Relatively nascent among alternative asset classes, infrastructure reached $150bn in total assets in 2010. Since then, the industry has gone from strength to strength, with rising investor demand driving fundraising activity, and high capital distributions and positive returns ensuring its place as an important component of investor portfolios. Preqin’s study of the Future of Alternatives, conducted in June 2018 in association with more than 300 fund managers and 120 investors across the alternatives industry, prognosticates an even brighter future for infrastructure.
Based on the results of the surveys and our own proprietary data, we expect the infrastructure industry to double in size over the next five years, growing from $0.5tn as at the end of 2017 to $1.0tn in 2023. Together with natural resources, Preqin expects real assets to be the fastest-growing area of alternatives over the next five years, anticipating an increase in its share of the overall alternatives market from 8% ($0.7tn) to 13% ($1.8tn) in 2023.
Preqin tracks nearly 28,000 fund managers across all alternative asset classes, and predicts that by 2023 this number will have grown to around 34,000. Notably, where fund managers across alternatives are largely united in the belief that there will be some consolidation in the industry within the next five years, infrastructure is the only asset class for which no respondents project a significant amount of consolidation. It also recorded the largest proportion (25%) of managers that foresee little or no consolidation in the period. This is likely due to the relative immaturity of infrastructure, with fewer fund managers operating in the space compared to other asset classes: since capital is largely concentrated among fewer managers, expansion is more likely than consolidation at this stage of the industry’s lifecycle.
Investors’ projected change in allocations over the next five years suggests that investors are more than satisfied with recent performance, and that the role of infrastructure in institutional portfolios may be even more pronounced going forwards. Among investors surveyed in the study, 70% expect to increase their infrastructure allocations – the second largest proportion among alternatives, behind only private equity (79%) – with only 7% intending to decrease them.
Given the global growth of investors and their increasing appetite for alternatives, most managers are anticipating organic growth to contribute significantly to their expansion in the next five years. Within infrastructure, however, a notable 43% of managers surveyed are intending joint ventures with other managers to form a significant part of their growth strategy moving forwards, perhaps in order to access larger deals.
Investors and fund managers across alternatives largely agree that environmental, social and governance (ESG) policies and practices will be of greater importance in 2023, as demand for responsible investment and ethical transparency continues to shape alternatives. Among all investors surveyed, 87% believe this will be the case, as compared to 73% of fund managers. The survey results reveal greater alignment among respondents solely focused on infrastructure, with 83% of investors and fund managers each predicting that ESG matters will have more weight in the industry in 2023. These proportions were among the largest recorded when looking at individual asset classes.
As the use of new technology in alternatives gains momentum, it remains to be seen how the infrastructure industry in particular will be impacted by such changes. However, we can be fairly certain that by 2023 new technologies will have shaped alternatives in some way: 89% and 75% of investors and fund managers respectively believe that AI/machine learning will be more relevant to alternatives in five years’ time, and significant proportions of fund managers feel advancements in technology – including big data processes – could benefit their operations in areas such as research (65%), fund operations (62%) and trade execution (56%).
For more information on The Future of Alternatives, and to download your free copy of the report, please follow this link.