The infrastructure industry is in a healthy state as we enter 2019, with assets under management (AUM) at a record $491bn as at June 2018. Despite recent strong performance and growth, 2019 will not be without challenges and could prove a deciding year for the industry.
Strong returns, strong appetite
Infrastructure funds have delivered attractive net risk-adjusted returns for several years now, relative to other private capital asset classes and public markets. As a result, investors are highly satisfied with the asset class, and 84% of those interviewed stated that their expectations had been met or exceeded over the past 12 months.
A record $90bn was secured by the 68 funds that closed in 2018, up significantly from $75bn in 2017. Record distributions have helped to fuel this: $77bn was distributed to investors in 2017, and $33bn was distributed in the first half of 2018 (the latest data available), meaning 2018 is on par with the previous year. The amount of capital called up, however, is still greater than the amount being distributed, reflecting the rapid growth of the industry in recent years; this is likely to continue as fund managers put the record $179bn in dry powder to work.
Investor appetite at present is strong, meaning 2019 could well be another successful year for infrastructure fundraising; over a third (35%) of investors plan to commit more capital to infrastructure funds in 2019 than in 2018. And, with many investors currently below their target allocations to the asset class, the outlook for the longer term is even more positive: half of investors plan to increase their allocation to infrastructure over the longer term, significantly higher than the 6% that plan to reduce it.
The competition challenge
On the fundraising side, while capital secured is up, the number of funds actually closing each year is falling significantly: just 68 funds closed in 2018, compared with 94 funds in 2017. Capital is increasingly concentrated among a much smaller pool of managers, and so it is becoming more difficult for fund managers, especially those that are less established, to secure capital commitments. The prospects for 2019 look no less challenging: a record 207 funds are seeking an aggregate $188bn in commitments – 50% more capital than was being sought one year ago and twice as much as was secured during the record-breaking 2018.
On the deal side, competition for assets is also intense and was cited by the largest proportion (66%) of surveyed fund managers as a threat to return generation in 2019. With record dry powder and high valuations, finding attractive opportunities in the current climate is no easy feat.
Just over half of both investors and fund managers see valuations as a key challenge for return generation in 2019, and over a third (35%) of fund managers have already reduced the returns they are targeting from their funds currently in market. Twenty six percent of investors believe their infrastructure portfolios will perform worse in 2019 compared to 2018, with only 15% of investors predicting performance will be better.
A critical juncture
There is no doubt that the infrastructure industry is in good shape as we move through the first part of 2019, but it is also clear that significant challenges lie ahead, and how these are overcome by fund managers will be critical to the asset class’s continued success. Investor appetite for infrastructure clearly exists, but delivering value in the current climate is what will differentiate fund managers going forwards.
For expert commentary, key trends, historical statistics and survey results, take a look at the newly released 2019 Preqin Global Infrastructure Report – the most complete and in-depth review of the industry available.