Seven Things to Know About Infrastructure Funds  (2024)

1: Appetite Persists, Despite Macroeconomic Environment

Since the global financial crisis, the private infrastructure market has more than tripled in size, with more than $550bn raised by unlisted infrastructure funds over the past 10 years¹. The asset class’s inherent decorrelation to GDP and public market performance, combined with strong inflation linkage, means it is widely viewed as a safe port in the face of current macroeconomic challenges.

Infrastructure is also riding the wave of several secular mega-trends including the energy transition and digitalization, and has been further buoyed by unprecedented government support, most notably via the Inflation Reduction Act. Any lull in fundraising is therefore likely to be short-lived. Statistics suggest that live fundraising figures are slowly normalizing², and there are many mega infrastructure funds currently in the market.

Infrastructure’s appeal has certainly not escaped the notice of private fund sponsors (GPs), and M&A momentum is building in the space. In recent months, there have been a number of high-profile acquisitions of infrastructure advisers by large private equity firms looking to expand their infrastructure offerings.

2: Diversity of Strategies

Infrastructure is a hugely diverse asset class, spanning myriad sectors, strategies and geographies. Infrastructure funds span the entire risk-reward spectrum, ranging from core and core-plus with a lower risk-return profile through to value-add, opportunistic, and even distressed infrastructure investing with a significantly greater potential for returns and corresponding risk. At the time of the global financial crisis, infrastructure was nearly entirely composed of core and core-plus funds. Now, debt and value-add infrastructure funds make up 13% and 22% of infrastructure fund AUM, respectively³.

Infrastructure debt is drawing particular interest, as it offers exposure to investments that provide an essential service and that have high barriers to entry, which results in long-term stable cash flows that are relatively immune to the macroeconomic environment. Infrastructure debt borrowers have also demonstrated lower historical losses than equivalently rated companies⁴. As a result, a number of infrastructure GPs are looking to raise parallel debt strategies, and generalist private credit managers are also looking to increase their presence in the infrastructure debt space.

Similar to other private markets asset classes, infrastructure has also sprouted more sub-strategies as it has grown. Infrastructure funds may be focused on a specific region, the mid-market, or particular asset types, such as digital infrastructure or data centers. There are also multiple mega infrastructure funds focused purely on the energy transition, which brings us to our next key feature.

2: Diversity of Strategies

Infrastructure is a hugely diverse asset class, spanning myriad sectors, strategies and geographies. Infrastructure funds span the entire risk-reward spectrum, ranging from core and core-plus with a lower risk-return profile through to value-add, opportunistic, and even distressed infrastructure investing with a significantly greater potential for returns and corresponding risk. At the time of the global financial crisis, infrastructure was nearly entirely composed of core and core-plus funds. Now, debt and value-add infrastructure funds make up 13% and 22% of infrastructure fund AUM, respectively³.

Infrastructure debt is drawing particular interest, as it offers exposure to investments that provide an essential service and that have high barriers to entry, which results in long-term stable cash flows that are relatively immune to the macroeconomic environment. Infrastructure debt borrowers have also demonstrated lower historical losses than equivalently rated companies⁴. As a result, a number of infrastructure GPs are looking to raise parallel debt strategies, and generalist private credit managers are also looking to increase their presence in the infrastructure debt space.

Similar to other private markets asset classes, infrastructure has also sprouted more sub-strategies as it has grown. Infrastructure funds may be focused on a specific region, the mid-market, or particular asset types, such as digital infrastructure or data centers. There are also multiple mega infrastructure funds focused purely on the energy transition, which brings us to our next key feature.

3: ESG in the Spotlight

Infrastructure is proving to be a natural fit for ESG investing, given the strong focus on the transition to cleaner energy among both specialist and generalist infrastructure funds. Infrastructure assets can have a big footprint, and thereby potential for substantial impact. In fact, many private fund GPs have made their first foray into climate and social impact investing via an infrastructure fund.

But the flip side of the potential ESG advantages are ESG risks⁵. Given the current political and regulatory environment surrounding ESG investing, it is especially important that infrastructure funds are very clear and accurate in their disclosure about how and to what extent, if any, ESG factors are taken into account in investment decisions. Infrastructure fund disclosure should also address the ESG risk profile of the fund and its assets, including environmental hazards that may be inherent in the businesses of the fund’s portfolio.

4: Diversity of Structures

Infrastructure strategies can be pursued via unlisted funds and listed funds with a variety of fund structures.

The lower risk-return core and core-plus infrastructure strategies largely derive their returns from the income generated by assets, as opposed to capital appreciation, and are likely to hold assets for longer. That predictable yield allows for the flexibility of structuring such infrastructure funds as “permanent capital” or open-ended funds with periodic redemption rights. Where such funds are closed-ended, they tend to have longer terms than traditional private equity funds, often around 15 years with possible extensions. In addition, long-term infrastructure funds can have terms of 15 to 20 years or more.

A value-add or opportunistic infrastructure fund, however, is deriving returns primarily from capital appreciation of the underlying assets. As a result, they are likely to have a closed-end structure, with a risk-return profile, holding periods, and fund term more resembling a traditional private equity fund.

4: Diversity of Structures

Infrastructure strategies can be pursued via unlisted funds and listed funds with a variety of fund structures.

