North America-based funds raised $101.1bn in 2022, more than double the previous high of $47.1bn in 2018, and up 131% on 2021’s $43.9bn.
April 17 (Preqin News) – The Infrastructure Investment and Jobs Act helped usher in record volumes to private infrastructure funds targeting the US after it was passed in late 2021. North America-based funds raised $101.1bn in 2022, more than double the previous high of $47.1bn in 2018, and up 131% on 2021’s $43.9bn.
Yet raising the funds may prove the easy part. Higher financing and material costs have cast a shadow over infrastructure project profitability globally. Risks associated with the initial stage of project development also pose an obstacle. Overcoming these may require closer cooperation between governments, lenders, and investors to get the projects moving.
“Government budgets are at their limits, and so governments have redoubled their efforts to mobilize private capital”, said Manpreet Kaur Juneja, Senior Economist at Global Infrastructure Hub in a recent post. “These efforts have paid off in record levels of private capital commitments to infrastructure – but actual investment has remained stagnant due to investor concerns about the financial feasibility of projects.”
Last year’s fundraising total came despite a decrease in the number of funds closing to just 34, the lowest since 2016. The average fund size ballooned to $3.0bn from $1.0bn in 2021 as heavyweight managers closed mega funds, with KKR (KKR Global Infrastructure Investors IV, $17.0bn), I Squared Capital (ISQ Global Infrastructure Fund III, $15.3bn), Brookfield Asset Management (Brookfield Global Transition Fund, $15.0bn), and Stonepeak (Stonepeak Infrastructure Partners IV, $14.0bn) all larger than the biggest fund targeting Europe, the €12.6bn ($13.8bn) Macquarie Super Core Infrastructure Fund Series 2.
Established managers benefited from the increased demand, with significant increases in fund size over the previous generation. The two largest funds, KKR’s fourth and I Squared’s third, were both more than double the size of their predecessors.
Infrastructure is seen as a resilient and stable asset class, with 70% of LPs surveyed for the Preqin Investor Outlook: Alternative Assets 2023 saying performance in 2022 had met their expectations, and 61% expecting it to perform “about the same” over the next 12 months. A majority of LPs surveyed by Preqin (58%) plan to increase their allocations to infrastructure over the longer-term, more than any other alternative asset class, except private debt (63%).
Juneja claimed five economic shocks are worsening the bankability of new infrastructure: the tight labor market increasing labor costs; supply chains weakened by the pandemic and geopolitical conflict increasing the cost to transport materials; rapid inflation escalating material costs; rapid and sharp spikes in interest rates unexpectedly increasing the cost of capital and reduced potential returns; and uncertainty about the global economy paralyzing the development of new projects.
Juneja added that private investors focus on later-stage, less risky projects and that there was a need for investors, banks, and governments to find creative approaches to the initial high-risk development phase. Incorporating blended financing, grouping small projects together to help secure economies of scale, and seeking technological solutions are among a number of approaches that she suggested could help infrastructure projects get off the ground.
Alex Murray, VP, Research Insights at Preqin, said higher material and labor costs, combined with supply chain disruptions, have heightened the risk for deeper J curves in primary deals. That, in turn, has increased interest in the purchase of steady state assets on the secondary market, helping managers to release capital and pursue more primary investments.
"Those managers with greater expertise and skill in delivering primary developments will be earning greater premiums in years to come from traversing the major risks within infrastructure investments during construction,” he said. “Investors need to have exposure to some primary development risks to ensure they can access higher levels of return.”