Total annual capital raised at the final close reached a new record of USD 148.75bn accumulated by 59 infrastructure, renewables and energy transition funds in 2022, beating the last record of USD 103bn raised by 54 funds in 2021. 

However, 2022 was characterised by two very contrasting halves, and 2023 in many ways is likely to mirror this fundraising dichotomy, according to sources and an Infralogic  analysis. Of last year’s total, USD 123.6bn was raised in 1H22 by 35 funds, while 24 funds raised only USD 25.2bn in 2H22. 

The second-half slowdown can be blamed on many factors, including the so-called ‘denominator effect’ and concerns by many investors about the economy’s direction. While fundraising is expected to ramp back up over the first half of 2023 for a variety of reasons, some GPs and placement agents are targeting smaller ‘tier 2’ and ‘tier 3’ LPs to ensure there is no significant let-down in infra funding. 

“As allocations among tier 1 LPs become tighter, fund managers are increasingly looking to tier 2 and 3 LPs,” said Fabian Potter, managing partner at German placement agent 51 North Capital. “These LPs have started investing more recently and are less constrained by tight allocation limits, and in most cases are looking to scale their infrastructure investments.” 

Cons, and pros 

The 2H22 fundraising slowdown was in large part a consequence of the denominator effect, and was not entirely unexpected, as Infralogic reported in July. When the values of non-infra assets in some institutional investors’ portfolios fall, their infra assets can grow as a percentage of their overall holdings to or beyond their allocation caps — limiting their ability to continue investing in infra assets. This ‘denominator effect’ has been particularly pronounced over the past year due to the ongoing strength of infra-asset valuations amid widespread volatility in non-infra asset values. 

In recent months, wider macroeconomic issues have also weighed on infrastructure, renewables and energy transition assets, with inflation, rising interest rates and the possibility of recession pushing many institutional investors to slow down or hold off on investing and actively manage their portfolios. 

As a result of these concerns and the denominator effect, third and fourth-quarter 2022 fundraising was among the slowest in the past five years: 

The extent to which these trends will continue into 2023 remains uncertain, sources said. Without a considerable rally in equity markets, the denominator effect is likely to continue constraining investor allocations. With the overall economic situation unclear, many investors may watch how infra assets valuations hold up early this year before settling on allocation strategies for 2023. 

However, even barring a rally in public equity markets, the effects on infra fundraising are unlikely to be catastrophic. Sources of fresh capital are still to be found, according to sources. 

Some investors, such as UK local government pension schemes, remain strategically under-allocated to infrastructure and renewable energy, as reported. Central European LPs are similarly under-allocated to infra assets, according to a Switzerland-based fund manager.   

In addition, some think the so-called ‘tier 2’ and ‘tier 3’ LPs will play a larger role in the infra market’s future. These LPs, comprising investors such as family offices, charities, smaller university foundations and high net-worth individuals, are often at a much less advanced stage of their deployment of real assets than tier 1 LPs and so proportionally have a greater amount of capital to invest. 

While the tier 2 and 3 investors have less dry powder, enough of them investing together could make up for any pullback by larger investors, according to a source at a Scandinavian fund manager. 

“Fund managers are tak[ing] more note of these investors,” the source said. “Aggregating investments from several tier 2 and 3 investors can make up for a shortfall in larger tickets usually provided by tier 1 LPs.” 

Early-year patterns 

What is more certain is that the resetting of investor allocation buckets that begins any year will mute any effects of a downturn in fundraising early this year. According to Infralogic estimates, about USD 50bn of capital has already been earmarked for close over the next five months. As such, this year’s fundraising activity may follow last year’s pattern of spiking in the first half before slowing. 

The new year may also follow another 2022 pattern. Last year, a large proportion of capital raised in the first quarter was driven by the overhang from the previous year, when large fund managers including I Squared, KKR and Stonepeak extended final close timelines into 2022 from 4Q21. 

Likewise, many managers have extended fundraising timelines into 1Q23 in order to take advantage of fresh investor allocations, and this overhang is again expected to keep the market buoyant through the first half of 2023: 

• EQT pushed back the first close of its EUR 20bn sixth flagship fund, originally planned for the end of last year, to the end of this quarter; 

• Macquarie Asset Management delayed the final close of its EUR 9bn Macquarie European Infrastructure Fund 7 from year-end 2022 to later this year; 

• Vauban pushed the EUR 3.5bn final close of its Core Infrastructure Fund IV into 2023; and 

• Abrdn delayed the final close of its EUR 1bn Core Infrastructure III fund. 

Competitive pressures 

The six largest funds that closed in 2022 accounted for over 50% of the total volume closed. While this mega-fund segment is no longer dominated solely by GIP and Brookfield, this fundraising pattern helps further explain the drop in volumes during the third and fourth quarters. 

All six mega-funds held final closes during 1H23. As there is often a ‘flight to familiarity’ in times of constrained allocations, many investor allocations were drained by early commitments to these mega-funds. 

This cleared the way for mid-market funds to step up. Every fund closed in 2H23 was in the mid-market space. 

The year ahead, however, will prove challenging for many of these smaller funds. As allocations tighten, the market becomes more competitive. “Many LPs are cutting down their annual fund allocations from five or six funds to three or four … and investors tend to favour aggregating smaller fund positions into larger ones,” said a senior figure at a European placement agent. 

This is especially true in sectors such as core infrastructure. The start of 2022 saw an increasing number of large-cap GPs such as GIP, EQT, Stonepeak, AMP Capital and Carlyle announcing plans to launch multi-billion dollar core funds. 

That made sense at a time of historically low-interest rates, with many LPs re-allocating away from low- or negative-yielding fixed income to what many saw as a comparable alternative in terms of risk/return profile and longevity. However, as predicted by Infralogic in late 2021, the move to infra assets from fixed income reversed when rates began rising. 

Now that interest rates are rising and investors turning back to fixed income, competition for their shrinking pool of capital will intensify. Core infrastructure fund managers are being placed under increased scrutiny to prove the core characteristics of their investments, said the senior placement agent. 

“Core managers are under greater pressure to prove their value,” the source said. “Many LPs are wondering whether low single-digit returns in infrastructure make sense.” 

In contrast, energy transition funds continue to be more attractive — especially among regulated investors, many of which have a certain amount of capital ringfenced for funds classified as article 9, the most sustainable classification under the EU’s SFDR regulation.