Whether or not the recently passed Inflation Reduction Act leads to the breadth of renewable energy projects envisioned by its sponsors, the legislation has kicked off a burst of investor energy around the asset class and a windfall for infrastructure funds. The renewed fundraising comes at a good time for alternative investments as venture capital and private equity activity cools down.
In North America, the amount of capital raised for infrastructure-focused funds was over $90 billion in the first half of 2022, “running at twice its usual pace,” according to the latest alternatives report from Preqin. Infrastructure represented 21 percent of all private markets fundraising in the first six months of 2022, according to the report. That’s a huge bump up from an average of 8 percent of total private capital raised by infrastructure between 2010 and 2021.
The amount of capital investors are pouring into infrastructure is expected to continue to rise for the rest of 2022. According to Preqin, institutional investors have a median target allocation for infrastructure of 5 percent in North America; but they only have 2 percent committed currently. In Europe, the actual allocation to infrastructure lags the target by 2 percentage points. Although allocators are committing money to infrastructure at a strong pace this year, it’s unlikely to narrow the gap between the current and target allocation in the short term, according to the report.
The reasons behind the recent growth in infrastructure and its appeal to investors goes well beyond the recent government legislation.
In the past few months, the massive sell-offs in public and private markets have made infrastructure particularly attractive to risk-averse investors. According to Pieter Welman, head of global infrastructure at $349 billion asset manager Barings, infrastructure is a far more defensive investment than most privately held companies and publicly traded stocks and bonds. Infrastructure, whether a critical bridge or clean energy plant, contractually locks in revenue over multi-year periods. Infrastructure services, say water, are also not optional purchases for most consumers.
Infrastructure can also serve as an inflation hedge, one of the top concerns of investors. Because most infrastructure projects can pass rising costs on to consumers, “the credit quality of the project itself is usually not affected by inflation,” according to Welman.
Investment products have also become more diversified over the past few years, which is another reason investors have been turning their attention to the asset class, according to Welman. About a decade ago, the main way to invest in infrastructure was through private equity, but a wide range of debt instruments have become available as well in recent years. “It was a niche [investment area] five or ten years ago, [but now] the industry itself has become more mainstream,” Welman said.
Infrastructure projects often are aligned with investors’ environmental, social, and governance goals, also helping fuel the growth in fundraising. According to Preqin, renewable energy will become the focus of many infrastructure funds as a result of the Russia-Ukraine war. The $1.2 trillion Infrastructure Investment and Jobs Act, which was enacted at the end of 2021, also encourages investors to reduce carbon emissions in their portfolios.
Welman agrees that ESG will become one of the main drivers of infrastructure investment. “In the last few years, we’ve seen a lot of attention from clients [who want to push for] social and environmental changes, as well as energy transition into the renewables,” he said.
