Painting a clearer picture

The first half of 2017 flattered to deceive. On face value, it was the best performing half-year in terms of capital raised by funds closed during the period (by a roomy 38 percent). Yet, key to this performance was the $15.8 billion close of Global Infrastructure Partners III – the largest private infrastructure fund ever raised – which we reported in January. Take it out of the total and H1 2017 was the worst half-year since a dismal H1 2012. 

GIP’s ability to raise such a sizeable fund in a relatively short amount of time may be an indicator of the industry’s direction. However, it is by excluding GIP III as an outlier that we gain a better picture of the current state of market affairs.

Infrastructure Investor research suggests that, since 2013, funds raising less than $1 billion spend on average about four times longer on the road than funds raising more than $1 billion. 

Thirteen funds reached a final close in Q2 2017, with an aggregate raised capital of $6.6 billion, and 29 funds closed in H1 2017, raising $36.2 billion – the largest five funds closed in the half accounted for 73 percent of total capital raised. Only one fund closing in Q2 is part of that top five: iCON Infrastructure, the London-based manager, closed Fund IV in one swoop at €1.2 billion.

iCON IV’s speedy close, with commitments from 47 LPs in a space of three months, is indicative of the private infrastructure fund market as a whole. 

This poses a question about where private infrastructure capital is being sourced. Larger funds naturally require larger LP commitments, however, this is not always an inhibitor for mid-sized institutional investors. For instance, iCON IV’s average LP commitment stands at about $30 million – well within the range of a mid-market institution. 

Instead, the differentiation may stem from the funds’ varying investment targets. Investors seem to be clambering towards larger funds – with a focus on larger, more expensive deals – than sub-$1 billion funds, the opportunity set of which is more likely to be found in the middle market.

This argument is strengthened by Infrastructure Investor’s capital consolidation data, which shed light on speed of deployment by estimating the time it takes for funds to come back to market. 

In 2012, 2014 and 2016, the largest three funds closed collected about 10 percent more, as a percentage of overall closed capital, than in intermittent years. The same large, established managers are shown to be closing in these periods (KKR in 2012 and 2014; Antin in 2014 and 2016). This suggests that, as well as experiencing faster fundraisings, larger funds can deploy capital quicker, thus reaching the deployment threshold required to return to market sooner. Brookfield Asset Management, for instance, took less than three quarters to raise $14 billion for Brookfield Infrastructure III. As of May 2017, BIF III was 45 percent invested, and the manager made clear its intention to hit the road with Fund IV in 2018.

GIP chairman Adebayo Ogunlesi confirmed this trend, telling us in April that, in hindsight, the manager could have raised $10 billion or $12 billion for GIP II, which closed on $8.25 billion in 2012, because of how quickly it ended up investing the fund. At the time, though, GIP turned down LPs for fear of how long it would take to invest a larger amount.

Geographically, the majority of funds closed in H1 2017 had at least a partial focus on North America or Western Europe. Only one fund, Actis Energy IV ($2.75 billion), has a multi-region remit that does not include North America, Europe or Asia-Pacific. The largest fund with a single geographic focus in H1 2017 was Fundamental Partners III, which closed above target on $990 million to invest in North American distressed real asset opportunities, including infrastructure.

Fundraising data for closed capital are likely to be autocorrelated for H1 and H2 2017. Excluding GIP III, H1 2017 was a mediocre period in terms of capital raised by closing funds and followed periods of accelerated institutional investor commitment to established names throughout 2016. Alinda, IFC, I Squared and Macquarie are in market with $4 billion-plus targets, however, even if these offerings reach a final close by December, it will be a tough ask to match 2016’s H2 fundraising levels, boosted by BIF III’s outsized $14 billion close.

With all being said, GIP III may still propel 2017 into a strong fundraising year. At the Infrastructure Investor Global Summit, held in Berlin in Q1, only 14 percent of attendees polled felt mega-funds would be more prevalent come 2020, with 52 percent expecting a shift towards more specialised strategies. It will be interesting, then, to see how investor opinion and market trends converge – if they do at all.