3Q22 Fundraising report: First half proves tough act to follow, as volumes plummet

Data InsightInside Infra 13 October

3Q22 Fundraising report: First half proves tough act to follow, as volumes plummet

After a record-breaking start to the year, infrastructure fundraising slowed during the third quarter. Although ‘bulge bracket’ fund names continue to secure LP funds, a more significant downturn is possible next year as wider economic trends take their toll, reports Pablo Martinez.

Capital raised at final close by infrastructure, renewables and energy transition funds fell to USD 12bn (EUR 12.3bn) raised by 12 closed-ended funds during 3Q22 from USD 62.24bn raised by 20 funds in the second quarter and USD 73.96bn raised by 28 funds during 1Q22, according to Infralogic data. It is the lowest amount raised at the final close during a quarter since 3Q17. 

That fundraising activity fell in comparison to the record 1H22, when USD 122bn was raised at the final close, wasn’t entirely unexpected. As reported, much of the spike in first half fundraising was due to decisions by several large managers to extend their final close deadlines into the year from 4Q21. The previous highest amount raised in the first half was USD 44bn, the previous year. 

Meanwhile, sources speaking around the close of 2Q22 warned that the so-called “denominator effect” was likely to cut investor allocations to real assets during 2H22. 

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. The denominator effect may be particularly pronounced this year given the strength in infra asset valuations amid a broad decline in capital markets and many other asset values. 

Of course, the entire 3Q22 fundraising decline can’t be attributed to the denominator effect. Other macro-economic trends, including inflation, rising interest rates and the possibility of recession, also played a role in pushing many institutional investors to slow down or hold off on allocations, and increase their focus on active portfolio management, sources said. 

The downturn so far has been far from catastrophic, and an increase in the amount of capital raised at interim closes during the quarter suggests that infrastructure investment activity will remain steady going forward. Some foresee a more significant downturn in fundraising beginning in 2H23 — when secondary market activity is expected to ramp up, according to an Infralogic analysis and several sources.   

Devil, details 

There was a shift in the types of funds raising capital during 3Q22. All 12 of the vehicles were in the middle-market space, in stark contrast to 1Q22 and 2Q22 — in both of which five funds held final closes above USD 5bn.  

With EUR 3bn raised, Copenhagen Infrastructure Partners’ Energy Transition Fund  was the largest fund to reach final close in the quarter. 

As has been the case for the last few quarters, energy transition funds comprised the largest proportion of vehicles raising capital during 3Q22. Five of the 12 funds reaching financial close this quarter were energy transition-focused, including Mirova’s fifth energy transition fund, Mirova Energy Transition 5, and first-time energy transition funds managed by Alantraand HitecVision. 

Co-investment capital has also been a casualty of the 3Q22 slowdown, according to sources. While investors have spent several years pressing managers for increased co-investment opportunities alongside their main funds, the fact that LPs have control over the capital they allocate to co-investments makes it an obvious area in which LPs at risk of being overallocated to Infra can cut back on investment volume. 

Light ahead 

While the USD 12bn raised during the quarter marks a sharp downturn from the first half of the year, there are signs of a rebound. As reported, much of 1H22’s volume was driven by overhang from the previous year, when large fund managers including I Squared, KKR and Stonepeakextended final close timelines into 2022 from 4Q21. 

Investors' preference for final close investments in those larger funds is reflected in the very small amounts raised at interim closes during the first half of 2022 - USD 6.8bn in 1Q22 and USD 1.87bn in 2Q22. In the third quarter, on the other hand, 23 funds raised at least USD 33.37bn at interim closes a - 284% increase over the first two quarters of the year combined. 

Interim closes during the quarter include Brookfield’s Infrastructure Fund V, which raised USD 20bn at first close, and Morgan Stanley’s North Haven Infrastructure Fund IV, which raised a “substantial” amount of its USD 8bn hard cap at first close — although the exact amount was not disclosed. 

That Brookfield raised such vast amounts of capital is hardly surprising. Mega funds such as Brookfield can rely on significant amounts of re-ups, which enable them to reach higher targets. And during times of market stress there is often what Richard Awbery, partner at Atlantic Pacific Capital Partners, calls a “flight to familiarity” as investors prioritize allocations to existing managers with long established relationships. 

Most LPs have already ring-fenced allocations to the mega-funds currently in the market, which should enable them to achieve their fundraising targets, according to a partner at a London-based placement agent.

EQT, which launched its EUR 17.5bn EQT Infrastructure Fund VI in August, is aiming to reach first close during 4Q22. 

Global Infrastructure Partners, meanwhile, is looking to hold an informal so-called anchor close this month for its Global Infrastructure Partners V fund before a formal first close in December. The fund targets USD 25bn-30bn, which could make it the largest infrastructure fund ever raised. 

Antin Infrastructure just held a EUR 5bn first close of its fifth infrastructure fund, Antin Infrastructure Partners V, which has a EUR 12bn hard cap. Macquarie Asset Management, meanwhile, is looking to hold a final close towards the end of the quarter for its Macquarie European Infrastructure Fund 7 with up to EUR 9bn of commitments. 

More slowing in works? 

Many other managers, however, are likely to extend their fundraising timelines, sources say. Most managers will need to add “at least two quarters” to timelines, according to a European placement agent. 

Fundraising for the first two quarters of next year will likely remain strong, with many investors already waiting for their infrastructure allocations to reset at the start of 2023, according to several sources. Stonepeak is already reported to be coming to market in 1Q22 with its fifth fund. Although the target size is still unclear, its predecessor raised USD 14bn. 

In total, roughly USD 85bnis actively being raised in the market, according to an Infralogic analysis. 

Still, some sources are concerned about what happens later next year, after those new allocations are deployed. The denominator effect has only just started to be felt by European LPs, and many expect equity markets to recover — and thus that the denominator effect will be muted, according to the London placement agent. 

But if they are wrong, and equity markets maintain their current highly volatile tack, LPs may feel even greater pressure on their infrastructure fund positions as overall portfolios shrink and real asset allocations top out on a percentage basis. 

As a result, one infrastructure secondary market investor expects that market to become even more active in the second half of 2Q23. While secondary market activity has been picking up steadily over the last few years and several large deals have already been completed this year, potential denominator effect pressure on investors could lead to discount selling, the source said. 

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