The rush for core is on – can it deliver on its promises?

Core funds are in strong demand, but their returns targets will need to match the motivations of LPs investing in them.

Another week, another two core infrastructure funds rise up the agenda. Last Tuesday, we gave you the lowdown on Stonepeak’s new core infrastructure strategy, in an interview with its head of Europe, Daniel Wong. Shortly after, we broke the news that Wong’s previous parish, Macquarie Asset Management, had raised $3 billion to date for its open-end core Global Infrastructure Fund, following its launch late last year.

The increasing shift has many of the market’s top GPs flying the core infrastructure flag, with even relative asset class newcomers like DigitalBridge raising capital for its own core fund, as well as Brazil’s Patria launching a Latin America-focused core vehicle.

Besides these specialists in digital infrastructure and growth markets, renowned value-add specialists Stonepeak and EQT are also getting in on the core game in today’s new world. And what is this world?

“In our view, core infrastructure can actually be a great hedge against the current environment, especially if you’re linking rising interest rates to the fact that inflation is high,” Wong told us, adding that “these can be excellent defensive investments to have in this sort of macroeconomic environment”.

Stonepeak – like several of its peers in the market with core ambitions, including Macquarie – is thought to be targeting net returns of 8-10 percent for its strategy. KKR, for its part, targets 7-9 percent for its own Diversified Core Infrastructure Fund, according to pension documents.

Achieving those targets would indeed be quite a defence against today’s uncertain environment, and not too far off many of the returns demonstrated by core-plus managers. Investments in regulated utilities – a potential target for Stonepeak and already invested in by KKR – will need some of their value-add expertise applied to get to that upper range.

Indeed, should these core funds achieve what might be considered above-average returns for today’s compressed core infrastructure assets, LPs are unlikely to be too concerned. However, it is worth bearing in mind why some investors are entering this space in the first place.

“The assets that might be considered infrastructure have evolved over time and [value-add] funds are on the edge of that [evolution],” James Bennett, chief investment officer of the Maine Public Employees Retirement System, told us in May, shortly after the pension committed $100 million to KKR’s DCIF and before it plugged another $100 million into Stonepeak Core Fund.

“We want to tighten the focus towards assets that are cashflowing from the beginning,” Bennett added. “It’s taking a little bit of risk off the table, but it’s appropriate for the portfolio to tighten up that focus.”

It’s not hard to fulfil the first half of Bennett’s desire. That is evidenced by recent core infrastructure fund deals, such as Stonepeak’s investment in American Tower’s operating US data centres, KKR’s purchase of John Laing’s existing assets portfolio, and Macquarie’s deployment in toll road network Autostrade Per l’Italia – all cash-generative from the get-go.

The harder test will be if Bennett’s wish of taking risks off the table can be granted, given the punchy returns targets promised and the value-add pedigree of core infrastructure’s new players.