Private Equity Bets on Infrastructure
Despite facing substantial headwinds that have impacted private equity funding, infrastructure investments have stood out as a bright spot that continues to pique limited partners’ (LP) interest due to its countercyclical character, lack of correlation with the stock market, and perceived lower risk profile.
Following a challenging 2023, during which unlisted closed-end infrastructure funds raised $112 billion, a 35% decrease from the record $172 billion in 2022, there are signs of improvement in the space.
According to a survey conducted by Infrastructure Investor in February, a significant portion of investors are planning to increase their allocations towards infrastructure in the coming year. Specifically, 41% of respondents indicated their intention to allocate more capital to infrastructure over the next 12 months, while only 10% planned to decrease their investment. They have an excellent argument for raising allocations, as 86% of investors reported that their portfolios had achieved or surpassed their benchmarks in the previous 12 months.
Today, private equity firms that previously focused solely on specific industries are now expressing a strong desire to incorporate infrastructure investments into their portfolios as evidenced by the acquisition of Actis, a UK-based infrastructure investor, by private equity firm General Atlantic earlier in the year, noted New York-based law firm White & Case, LLP in a recent note titled, PE firms increasingly target infrastructure. Furthermore, CVC, a global private markets manager, announced in September 2023 its intention to purchase a controlling interest in DIF Capital Partners, a global infrastructure fund manager.
“PE’s interest in the space should come as no surprise. For investors, infrastructure offers dependable cash flow yields from critical assets that are well insulated from economic downturns,” said White & Case.
The firm also highlighted the benefits of inflation protection. “Regulated inflation-linked contracts allow for the adjustment of fees and tariffs, ensuring that revenue streams from these assets maintain their real value over time. For PE firms, these conditions have given rise to lucrative fundraising opportunities, and a path toward diversification and strategic expansion.”
Private equity’s interest in infrastructure is not limited, but rather part of a continuous growth into related and complementary private asset classes. “Unlisted infrastructure remains underutilized as a diversifier,” added Russell Investments. Traditional asset classes like equities and fixed income play crucial roles but are more susceptible to broader market volatilities and may be supplemented to meet the long-term return objectives of investors.”
According to White & Case, the trend in infrastructure is driven by capital consolidation in the private markets business. Citing Preqin data, the firm noted that total fundraising in 2023 decreased by 11.5% year on year, from $909.1 billion to $804.1 billion. However, the sharp decline in the number of funds was more alarming. Last year’s 1,936 final closes represented a 46.5% year-on-year contraction from the 3,618 funds raised in 2022.
“Major LPs are making large allocations to fewer funds, demonstrating a preference for established firms with proven track records,” noted White & Case. “This consolidation in fundraising is prompting big PE firms to diversify their offerings to include a range of private market strategies, including infrastructure, to solidify their market position.”
By diversifying into these private asset classes, PE companies can attract more cash from LPs seeking to deploy funds to fewer, more versatile managers. This expansion enables organizations’ investor relations staff to engage in cross-selling fund products, thereby retaining their most esteemed clients and preventing them from seeking alternative options to fulfill their allocation requirements.
“It is a ‘one-stop shop’ approach that shows little sign of losing steam any time soon,” said White & Case.
Although there was a decline in dealmaking and fundraising in 2023, the prospects are optimistic. Limited partners intend to augment their investment in the asset class as a sign of the imminent revival in infrastructure fundraising. Pension funds and private wealth managers are projected to increase their investments by over $600 billion by 2027, driven by limited partners, according to Boston Consulting Group.
