Last year’s Infrastructure Investor Debt 30 ranking of the largest fundraisers in the infrastructure debt space showed that not even a global pandemic could contain the expansion of the asset class. 

Fast forward another year, and while the world may have been shaken by the war in Ukraine, appetite for infrastructure debt shows little sign of easing.

“Through the turbulence of the covid-19 economic shutdown, unprecedented monetary easing, inflation and supersonic pace of rate hikes, infrastructure debt has demonstrated its appeal, providing excellent credit resiliency with no material losses,” says Jorge Camiña, partner and head of sustainable infrastructure credit at Denham Capital.

Upward pressure on interest rates and cautious traditional lenders, triggered by market uncertainty, are also creating opportunities for debt managers to help close the funding gap. And if the world is to reduce its fossil fuel addiction and transition to a low-carbon future over the next few decades, debt financing will have to play a crucial role. 

1. The show must go on 

Fundraising has boomed in recent years and our debt ranking has expanded to keep pace. In 2021, we doubled the list and last year we added another 10 spots as fundraising eclipsed $139 billion. 

Over the past 12 months, once again the growth of infrastructure debt has been meteoric. Total capital raised has increased by another $23 billion since last year’s report, while the top 10 firms between them managed to close on $10.2 billion more.

“Infrastructure debt in particular has seen increasing interest from LPs over the last decade due to the asset class’s stable contracted cashflows and its inherent defensive characteristics against inflation,” says Patrick Trears, global head of infrastructure debt at Ares Management. 

Over the past five years, the largest 10 infrastructure debt funds closed on a combined $34 billion, led by Ares’ $5 billion Infrastructure Debt Fund V. Ares also manages Infrastructure Debt Fund IV, the third-largest on the list. Both funds were brought under Ares’ management when the firm bought AMP Capital. US-headquartered firms dominate the top 10, with seven of the 10 largest funds closed over the past five years.

Interestingly, the geographical split changes when you examine today’s largest funds in market. European managers account for seven positions in the top 10 of our Debt 30 ranking, although Toronto-based Brookfield Asset Management tops the chart with its $4 billion Brookfield Infrastructure Debt Fund III. Combined, the 10 largest funds in market are aiming to raise more than $16 billion. 

Another noticeable trend has been the lack of strong crossover between the top debt and equity managers over the past five years. This year, only nine of the 100 largest infrastructure equity fund managers – as tracked in the II 100 ranking – charted in the debt ranking.

While Macquarie Asset Management takes fourth place in the debt ranking, it has the number-one spot for equity fundraising. 

Canada-based Brookfield may have achieved a silver podium finish for equity but only made it into eighth place in the debt listing. In third spot for equity, New York-based GIP dropped three places this year into 10th position in the debt ranking.

2. Shaping the low-carbon economy 

The shift towards cleaner, greener energy is another trend that cannot be ignored. While half of the top 10 infrastructure debt funds closed over the past five years had an energy angle, the same proportion for top funds in market have an explicit renewables focus.

All but two of those funds were also launched in the past two years. The war in Ukraine may have shone a spotlight on energy security, and particularly Europe’s dependence on Russian oil and gas, but, if anything, the move towards renewables is accelerating.   

“We are seeing continued shifts in the infrastructure asset class towards renewable energy, digital and new transportation assets, requiring significant capital to build,” says Trears. “At the same time, we continue to see market dislocation and retrenching from traditional bank lenders, creating opportunities for private debt lenders.”

When you look back over the past 12 months at fundraising activity, the scale of investor appetite for the energy transition is profound. Beyond debt, renewables accounted for 55 percent of all sector-specific infrastructure fundraising in 2022, and when combined with all energy-specific strategies, this total increased to 82.5 percent of all fundraising for the year.

Regulations are playing a noticeable role in this shift, particularly in Europe where the recent energy price shock has been hardest felt. In May, the EU launched its REPower strategy aimed at lifting renewables to 45 percent of the energy mix by 2030, up 5 percentage points over the previous goal. The bloc is also targeting almost 600GW of solar photovoltaic capacity by 2030. 

In the US, last year’s Inflation Reduction Act pledged $370 billion in climate and clean energy spending that should help spur investment and reassure developers that the government is finally committed to its decarbonisation promises. Other important policies include extending and providing tax credits for emerging technologies and onshoring low-carbon domestic manufacturing. 

3. The digital frontier 

For anyone who has experimented with the next generation of AI-powered chatbots, it is clear that digital transformation is coming. Already, these self-learning algorithms can write student essays, poetry, compose music and even debug computer programmes. Sometimes all in one go. Soon no industry will be safe from the robots.

But even before big tech does its best to upend work, the rise and rise of digital infrastructure has been impressive. In 2021 alone, over half of all infrastructure funds had a digital focus, with more than $64 billion raised. Demand for data centres and higher connectivity has also snowballed over the past three years, the pandemic a clear factor in the global pivot.

“There is a really high demand from the public, in general, and in the market, so we have seen very large transactions especially in the fibre space,” says Jan Richter, vice-president at Berenberg Bank. “We see that the fibre sector is coming of age, and the project and finance structures are, more or less, established so that a lot of investors feel increasingly comfortable lending to the digital infrastructure space.”

Keeping pace with user demand has seen private debt financing particularly look towards data centres and telecom towers. In the US, KKR and Global Infrastructure Partners snapped up data centre operator CyrusOne for $15 billion. Last year, fellow data centre provider Switch was also acquired by DigitalBridge and IFM Investors for $11 billion, while all-fibre network operator Everstream secured more than $1 billion in debt refinancing.

“It shows you, you can get a broad spectrum of investment-grade and high-yield deals in the digital space,” says Steve Coscia, senior director, global infrastructure debt at Barings. “This year we will probably see a combination of high-yield and investment-grade investments.”

Another key driver has been government support for higher-quality internet and narrowing the digital divide. In the US, management consulting firm McKinsey estimates that 24 million Americans still lack access to high-speed internet. In response, more than $100 billion is set to be deployed as part of President Joe Biden’s Bipartisan Infrastructure Law and the American Rescue Plan Act. 

“We will see some more greenfield development in fibre where you are taking a little more build-out risk, and risk in signing up customers,” says Coscia. “[Also], the US is a bit behind Europe in fibre build-out and you will start to see us catch up with a few more of those deals.”

For the EU, the bloc aims to reach full Gigabit network coverage and scale 5G to all households by 2030. In January, more than 60 percent of rural households were still unserved by very-high-capacity networks, more than double the proportion of urban areas. The asset class may have grown in a hurry over the past three years, but for LPs and managers alike there will still be plenty of opportunities as we head towards the digital horizon.