December 20, 2023 (Preqin News) – Inflation and central banks’ responses to accelerating prices proved to be formidable challenges for unlisted real estate and infrastructure in 2023. Both asset classes struggled to raise funds, while higher borrowing rates tamed real estate yields and raised input costs to dent deal-making in infrastructure.
The fundraising environment marked a stark contrast to 2022, particularly for infrastructure, which had attracted huge investment, primarily from the Biden administration’s Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA). Total capital raised so far in 2023 stands at $47.4bn across 79 funds, a big fall from 2022 when 156 funds closed and the total raised was a record $176.0bn.
‘This year proved to be a major challenge for the unlisted infrastructure asset class. The huge drop in fundraising pace was made all the more stark by the record levels raised in 2022,’ said Alex Murray, VP, Head of Real Assets at Preqin in this year’s Preqin Global Report 2024: Infrastructure.
‘However, deal markets have remained far more active than in real estate, providing some reassurance to investors of a more favorable exit environment and performance is proving the asset classes’ resilience in slower growth scenarios. Further, infrastructure is at the center of the energy transition and will capture these long-term tailwinds for many years to come.’
As a difficult year draws to a close, the outlook for the coming year continues to orbit around the likely path of policy rates. To review these and other factors likely to influence the market, Preqin News gathered views from investors and advisors to share their views on where the path for real assets will lead in 2024.
On fundraising...
‘We're pretty bullish on infrastructure. The fundamentals are not really in question. It was a slow year, perhaps because credit was in such demand and people saw they could make the same returns from high yield or unitranche that they could from core or core plus infrastructure, without the equity risk. But we think the market will reopen in 2024.’
William Barrett, Managing Partner, Reach Capital
‘Infrastructure fundraising suffered a slowdown this year, due to the so-called ‘denominator effect’. However, this trend is expected to reverse over the next 12 to 24 months as other asset classes recover. The ongoing need for renewable and conventional energy investment will underpin investment. Europe will lead the way as it seeks out long-term energy security, if not independence, amid concerns over Russian aggression.’
Roger Pim, Senior Investment Director, Core Infrastructure, abrdn
(Taken from: Infrastructure: How sustainability is focus of new investments)
‘Not only does infrastructure have a well-established, attractive risk-return profile, it also has strong defensive characteristics, a trait that is likely to serve the asset class well in 2024. Deal volumes were weak globally in 2023 but should pick up over the course of the year. Digital infrastructure also continues to see strong demand, particularly in Asia and in the US.
Ben Way, Group Head, Macquarie Asset Management
(Taken from: Outlook 2024: A world in transition)
‘We are entering 2024 in a real estate investment environment that remains uncertain. While interest rates are no longer growing, they remain high and are unlikely to fall back to artificially low levels. As a result, asset valuations are extremely difficult to pin down, which makes investors, and particularly lenders, skittish. We are not looking for any meaningful growth in transaction volumes until there is more clarity around valuations. At that point, we expect a wave of capital to flow back into the real estate sector.’
Joseph Rubin, Senior Adviser, Real Estate Services Group, Eisner Advisory Group
‘Europe has been at the forefront of welcoming private capital into infrastructure for many years creating a large pool of private infrastructure investment opportunities which offer inflation-linked, uncorrelated, defensive returns from assets with strong market positions and inelastic demand profiles. An improving regulatory environment will support several sectors that have been on the periphery of infrastructure investor pipelines. This creates significant opportunities for infrastructure investors looking to target a higher return profile, with a view to participating in a sector’s scaling and de-risking.’
Hamish Mackenzie, Head of Infrastructure, DWS
On deals…
‘In 2024, we expect an increase in transaction activity as capital markets thaw and the valuation gap continues to narrow. We think infrastructure assets with entrenched customer bases, strong market positions, and contractual and regulatory protections provide both a downside cushion in the face of uncertain economic growth and higher-for-longer interest rates and a risk-mitigated, collateral-based way to buy exposure to secular trends with high growth potential.
Raj Agrawa, Partner and Global Head of Infrastructure, KKR
(Taken from: KKR Market Review: Infrastructure)
‘Continued alignment and collaboration between the public and private sectors will be key to addressing traditional barriers to alternative investments and untapping capital sources that can address societies’ biggest needs. What concerns me is speed, and specifically our ability to collaborate and educate those who still don’t understand the value of alternative investing, how it can contribute to an optimal portfolio, and at the same time, better our planet.’
Christoph Schumacher, Global Head of Real Assets, Private Markets, Manulife Investment Management
‘Infrastructure is interesting. Fundraising this year has been appalling and there have not been that many deals in the private markets, but the long-term drivers of decarbonization, digitization, and demographics look really good. There's a lot happening in the green transition, while sectors like student housing, healthcare, and senior housing also have very strong fundamentals. And, if you have a medium- to long-term view, I'm pretty confident that you're reasonably safe there.’
Rene Paulussen, Alternatives Leader, PwC Luxembourg
On performance…
‘The energy transition segment appears to be very attractive in the short to medium term. In addition to considering investing in projects, one could also consider transactions in the supply chain and the value chain, including technology, application infrastructure, and equipment.
‘However, sub-sectors which are fully/fairly priced or have current or expected excess supply should be avoided. It’s important to be able to do thorough due diligence on the capability of the GPs to deploy and deliver acceptable returns in strategies such as energy transition and renewables.’
Zia Ul Rab Siddiqui, Acting CIO, Investments & Partnerships, The Arab Energy Fund
‘Real assets are continuing to do what they do best in a volatile macroeconomic landscape; provide investors with diversified, sustainable, long-term, risk adjusted returns. Investments in timberland and infrastructure have performed especially well, and we’re particularly encouraged by the announcements at COP28 calling for increased collaboration and private capital mobilization to support the UN’s sustainable development goals.’
Christoph Schumacher, Manulife Investment Management
‘The private equity industries have made insufficient progress in the energy transition including major CalPERS partners like Blackstone, Carlyle, KKR, and Energy Capital Partners. Private equity and infrastructure firms hold billions in polluting fossil fuel assets, including coal and gas power plants, pipelines, fracking and drilling operators.
‘They are investing to expand fossil fuel infrastructure including new drilling permits, pipelines and LNG terminals, even as the IEA has called for no expansion of supply and predicts the demand for oil, gas and coal will peak before 2030.’
Alyssa Giachino, Director, Investment Engagement, Private Equity Stakeholder Project
(Taken from: CalPERS Investment Committee Meeting, November 2023)
‘Refinancing mortgages at higher rates and lower leverage has created a wide equity gap for current property owners that is contributing to growing distress. As in every downturn, properties will be transferred to new investors with a low enough basis to make appropriate risk-adjusted returns in the current environment.
‘That means heavy losses by existing owners and potential opportunistic returns for cash risk investors such as private equity funds and family offices.’
Joseph Rubin, Eisner Advisory Group
The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.