Yes, Q1 fundraising is down – but don’t panic

Our final fundraising numbers for the first quarter of the year are in and they pretty much confirm what we published earlier this month in our preliminary Q1 data snapshot – that capital raised for unlisted infrastructure funds is down substantially, with $10.3 billion of funds closed during the quarter versus $30.9 billion in Q1 2017.

The difference is heightened by the $15.8 billion close of Global Infrastructure Partners III (still the largest unlisted fund ever raised) in Q1 2017. But even if we took GIP III out of the equation, that quarter would still edge ahead with $15.1 billion of funds closed.

So, is this the beginning of the end? A sign that infrastructure fundraising has peaked, with record amounts of dry powder and an overheated core market finally scaring away LPs?

Here are four reasons why GPs shouldn’t get too nervous just yet:

A quarter’s just a quarter: It’s tempting to read too much into the numbers and easy to overreach, but in the end, a quarterly snapshot is, well, just a snapshot. GIP III made Q1 2017 look great, and Q1 2018 could’ve easily looked better if some of the year’s anticipated larger closes had fallen within its purview. Which brings us to the first reason to be optimistic: 2018 is not without its heavyweights. In fact, by the time we release our H1 figures, it is likely they will include the combined $13.5 billion raised by Stonepeak Infrastructure Partners and I Squared Capital for their latest funds. What’s more, if Blackstone makes good on its fundraising plans for its debut vehicle, it might amass around $15 billion by the end of the year, giving 2018 another GIP III-sized fundraise.

Average fund size keeps growing: Year-end totals have been remarkably stable since 2014, hovering at around the $60 billion mark, according to our data. What has changed is the number of funds in the market, which has decreased markedly. Case in point: only seven funds crossed the finish line during Q1 this year compared to 17 in Q1 2017. That certainly creates winners and losers, but here’s the thing: the winners are vacuuming up ever greater amounts of capital, with average fund size at Q1 standing at $1.47 billion (it was just over $1 billion for full year 2017). That means LPs are choosing to put more of their eggs in a smaller number of baskets. We would’ve been much more worried if average fund size, which has been growing steadily since 2014, had shrunk, as that would’ve almost certainly signalled decreasing LP interest in the asset class.

…. and so does LP interest: So far, though, there’s no sign of investor interest in infrastructure abating. In a survey of 60 of the 450 LPs that attended our flagship Global Summit, 86 percent stated they planned to increase their exposure to infrastructure. When asked how they plan to do that, 85 percent responded they would invest in the asset class through funds. Yes, they have concerns about the asset class, with rising interest rates and a frothy market at the top of the list, but these worries are not turning them off from allocating.

There’s an energy & telecoms revolution going on: Between the build-out needed to meet agreed climate-mitigation targets and the favourable economics behind renewable assets, on the one hand, and the explosion in data consumption that is catalysing a generational roll-out of wired and wireless broadband and the facilities to store that data, on the other, there is plenty of dealflow in the pipeline. It’s true that some of these assets will take longer to hit the mainstream of infrastructure investment than others. But these are sectors underpinned by strong fundamentals, including robust demand that in many cases is not correlated with GDP growth and favourable government policies. More importantly, they require tremendous capex which cannot solely be met by governments and incumbent corporate players. Expect a rise in sector-focused funds, like the $3bn-plus Digital Colony Partners, to cater to that need.