At the beginning of this year, we looked back on 2017’s fundraising efforts and told you to decide whether the glass was half-full or half-empty, after a fall in the number of funds and a slight increase in the capital they raised.
As we hurtle towards the end of the year, our fears that Global Infrastructure Partners’ record-breaker last year had disguised what looked like a reliance on mega-funds to prop up the market have been somewhat tempered. Some 41 funds had raised just over $68.21 billion by early September, according to our data, while a total of $68.16 billion was raised in whole of 2017.
In a year without GIP and Brookfield, the triumvirate of I Squared Capital, KKR and Stonepeak Infrastructure Partners has demonstrated its ability to capture the market’s attention, even if their ascendancy into the $7 billion to $8 billion bracket previously occupied by the two heavyweights begs the question of whether we can still call them middle-market managers these days?
That segment is alive and well, by the way, with the likes of InfraVia Capital Partners (€2 billion), DIF Infrastructure (€1.9 billion), Infracapital (£1.8 billion), First State (€1.4 billion) and Alinda ($1 billion) all closing mid-market funds this year, although the latter was originally targeting a rather larger $5 billion, in a rare case of the big getting smaller.
So, while 2018 is almost certainly going to be a record year for infrastructure fundraising, 2019 shows no signs of abating. Later this year, the market is set to welcome back Brookfield and GIP, anticipated to raise upwards of $40 billion between them for their new flagship funds. Blackstone, itself targeting $40 billion through an open-ended structure, is set to gather between $10 billion to $15 billion by next March, to conclude its first phase of fundraising.
Alongside them, the likes of EQT, Antin and Ardian are collectively targeting about €17 billion. Assuming they are all successful and continue raising money at the current brisk pace, a veritable wall of capital will descend on the asset class next year.
Have you caught your breath yet? Welcome the golden age of infrastructure fundraising.
“In terms of the amount of capital being sought in the unlisted infrastructure market at present, I think it’s quite unprecedented,” notes James Wardlaw, head of infrastructure at Campbell Lutyens. “So, if you’re an LP, I think the challenge is you’ve got to have a view on whether you’re going to re-up, invest or pass on a number of those funds. The challenge for a lot of managers is going to be getting that airtime and getting that share of mind with investors over the next few months.”
One solution may be spending more time attracting investors previously based in a different frontier.
“We put more effort in raising capital from outside Europe [for DIF V],” says Allard Ruijs, partner at the Dutch fund manager. “In the previous funds we had Asian investors and we’re investing more time in developing relationships in Asia. That always takes time and so in the following fund it led to increasing commitments from that part of the world. They have a similar appetite to German investors, typically more in the core space.”
He believes a continuation of its strategy towards PPPs, regulated assets and renewables also helped with the fundraising.
“Replicability of the track record is possibly the biggest issue,” adds Wardlaw. “A lot of the infrastructure funds have performed really quite well. Some of those historic returns are looking very good indeed, boosted by exits at multiples that are ostensibly very good. Is that replicable? In this environment it’s quite challenging to increase the value of assets.”
Indeed, those with longer track records are posting healthy figures, despite raising and investing in sometimes difficult periods. Macquarie’s four European infrastructure funds, raised between 2004 and 2011, have a combined gross IRR of 12.4 percent and gross multiple of 1.8 times. Infracapital’s 2005-vintage first fund returned 2.1 times capital to investors and its second is delivering a 24.9 percent gross IRR.
Below 2018’s mid-market escalation lies another theme lighting up the market: segmentation. Copenhagen Infrastructure Partners returned to the market with its third fund, closing on €3.5 billion at the start of the year, €1.5 billion more than its predecessor. While CIP is no neophyte, the close demonstrated the pulling power of a renewables-only vehicle, even if such offerings tend to be significantly lower than CIP III.
“We have seen a lot of interest for renewable-specific managers, be it driven by moves to decarbonise the portfolio or just an appreciation of the types of characteristics associated with certain renewable energy strategies,” says Anish Butani, director of infrastructure at advisory firm bfinance. “Not a week goes by when we don’t speak to an institutional investor that is looking at a real-asset allocation via an ESG-friendly lens and, more often than not, that leads them to a renewable-energy strategy.”
Meanwhile, Digital Colony stormed on to the scene as a joint venture between towers and data-centre owner Digital Bridge and Los Angeles-based real estate investment trust Colony NorthStar, raising a digital infrastructure fund that will close on $3 billion-plus. Digital Colony Partners is notable not only for being a large first-time fund dedicated to one of the market’s youngest sub-sectors, but also for the expansion of what was previously solely a real estate-based manager.
While Digital Colony’s targeted assets fall on the core-plus side of the spectrum, segmentation isn’t limited to the upper echelons of the risk curve, as has been proved by Macquarie Infrastructure and Real Assets. The group raised €2.5 billion for its Super Core Infrastructure Fund, focusing on core regulated assets. Brookfield quickly followed suit, with infrastructure head Sam Pollock describing its super-core offering as part of “a unique infrastructure story”.
