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Credit where it’s due

It was always going to require a superhuman effort for third-quarter infrastructure fundraising to beat its 2016 counterpart, but the amount by which it fell short still managed to astonish.

Last year, 18 funds closed for a combined record-breaking $24.7 billion. However, this amount would have been $14 billion lighter if not for Brookfield Infrastructure III – at the time the largest private infrastructure fund ever raised. BIF III has since been nudged into second place by the colossal Global Infrastructure Partners III (tipping the scales at $15.8 billion in H1 2017), but Q3 2016 still holds the crown for most capital raised from July to September.

Fast forward to Q3 2017 and a post-GIP III fundraising lull is evident – $10.6 billion of capital was raised across 10 funds holding a final close in the period. Those closes, it must be said, were as speedy as ever, with half the funds closed in the third quarter spending less than 18 months on the road. But we are still left with less capital raised by fewer funds holding final closes. Whether this is a signal of less opportunity is yet to be deduced.

In a way, there is no better barometer to measure the changing private infrastructure landscape than Q3 2017’s largest fund close: the junior debt-focused AMP Capital Infrastructure Debt III, one of three infrastructure debt funds accounting for 32.6 percent of capital raised in the quarter. This contrasts with the quarter of BIF III’s dominance a year earlier, during which four debt vehicles accounted for just 5.2 percent of total capital, with none breaching the top five largest funds.  This suggests that debt products are proving an attractive opportunity set in a crowded private equity market full of dry powder.

The reduction in return expectations for a given level of risk has been a key concern of institutional investors regarding private infrastructure markets in recent years.  Among the ways to thwart shrinking IRRs are a move away from a classic fee structure – as per SL Capital Infrastructure I – or to gradually ascend the risk curve.  In conversation with Infrastructure Investor, Brookfield’s Ian Simes suggested that subordinated debt can offer better risk-adjusted returns than core equity, given the latter is experiencing smaller returns in an increasingly risky environment.

“We’re seeing core infrastructure equity at sub-10 percent IRRs and that doesn’t seem to put very much return on risks like regulatory changes or exit multiples. If you’re a 10-year closed-ended equity fund and you buy something today at a very high multiple, and you’re expecting to sell it in 10 years’ time for that same high multiple, if discount rates are higher and general values have come down for whatever reason, then you may not achieve the IRR you were expecting,” Simes explained.

Though fundraising has slowed and final closes have retreated, Q3 2017 provided a positive uptick in the diversification of the opportunity set. At $1.65 billion, BlackRock’s Global Renewable Power Fund II was the third-largest fund to close – more than double the size of the firm’s last renewables-focused offering a year earlier (BlackRock Renewable Income Europe Fund, on $716 million).

First Infrastructure Capital, which will focus on greenfield investment in the Americas and Australia, closed a $1 billion first-time fund in Q3, the fourth-largest vehicle to close in the quarter and the fifth maiden fund to close year to date. Moreover, at least one manager of these industry new entrants is well on its way to launching a successor fund, with SL Capital limbering up for another go.

The turn in fundraising fortunes for first-time funds is supported by Infrastructure Investor research, which found that 53 percent of institutional investors would invest opportunistically with new managers.

Perhaps a sign that, contrary to faltering, fundraising is finding its feet as it heads in a different direction.