Infrastructure Over Real Estate
This year has provided interesting backgrounds for the two real assets sectors – infrastructure and real estate – for next year. Real estate is set to face the same challenging issues as it has this year, with valuations falling amid rapidly rising interest rates, while infrastructure is expected to outperform the overall equity and bond markets.
Infrastructure continues to provide a compelling track record of performance across market cycles and has once again proven to be a robust asset class for its stability, returns, and inflation protection, with many experts predicting the sector to perform well in fundraising in the coming year.
While analysts anticipate a decline in 2024 earnings for economically sensitive companies due to a likely weaker economy, the solid and defensive characteristics of infrastructure corporations’ earnings and operations will be on show next year.
While fundraising remains a challenge for GPs in the face of existing factors such as the risk of recession, heightened geopolitical conflict, inflation, and high rates, a new Goldman Sachs Private Markets Survey of more than 200 LPs and GPs across private market strategies from June to July 2023 shows increasing optimism about investment opportunities compared to a year ago. The report noted that 64% see improved investment conditions, 22% say they are stabilizing.
“While inflation is a key consideration for many investors’ infrastructure allocations, the strategy is benefitting from structural tailwinds that support a bullish long-term outlook, including the digitization of our economies and the transition toward renewable energy sources,” said Scott Lebovitz, partner and co-CIO of Infrastructure Investing at Goldman Sachs.
Policy initiatives such as the Bipartisan Infrastructure Bill and the Inflation Reduction Act are expected to have generated $400 billion in energy and climate funding, the majority of which is in the form of tax credits targeted at accelerating private investment in clean energy, transportation, and manufacturing.
According to Pitchbook data, fundraising for oil/gas funds remains difficult, despite a noticeable increase in conventional oil/gas GPs returning to market for the first time in over five years. The rise in commodity prices and associated rise in portfolio valuations has given the sector hope that some LPs will reconsider investing in oil and gas funds.
Among LPs, real estate is the leading choice for decreasing allocations (28%). “With real estate assets in the process of repricing, and with more than a $2 trillion wall of maturities over the next three years likely to force more revaluations, its unsurprising that some LPs remain cautious about their real estate allocations,” said Jim Garman, Partner and Global Head of Real Estate Investing at Goldman Sachs. “We expect more dislocation ahead as the market adjusts to the new economic reality.”
The signals indicate that the difficult times will continue for (some) managers establishing funds, with investors capped out of real estate allocations. With the pace of transactions slowing and less capital being deployed, existing funds are making fewer payouts, leaving less money to invest in new funds.
It is possible that a larger focus is being placed on infrastructure funds. However, in April, Blackstone revealed that it had raised nearly $31 billion for its latest global real estate fund, indicating that some people are investing.
Casey Wilson, managing principal, head of investor relations at real estate venture capital firm Loci Capital, told Connect Money that “raising capital from institutional investors as an emerging manager in the real estate space has become increasingly difficult. Despite this, we received a commitment from an institutional investor (insurance company) in our first close for Fund II.”
Wilson noted that while the firm is not “immune” to the higher interest rate environment, its “conservative views” on capitalization and focus on cost basis put the company in a relatively comfortable position compared with the broader market.
“We are actively exploring sponsoring a DST as a means to maximize value for our opportunistic investors while simultaneously increasing the breadth of our product offerings. Given a substantial portion of the investors in our opportunistic funds also have a need for 1031 opportunities, we believe this is a natural evolution of our platform,” he added.