Fundraising’s silver lining

There are two schools of thought for 2017’s fundraising totals: the positive, which shows the average infrastructure fund growing larger, and the negative, that fewer funds actually closed, writes Jordan Stutts

Last year started with a bang when Global Infrastructure Partners closed the largest unlisted infrastructure fund ever on $15.8 billion, but was this a sign of a big fundraising year to come?

The answer was mixed.

First, the glass-half-empty view: the amount of funds that held a final close in 2017 was down from the year before, from 67 to 51, according to Infrastructure Investor data. Now, the glass-half-full perspective: the 51 funds that did hold a final close raised only $2 billion less than in 2016. This means that, even with fewer funds, the amount of capital being raised remains steady.

Infrastructure fundraising fell, albeit slightly, for the second year running in 2017, the first time this has happened since 2010. However, though the number of funds closing per year has been decreasing since 2015, the average fund size is on an upward trajectory, increasing by 43 percent and 27 percent in 2016 and 2017 respectively.

With fundraising totals relatively steady over the last three years, the real story in 2017 is how average fund sizes – for the shrinking number that can raise them – keep getting bigger and bigger.

The average size of funds closing in 2016 was $892 million, a number that factors in Brookfield’s $14 billion third fund. The average in 2017 was $1.135 billion. The total without GIP III’s outsized influence was $842 million. Both of the past two years bode well for the industry, though. The three years before, 2013 to 2015, averaged in the $600 million to $700 million range.

How much impact did GIP’s fundraising have on the yearly figures? Here’s some context: the next four funds closed in 2017 combined did not reach GIP’s $15.8 billion. At the year’s midway point, nearly half of all unlisted infrastructure equity raised was committed to GIP III.

The fund’s January close set off a debate among investors about the merits of infrastructure mega-funds and if that’s where the market is heading. LPs that write large cheques can take a decent stake in a $15.8 billion fund without fear of lacking portfolio diversification. However, some smaller investors worry their commitment will be drowned by larger interests.

There have also been questions about dealflow – whether enough assets are available for the capital GIP III-sized funds must invest. The firm has so far put that question to rest with big 2017 acquisitions, including its part in a consortium paying $5 billion for Equis Energy – the biggest renewables deal ever – and a $1.8 billion purchase of a West Texas midstream company.

It’s important to note that several firms have been raising sizeable funds throughout the year that are expected to close in early 2018. Stonepeak Infrastructure Fund III is likely to hit its $7 billion hard-cap and I Squared Capital is also on track to hit its $6.5 billion ceiling, for example. Those fund sizes are similar to the sophomore vehicles raised by GIP and Brookfield, which collected $8.25 billion and $7 billion respectively.

At that time, around 2012, infrastructure funds in the $7 billion range set the standard for the asset class. They have now upped their own ante, leaving the likes of Stonepeak and I Squared as heirs apparent to the $7 billion fund range. There is also the launch of Blackstone’s infrastructure programme, which received a $20 billion commitment from Saudi Arabia’s Public Investment Fund. The firm’s plan is to raise $7.5 billion over the next nine months alongside Saudi Arabia’s commitments in an open-ended vehicle, with a first close expected around March. Given the open-ended nature of the vehicle, there is also an open question on whether Blackstone will succeed in popularising a structure which, to date, has mostly been taken up Down Under.

There are interesting trends to pay attention to about what regions are being targeted by funds in market.

North America has been the most active region over the past few years with some $75 billion of funds in market. This trend is likely to continue as well, possibly buoyed by President Donald Trump’s promise to revitalise US infrastructure and the launch of an infrastructure bank in Canada.

Europe is the next largest funds-in-market region at $50.43 billion and where 2017’s sixth largest infrastructure fund closed on $2.16 billion. After that, multi-regional vehicles hold $46.51 billion of funds in market.

Things tighten up significantly for the next few markets – Asia-Pacific, Latin America and sub-Saharan Africa. Together, those three regions hold $33.64 billion of infrastructure funds in market. And among the funds focused only on non-OECD markets, only Actis Energy 4, which raised $2.75 billion, was among the top 10 fundraises of the year.

Whether 2017 can be considered a good fundraising year is a matter of debate. Milestones were reached and the asset class certainly attracted a lot of attention. But as the year drew to a close, it didn’t post as strong a set of numbers as the two preceding years.

The silver lining is that those who did manage to raise money in 2017 will probably remember it as their most successful year to date.