It is perhaps fitting that renewables fundraising would break through in 2021. After all, this was the year the world came together at Glasgow’s COP 26 summit to once again try and find common ground on how to mitigate the worst effects of climate change. It would’ve been concerning if that heightened awareness hadn’t been felt across the asset class, even if we are well aware there is much to do on climate change.
Fortunately, that was definitely not the case. As we noted in our Q1-Q3 fundraising report, renewables accounted for over $22 billion of the $81 billion raised by unlisted, closed-ended funds during the first nine months of the year. That’s more than 27 percent of all capital raised during this period. But perhaps more tellingly, dedicated renewables funds accounted for 61 percent of all sector-specific vehicles that closed during Q1-Q3.
That’s another way of saying that renewables firmly established themselves as the most successful sector-specific strategy of 2021.
As Gianluca Minella, DWS’s head of infrastructure research, noted in an end-of-year update: “Infrastructure fundraising continues to grow, with sustainability-linked strategies emerging beyond traditional core and core plus.” That trend is not expected to subside anytime soon, with Minella predicting LP appetite will shift away from flagship fundraising (though for our money, these still look pretty popular as we head into 2022).
“Rather than [focusing] on mega-funds, we anticipate a stronger demand from long-term investors for strategies focusing on sustainable infrastructure assets in the small-cap and middle market, as these strategies appear well positioned to provide portfolio diversification from more traditional core infrastructure, while also contributing to supporting sustainability targets,” Minella wrote.
Unsurprisingly, some of the biggest fund closes of 2021 have been renewables funds, with Copenhagen Infrastructure IV and BlackRock’s Global Renewable Power Fund III the largest and third-largest vehicles to close during Q1-Q3. However, activity in the sector remained steady as the year drew to a close, with Ares Management Corporation, a US power veteran, raising $2.2 billion for climate infrastructure – including $1.4 billion for its debut climate infra fund – and Schroders buying a majority stake in Greencoat Capital, one of Europe’s largest renewable infrastructure managers with £6.7 billion ($8.9 billion; €7.9 billion) of AUM as of 30 November 2021.
What’s more, LP appetite is growing beyond ‘vanilla’ renewables strategies and into the wider world of energy transition infrastructure, including transmission, storage, distributed energy and clean mobility, with Ares’ debut vehicle a good example of that. Another, higher-profile one is Brookfield Asset Management’s debut Global Transition Fund, spearheaded by former Bank of England governor Mark Carney and on its way to a $15 billion-plus final close in March.
In fact, it won’t be surprising if some of these funds start increasingly straddling the asset class divide, embracing a wide variety of risk-return profiles. As our colleagues at affiliate publication New Private Markets wrote in December, 2021 was also the year ‘climate’ became a private markets strategy.
The energy transition, renewable power, water sustainability and regenerative farming are all investments that could fall within the mandate of a climate fund, Brent Burnett, Hamilton Lane’s managing director for real assets, told NPM. “The reality is that climate funds could touch any one of those sectors,” he said, adding that “at each stage, there’s a role that private capital can play.”
We expect infrastructure managers to be well-positioned to continue capturing the lion’s share of those climate allocations.