Q1 fundraising – it’s not closing time yet

In August 2022, after fundraising for unlisted, closed-end infrastructure posted its best half-yearly result, we wondered if we were witnessing one last fundraising blowout before the music stopped. Last month, McKinsey answered our question more broadly when it noted in its annual private markets report that “the music didn’t stop, but someone turned it way down”. This week, as we survey our preliminary Q1 2023 fundraising figures, our main takeaway is: the show must be kept on the road for a while longer.

We’ve always celebrated the figures on the way up and we have no intention of ignoring them on the way down: the circa $5 billion of unlisted, closed-end capital we estimate has been raised in the first quarter of the year is not just a precipitous drop on the $65 billion recorded in Q1 2022 – it’s also set to become the second poorest Q1 on record, with only 2009 hosting a worst first quarter.

Still, context is king, and in our opinion, we are essentially seeing the data illustrate what we wrote shortly after the Infrastructure Investor Network Global Summit in Berlin: that the fundraising slowdown is real and is probably going to be with us for a while, but that fundraising processes are likely to be delayed rather than fail.

It’s all a world away from Q1 2022, by which point two mega-funds had closed on $31 billion to help make it the best first quarter on record. Though if we’re honest, not wholly unexpected when you consider how concentrated infrastructure fundraising has become. After all, it took 126 funds to raise $168 billion in 2022, representing an average fund size of $1.33 billion. Compare that with real estate, where 323 funds raised $169 billion last year, putting average fund size at $523 million.

A look at the top five funds in market further illustrates this point. Together, they are seeking a combined $96 billion – about 57 percent of all capital raised last year. If we were still living in our old world, we’d have no qualms stating that most of them would reach a final close this year, despite having launched in 2022. As it is, Antin Infrastructure Partners V and EQT Infrastructure VI have indicated they expect to substantially complete fundraising this year (meaning a 2024 close is likely); Global Infrastructure Partners V is yet to reach a first close; and Copenhagen Infrastructure V has just started fundraising. That’s enough to wipe some $70 billion off 2023’s fundraising total if only Brookfield Infrastructure Fund V reaches a final close this year.

So buoyant this market is not, but neither have its fundamentals changed. Infrastructure, particularly core, is still a great (but not magical) inflation hedge and a source of inflation-adjusted yield, as Serkan Bahçeci, a partner at Arjun Infrastructure Partners, convincingly argued recently. The asset class still benefits from the secular tailwinds of the energy transition and digital infrastructure. And infrastructure is still seen, within private markets, as one of two “in-demand asset class exposures”, the other being private debt, as per a recent Jefferies note (Alts: The Next Shoe to Drop?).

That doesn’t insulate the asset class from the denominator effect. Nor from what Bahçeci called the “inherent short-termism of asset allocators at institutional investors”. Or change the fact most institutions could be 100 percent invested in bonds these days to get their sought-after 7 percent target return, as highlighted by BlackRock president Rob Kapito in February.

Infrastructure’s fortunes, then, are closely tied to where our macro environment is headed, a picture that still includes a wide range of scenarios taking in everything from sticky inflation and higher-for-longer rates, to imminent rate cuts and a mild recession, to a full-blown financial crisis followed by a deep recession.

Which is another way of saying that we are still a few quarters away from having a clearer idea of infrastructure’s fundraising performance in our new world. Then again, this was never an asset class obsessed with quarterly performance.