Themes of the Year 2019: Segmentation becomes increasingly specialised

Segmentation within the infrastructure asset class didn’t emerge in 2019 but it did take on new forms, one being specialist funds.

Energy transition and digitisation are two mega-trends participants at our recent European roundtable identified as creators of investment opportunities.

“These trends are stronger than the overall GDP direction of any given market,” Simon Söder, a partner at Antin Infrastructure Partners said during the discussion. “We like the fact that energy transition and telecom investment are, relatively speaking, uncorrelated to GDP because they are not driven by everyday economic activity. They are driven instead by the need to upgrade infrastructure for the economy of today, but also for what will be required in 10 years’ time.”

Those statements apply not only to Europe but globally and it is this tremendous growth potential that has led many fund managers to launch specialist funds.

Within the past 12 months, Stonepeak Infrastructure Partners has reportedly launched its first renewables-dedicated fund setting a target of $1.25 billion. Macquarie’s Green Investment Group is also in the market pitching a $1.5 billion vehicle dedicated to the sub-sector.

More recently and just as the year was drawing to a close, Mirova raised the largest European renewables fund, Eurofideme-4 at €857 million, while BlackRock Real Assets held a $1 billion first close on the third vintage of its Global Renewable Power III fund.

The size of the opportunity and the ESG characteristics associated with renewables are certainly part of the reason the sector is attracting so much investor attention, but the growing number of renewables-only funds is also an indication of trending market segmentation.

As Northleaf Capital Partners’ co-head of infrastructure Jamie Storrow recently told us, “there are numerous renewable power funds being marketed right now. A few years ago, that degree of focus was rare”.

The same can be said about telecoms and digital infrastructure. As Storrow, pointed out, “five years ago, a communications infrastructure fund wouldn’t have been a marketable idea”.

But, in 2019, the industry saw a fund solely dedicated to the digital infrastructure sector close on $4.05 billion. While Digital Colony Partners stands out for its size, it’s not the only example. Luxembourg-based Cube Infrastructure Managers has already made three investments through its Connecting European Broadband Fund, which targets underserved areas in Europe; while in the US, San Francisco-based GI Partners is looking to raise $1.25 billion for its debut digital infrastructure fund that will target data centres and fibre opportunities in North America and Europe.

Regardless how fund managers are choosing to specialise – whether by sector, geography, risk profile or transaction size – the key driver is compressed returns.

“Return segmentation is really what is driving [specialisation based on] geography and asset type,” Ian Whitlock, a partner in Eight Advisory’s infrastructure team, told Infrastructure Investor. “The thing that strikes me is the way that infrastructure funds, pension funds are looking at return segmentation,” he noted, referring to trends prevalent in 2019 and those he expects to continue in 2020.