Infrastructure fundraising during the second quarter of 2022 has pushed the year into record territory with six months left to go. But don’t expect to see a doubling of the USD 122.18bn raised at financial close through 1H22.

Rising rates may spark a shift in some investors’ allocations back to fixed income products and away from infrastructure, sources say. And volatile global capital markets are already sparking a ‘denominator effect’ whereby declines in the values of some non-infra assets are shifting investors’ overall investment allocation percentages — resulting in cases where some institutional investors are hitting their infra allocation caps early on a percentage basis, potentially preventing them from making additional investments this year.

But with an ever-increasing number of megafunds coming to market, there are few indications that there will be a sharp slowdown in fundraising over 2H22. Global Infrastructure Partners is due to launch Global Infrastructure Partners V imminently, which will target at least USD 25bn. Meanwhile EQT is also due to launch its next fund imminently, targeting EUR 17.5bn (USD 17.7bn).

Behind the numbers

According to Infralogic data, 12 funds held a final close in total in 2Q22, securing USD 49.16bn in commitments — the largest total ever raised in a second quarter.

ISQ Global Infrastructure Fund III and Brookfield Global Transition Fund were the largest funds to reach a final close during the quarter, securing USD 15bn each and together accounting for 61% of all commitments raised at final close during the quarter

Ardian, meanwhile, held a final close of its eighth infrastructure secondaries fund, bringing in USD 5.2bn — the largest dedicated infrastructure secondaries fund raised to date.

Macquarie Asset Management (MAM) held a final close of its Macquarie Asia-Pacific Infrastructure Fund 3 with USD 4.2bn of commitments — the only APAC-registered fund to hold a final close in the quarter.

With a EUR 6bn first close of its seventh European infrastructure fund (MEIF 7), and the launch of its USD 7bn sixth North American fund (MIP VI), both in May, the manager’s global strategy is well underway.

Brookfield Infrastructure Partners also held a first close of its fifth flagship fund (BIF V), which targets USD 25bn, towards the end of 2Q22, while it launched its inaugural secondaries strategy.

The first closes of BIF V and MEIF 7 meant that interim closes for the quarter, which in the first quarter were at their lowest level in five years, were back up to at least USD 10bn.

Denominator effect

While fundraising has rebounded and grown consistently since the end of 2020, there are signs that wider macroeconomic trends could finally lead to at least a temporary slowdown in LP allocations.

Several market sources expressed concerns that downturns in public equity markets could result in a slowdown in infrastructure allocations among some LPs. This is the so-called denominator effect, in which a decline in public equity valuations results in real asset holdings including infrastructure growing proportionally to become a larger portion of an investor’s portfolio — particularly if the real assets are either more resilient or valued with a lag of at least a quarter. In some cases, the decline in equity holding valuations boosts the value of an investors’ real assets to or above the investor’s target allocation for those real assets.

“What you’re seeing at the moment is LPs temporarily being at the threshold, or exceeding, their infrastructure and real assets allocation as their public equities portfolios take a valuation hit,” said Gordon Bajnai, head of infrastructure at Campbell Lutyens.

This is not a new phenomenon. After the last significant decline in public equity markets, at the start of the COVID-19 pandemic in March 2020, allocations slowed significantly. As a result, 2020 finished with the lowest volume of infra capital raised since 2018 — ending a run since 2014 of year-on-year increases in total fundraising.

“Investors are still very keen to invest into infrastructure funds, but an increasing amount of institutional investors are already starting to pause investments and earmark funds for investment next year, when their allocations re-set,” said a source at a London-based LP advisor.

While final close volume for the rest of the year won’t reach the same highs as during the previous two quarters, this is likely to be a short-term phenomenon for infrastructure — mainly affecting allocations in the next six to nine months.

"This will result in a slowdown in allocations over the next six months or so- but beyond that infrastructure and real assets will actually benefit in the current high-inflation environment," said Bajnai.

Interest rates: FI at the expense of core?

Inflation protection is one of the key benefits of investing in infrastructure, particularly infrastructure assets deemed to be “core.” Over the past year, a record number of core funds have been raised or prepared for launch. A key driver of this surge, as reported, has been historically low interest rates, which pushed many investors towards core infrastructure funds as an alternative to fixed income.

However, interest rates have been on the rise lately. The Bank of England recently announced an increase of its bank rate to 1.25% from 1% — its highest rate in 13 years. The US Federal Reserve announced its biggest rate hike in 30 years, to a target range of 1.5%-1.75% from 0.75%-1%, and is widely expected to raise its target range by another 75bps this month. The ECB has also announced plans to raise interest rates over the summer.

These increases could tip some investor allocations back toward fixed income, thereby decreasing that additional source of capital. It is therefore key, said Bajnai, that core funds can prove that their assets have strong inflation protection, as well as contracted revenues, in order to secure commitments in a much more competitive environment.

As reported in Infralogic’s core funds report, the market does not agree on a concrete, established definition of what exactly constitutes ‘core’ infrastructure. This will change as managers come under even more scrutiny from LPs, sources said.

“Marketing a fund as core because some of its assets fall under a vague definition of core infrastructure is not enough anymore,” said the LP advisor source. “The space is now much more sophisticated and much more competitive. Investors want to make sure that every asset … falls under rigid definitions of core infrastructure. The next few months will separate the good core funds from the bad ones.”