Infrastructure: Rebuilding the Foundation
Global private infrastructure funding declined dramatically in 2023, despite the confluence of key investment tailwinds such as decarbonization, digital infrastructure expansion, and supply chain onshoring.
While there was a significant drop of slightly more than 50% from $176 billion in 2022 to almost $88 billion in 2023, early indications suggest a potential comeback in the infrastructure sector in 2024.
“We are seeing a return of ‘animal spirits’ – a healthy level of risk taking and market buzz that was severely lacking in 2023 within the infrastructure investing industry, said Alex Leung, head of research & strategy, infrastructure, at UBS.
As a result, the average infrastructure fund size is increasing. “We have seen some positive announcements in the beginning of the year of successful fund closings, which has certainly improved sentiment,” added Leung.
With over $300 billion in infrastructure dry powder, there is an increasing desire to allocate capital this year. Two major acquisitions during the first quarter revealed alternative asset managers’ eagerness to expand their infrastructure investment strategies.
In January, BlackRock Inc. announced a $12.5 billion deal to acquire infrastructure investor Global Infrastructure Management LLC and private equity firm General Atlantic Service Co. acquired Actis LLP, which will become General Atlantic’s new sustainable infrastructure arm.
According to BlackRock’s 2024 private markets outlook report, two additional significant themes driving infrastructure investment are the expansion of digital infrastructure and the rearrangement of supply networks in response to increased geopolitical tensions.
Increasing public deficits are a crucial driver of private infrastructure investment, as cash-strapped governments rely on the private sector to fund critical infrastructure projects, noted CEO Larry Fink.
According to UBS, recent fundraising activity remains concentrated among mega funds, as the average fund size has risen from roughly $500 million ten years ago to approximately $1.5 billion in the last two years, and over $2 billion based on early 2024 data.
“Not only does the demand for infrastructure investment remain high, but it is also expected to be one of the fastest growing segments of private markets: the mismatch between projected investment needs and capital required is expected to grow to $15 trillion by 2040,” Michael Underhill, co-founder and CIO of global alternative assets management firm Capital Innovations, LLC., told Connect Money.
However, large funds are not the only ones operating in the market. In recent years, UBS has seen an increase in the number of sector-specific strategies. From 2021 to 2023, sector-specific strategies accounted for 30% of infrastructure funds raised, up from 10% in 2019.
“In our view, this is a natural evolution of the asset class; the dominance of generalist mega funds, on one end, has also opened up more opportunities for niche strategies, on the other end, especially with some investors becoming more sophisticated and looking for unique investment themes to diversify their portfolios,” explained Leung.
The amount of investable capital is expanding as private market participants look at a broader range of infrastructure investment opportunities, particularly as initiatives like the U.S. Inflation Reduction Act provide fresh incentives for energy transition projects.
This capital influx has already begun amid a very tight labor market, energy price volatility, and ongoing attempts to decrease carbon emissions in the energy and industrial sectors. The combination of federal investments in clean energy and decarbonization demand from public and private entities has never been greater.
“The IIJA [Infrastructure Investment and Jobs Act] of 2021 created opportunities for pilot projects created additional deal flow across what Capital Innovations calls the three mega trends: Energy Transition, Digital Transformation & Enhancement of Aging Infrastructure,” added Underhill.
Sellers, meanwhile, who have been cautious owing to recent macroeconomic uncertainty, are resuming their sales operations, particularly for disposals required for strategies nearing the end of a fund’s life.
That said, we may be reaching an inflection point, with recognition that a “new normal” phase has arrived, with perhaps more predictable conditions ahead.
“We have already seen a pick-up in multi-billion dollar deals in the market, and we are optimistic the improvements in sentiment will drive increased activity and close the wide bid-ask spread we saw last year,” said Leung.
