writing large cheques will keep bumping up against each other and the large sovereign wealth funds and pensions that are direct investors in the large-cap space. This will almost certainly perpetuate the compressed returns and 25 to 30 times EBITDA multiples being paid for trophy assets, which is not good news.

Investors and managers tend to get a bit antsy when they see headlines focusing on high prices. Most will argue that price doesn’t tell the full story and that they have robust business plans to improve the purchased assets and increase profitability. But as Whitehelm's Graham Matthews points out on p. 30, investors are generally happy to accept compressed returns because of the current low inflation and interest rate environment. That environment, though, is not conducive to the kind of aggressive business growth many of the purchasers need to justify their acquisition multiples and generate an adequate return. 

The second trend we see being perpetuated, partly as a result of this returns compression, is the search for infrastructure characteristics in non-traditional assets. For the believers, laundry businesses and clinic networks are the new motorway service stations; for the cynics, they’re evidence of strategy drift. We try to keep an open mind, but we are not entirely convinced many of these infrastructure-like investments offer the same long-term resiliency as blue-chip infrastructure assets. 

A laundry business can see a nimbler competitor emerge and eat into its market share; so can a network of clinics, which can also be disrupted by, say, technological advances that allow consultations to take place at home. Now compare them to a port. Sure, a port can also be disrupted by a competing port being built in its vicinity, but the barriers to entry seem much higher.  

So while managers with a good track record are being handsomely rewarded with greater sums of capital, the stakes to deploy that capital have arguably never been higher. For the time being, they have the wind at their back, with the overwhelming consensus among industry practitioners being that infrastructure performs well, as shown by a recent Deloitte survey. If that sentiment persists, we should be talking about positive quarters for many years to come.