The lower risk-return core and core-plus infrastructure strategies largely derive their returns from the income generated by assets, as opposed to capital appreciation, and are likely to hold assets for longer. That predictable yield allows for the flexibility of structuring such infrastructure funds as “permanent capital” or open-ended funds with periodic redemption rights. Where such funds are closed-ended, they tend to have longer terms than traditional private equity funds, often around 15 years with possible extensions. In addition, long-term infrastructure funds can have terms of 15 to 20 years or more.

A value-add or opportunistic infrastructure fund, however, is deriving returns primarily from capital appreciation of the underlying assets. As a result, they are likely to have a closed-end structure, with a risk-return profile, holding periods, and fund term more resembling a traditional private equity fund.

5: Appeal to High Net Worth and Retail Capital

Infrastructure strategies can be a good fit for individual investors that are beginning to dip their toes into private markets. This is particularly true for core and core-plus infrastructure funds that are open-ended with periodic redemption rights.

Not only do these funds present the potential for consistent returns, they are also more easily understood by LPs that are new to private markets. There is an intrinsic appeal to investing in “real assets” such as utilities, transportation hubs, and roadways that are highly valued in society and essential to daily life.

This compelling narrative, particularly when combined with stable returns and the greater liquidity of an open-ended fund structure, can be very attractive to high net worth and retail investors – a fact that is not lost on private fund GPs that have set their sights on the relatively untapped retail market.

Some of the world’s largest private equity GPs already have listed products to appeal to this emerging investor demographic, and others are now following suit. In fact, there were over 15 new open-ended infrastructure funds launched in 2022 alone, bringing the universe to more than 40⁶.

5: Appeal to High Net Worth and Retail Capital

Infrastructure strategies can be a good fit for individual investors that are beginning to dip their toes into private markets. This is particularly true for core and core-plus infrastructure funds that are open-ended with periodic redemption rights.

Not only do these funds present the potential for consistent returns, they are also more easily understood by LPs that are new to private markets. There is an intrinsic appeal to investing in “real assets” such as utilities, transportation hubs, and roadways that are highly valued in society and essential to daily life.

This compelling narrative, particularly when combined with stable returns and the greater liquidity of an open-ended fund structure, can be very attractive to high net worth and retail investors – a fact that is not lost on private fund GPs that have set their sights on the relatively untapped retail market.

Some of the world’s largest private equity GPs already have listed products to appeal to this emerging investor demographic, and others are now following suit. In fact, there were over 15 new open-ended infrastructure funds launched in 2022 alone, bringing the universe to more than 40⁶.

6: The Market for Infrastructure Secondaries is Heating Up

Secondaries is another growing segment of the infrastructure universe that is benefiting from the current macroeconomic environment. In the first half of 2023, approximately $2bn to $4bn of infrastructure secondaries transactions closed, with many more transactions targeting closing in the second half or early 2024⁷. Of those transactions, approximately 61% were LP-led. Pricing of infrastructure secondaries, due to the cash-generating nature of the underlying assets, has also remained strong in periods where other strategies have experienced mismatches.

Most of the large secondaries GPs already have dedicated funds for infrastructure secondaries, and it is likely that more will seek to enter the space. Particularly given the longer terms of closed-end infrastructure funds, LPs’ need for liquidity is predicted to continue to drive deal volume.

6: The Market for Infrastructure Secondaries is Heating Up

Secondaries is another growing segment of the infrastructure universe that is benefiting from the current macroeconomic environment. In the first half of 2023, approximately $2bn to $4bn of infrastructure secondaries transactions closed, with many more transactions targeting closing in the second half or early 2024⁷. Of those transactions, approximately 61% were LP-led. Pricing of infrastructure secondaries, due to the cash-generating nature of the underlying assets, has also remained strong in periods where other strategies have experienced mismatches.

Most of the large secondaries GPs already have dedicated funds for infrastructure secondaries, and it is likely that more will seek to enter the space. Particularly given the longer terms of closed-end infrastructure funds, LPs’ need for liquidity is predicted to continue to drive deal volume.

7: Fund Terms Unique to Infrastructure Funds

Terms of infrastructure funds are generally similar to private equity with some notable differences, including but not limited to the following:

• Economics, Fund Term, Holding Periods, Withdrawal/Redemption Rights – As noted above, infrastructure funds with a greater risk-reward profile are more akin to traditional private equity funds in terms of fund structure, economics, holding periods and a general lack of liquidity. Core and core-plus infrastructure funds, in contrast, with their lower risk-return may have correspondingly lower fees, as well as longer holding periods and terms.Given the cash yields and long-term nature of core infrastructure investing, LPs are also more likely to have some kind of periodic liquidity right.
• Affiliated Service Providers – Although private equity GPs often have affiliated service providers that may be engaged by the funds they advise, there are unique services for infrastructure fund investments for which the GP may wish to engage affiliates with specialty knowledge. For example, infrastructure fund documents may include the flexibility for affiliates of the GP to provide design, development, and/or asset management services.
• Exit and End of Life Options – Infrastructure funds tend to exit their investments like their private equity counterparts, through fund-to-fund sales, sales to strategic buyers and, increasingly, continuation vehicles. Many infrastructure funds, however, may provide for alternative fund-level liquidity opportunities. For example, the fund’s governing documents may contemplate a potential IPO of the fund (or a pool of assets within it) or the merger of the fund with a listed entity.

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