Market segmentation hasn’t borne fruit in every instance, though. Last year, Oaktree Capital split a more generalist infrastructure strategy into separate energy and transportation vehicles, partially because of unexpected LP demand for a fund targeting transportation assets. Contrasting fortunes followed, as Oaktree announced in July that $1.1 billion had been raised for the transportation fund, but the energy fund was no longer being pursued. However, the well of energy assets targeted by US funds suggests this is perhaps less of a failure of segmented strategies. LPs wanting to specialise are able to access energy assets through several other managers in the US. Despite the opportunity, there are few specifically targeting transport investments.
Segmentation isn’t just restricted to sectors. One of 2018’s largest fundraises remains Macquarie’s $3.3 billion Macquarie Asia Infrastructure Fund 2, targeting assets in somewhat trickier markets such as India, the Philippines, Singapore and China. Elsewhere, Danish and Swedish pensions have been enamoured by AP Moller Capital’s Africa Infrastructure Fund, expected to close above $1 billion before the year is out, demonstrating institutional-investor appetite for an emerging markets fund not backed by any multilateral agency.
While the Nordics flocked to Africa, Europe-based manager Ardian crossed the Atlantic, closing its first Americas fund on $800 million, a success beyond expectations, according to Ardian head of infrastructure Mathias Burghardt.
An interesting figure in the past year has been the fall in the number of debt funds closing. While 18 percent of the funds closing in 2017 were debt-focused strategies, this dropped to just 7.9 percent in 2018 to date. However, Butani insists there remains plenty of demand for such offerings.
“An area of growing interest in the market is within the infrastructure debt class, in particular subordinated debt” he outlines. “Investors are looking for a stable, secure income strategy but one that has a little bit more seniority compared with equity.”
This year’s stats may be showing a quirk of the fundraising market, as 13.1 percent of the current funds being raised are debt vehicles – which remain the younger and less celebrated end of the market. In addition, much of the debt capital raised in 2017 came from AMP’s $2.5 billion fund, with other funds raised through segregated accounts.
Throughout the past year, the exception has increasingly become the rule – with funds frequently closing beyond their hard-caps.
Stonepeak , I Squared, KKR, DIF and First State all went through this process, seeking to include what turned out to be overwhelming amounts and numbers of commitments. The trend does start to beg the question, why are such hard-caps being set if funds are almost inevitably going to surpass them?
“The rationale for a hard-cap is often complicated. It’s tough to generalise why it’s being done in each circumstance.” Wardlaw says. “It’s often imposed by the initial investors in a fund, who don’t want too much scope creep in terms of the scale of deals done and to try to keep things to the mandate they were committing to.”
For DIF, its Fund V hard-cap increase was partly driven by a desire to avoid coming back to market too quickly, after clinching several deals early on.
“It was widely accepted [amongst LPs] because we were able to demonstrate we had about five transactions done and we were able to show a strong pipeline,” Ruijs explains. “Our increase was about €150 million and we got positive feedback on that modest increase proposal compared to what other GPs proposed to their investors. We were also able to get on board some very interesting names from outside Europe that we didn’t want to miss out on for DIF V – that was another reason for the increase, although it came a little later in the process.”
So, too, with Stonepeak – where the group moved to cater to last-minute commitments for its third fund, going $200 million over the original $7 billion hard-cap.
A hard-cap extension can sometimes involve scaling down some LPs already present in the fund, although the trend does not appear to have led to significant dissent, as long as the fundraising doesn’t distract managers from the task at hand.
“LPs may have invested with the knowledge of the final closing happening in a certain time frame,” explains Butani. “Managers are still deploying the capital on account of increasing the hard-cap. It matters only if it delays deployment and we haven’t seen that.”
Concerns around deployment are, however, leading to a growth in demand for open-ended funds, Butani says, particularly by investors in the UK, who are wanting to see more immediate levels of deployment.
“It can help from a planning perspective,” he explains. “From a governance perspective, there are some who prefer an open-ended structure, as it takes away the need to decide what to do with funds when they come back in 10 years’ time as well. It’s cropping up more widely in the market. There are a number of managers actively contemplating raising their next infrastructure fund as an open-ended vehicle.”
But Wardlaw believes this increased demand speaks more to the issues investors are having with closed-ended structures.
“I think this is caught up in a broader issue about the kind of returns that are available and the structures that work at the lower-returning [end] of the infrastructure return spectrum,” he contends. “At 15 percent-plus IRRs, that closed-ended model is well understood. The fees are justifiable as a proportion of the value-add. Where it gets more difficult is where returns are in single-digits and low double-digit target returns, where the traditional closed-end fund model is being called into question by some people.”
He qualified that by adding: “Some people want boring, stable, predictable cashflows from infrastructure.” The next 14 months should be a strong test of that statement.