From humble beginnings, the infrastructure asset class is now a vital part of institutional investment portfolios. This is evidenced by this year’s Infrastructure Investor 100 ranking, where the collective amount of capital raised by the top GPs in the sector crossed the $1 trillion threshold for the first time.
But it hasn’t always been this way, and the story of infrastructure investment’s evolution is one of steady (and sometimes rapid) increases in capital raising, a change in the very definition of what an infrastructure asset can be, and a shift towards investing in assets across the globe, with LPs similarly coming from a wide variety of places.
“I’ve been doing this for 20-plus years. In the old days when we had just started, it was obviously a very different world. We were running around trying to tell everybody what infrastructure was – and now we’re here,” says Rob Kupchak, senior managing director and head of core for the Americas at Stonepeak (ranked 6th).
“The thing that stands out the most to me is just the size and scale of the asset class. When I started doing this, hardly anyone even knew what infrastructure was, or thought of it as an asset class.”
This sentiment is repeated by several GPs, including Macquarie Asset Management (1st) global head of real assets Leigh Harrison: “The fact the sector has matured, with more investors seeking exposure to the asset class and allocations increasing, has obviously been incredibly pleasing to see. We’d expect to see that continue.”
“When I started doing this, hardly anyone even knew what infrastructure was, or thought of it as an asset class”
Rob Kupchak
Stonepeak
The asset class really began with a primary focus on what we would now call core or super-core assets in OECD markets: tangible assets with contracted revenues, in developed economies with stable political environments and favourable regulatory regimes.
While that is still the bedrock of infrastructure, the focus for many GPs, particularly in terms of fundraising, has broadened as the asset class grew larger. Outside the traditional LP strongholds of Europe, North America and Australia that dominated in the early days, the Middle East and Asia have emerged as large sources of capital for a range of strategies.
“First, fundraising was heavily focused on Europe where investors were driven by infrastructure’s resilience and non-correlation with GDP, with the US coming in soon after, with investors more focused on value,” says Gordon Bajnai, partner and global head of infrastructure at Campbell Lutyens. “Asia was really the third market driven by low risk and yield – and now today, in Japan and South Korea in particular, you have a significant number of institutional allocators.”
Asia and the Middle East are both “really important sources of capital”, says Bruce Chapman, co-founder and partner at Threadmark, never more so than now when the sector is experiencing its first significant fundraising slowdown since its emergence in the mid-2000s.
“If you’re a manager that habitually seeks to raise $10 billion-plus, and your existing investor base is retrenching or unable to support you in the same way as last time, you need to do everything you can to find capital – and many of these larger funds have been successful in the Middle East and Asia.”
Geographically close to Asian markets but distinct in most respects is Australia, which despite many superfunds’ long history with the asset class and its place as the home of long-term sector heavyweights like Macquarie and the now defunct Hastings Funds Management, still presents some challenges for fundraising, Bajnai says.
“Australia’s superannuation funds make that one of the world’s largest and most sophisticated pools of private capital, but the fee-paying capability of those funds due to the local regulatory regime make it quite difficult to raise capital, especially for the higher-returning, higher-fee strategies. But it is up and coming.”
“There are still some great GPs out there that can raise money by clicking their fingers – and for those, we might ask to pay less but we just can’t because they will only accept LPs that pay a certain fee”
Nik Kemp
Australian Super
Niall Mills, managing partner and global head of Igneo Infrastructure Partners (17th), points out that commitments to the asset class from Asia and the Middle East are not new, as many very large, highly sophisticated investors like Singapore’s GIC or Kuwait’s Wren House Infrastructure have become influential players in the sector.
“But we are seeing some of the smaller pools of capital following what the bigger players are doing – and they don’t have the same scale to build their own direct investment teams. Obviously, the economic turmoil of the last year or two in Western markets has meant that some traditional allocators have had to rebalance, so you can see why GPs have been encouraged to broaden their horizons for finding new investors.”
As for geographical capital deployment, Mills says he has yet to see a huge shift, but that change is coming as regulatory regimes in emerging economies, such as India, become more favourable.
This is echoed by Harrison, who says: “Over time, capital has increasingly been allocated to developing markets, whether that is in Asia, Latin America, central and southern Europe, or other markets. That’s partly a function of the scale of capital, meaning people need to look further afield for opportunities – but it’s also a function of these markets becoming more mature, with regulation evolving into something more akin to more established markets. This makes them more investable and as that happens, capital tends to flow.”
With new sources of capital come new LPs, at the same time as most of the sector’s early adopters have grown to become huge funds, leading many to build out significant direct investment teams. Has that given them more power in the LP-GP relationship?
“These relationships are a contrast of pendulum swings for the majority of managers, with the most highly sought-after managers impervious to it,” says Threadmark’s Chapman.
Generally, he argues, the most followed managers in the mid-market are often able to resist pressure from LPs to change terms in their favour when fundraising tightens, but that others seeking to raise mega-funds or emerging managers with a less well-known brand name may have to give up more.
The other area where LPs have increased their sophistication is co-investment. “Many more investors are requiring co-investment rights, with some sophisticated investors looking for more than a 1:1 ratio, perhaps as much as 2:1 or even 3:1 at times,” he says.
AustralianSuper, the largest LP in Australia with more than A$300 billion ($19.6 billion; €181.1 billion) in AUM, is one of those that has built a significant direct investment function and that is regularly found as a co-investor on major deals. Head of real assets Nik Kemp says the fund looks for partners when it commits funds to a GP, specifically a manager that can help it develop new expertise in a sector or geography in which it wants to gain exposure.
Kemp pushes back on the notion that LPs have more power than in the early days, saying: “It’s not quite the right word. GPs are as interested in how we think about the world as we are, and they then use that information to help them find better opportunities. It works both ways.”
“With the structural challenges that interest rate hikes create for some other asset classes like real estate, can I see a lot of allocation flowing away from real estate and into infrastructure? That’s a real possibility”
Patrick Samson
PSP Investments
This view is backed by Neda Vakilian, managing director and global head of the investor solutions group at Actis (22nd), who says: “Co-investment is not a problem. Our LPs are very interested in how they might more strategically partner with us to better understand us, our markets, our investment approach. And that works very well for us because we find that the more familiar they are with our markets, the more they are likely to stick with us and to work with us in these target markets.”
And as Kemp puts it, even LPs with significant influence can’t dictate all the terms of an agreement: “There are still some great GPs out there that can raise money by clicking their fingers – and for those, we might ask to pay less but we just can’t because they will only accept LPs that pay a certain fee.”
Another emerging trend is the proliferation of funds with an explicit impact focus. Many, particularly in Europe, are being established as Article 8 or Article 9 funds, seeking to benefit from growing investor focus on ESG issues.
Kate Campbell, founding partner at Astrid Advisors, says that more investors are now setting up separate buckets for these types of investments, often badged under labels such as climate, sustainability or impact.
“The strategy they’re looking for quite often has a link back to infrastructure because of the energy transition,” she says. “Many investors are pulling in their infrastructure colleagues to help set these buckets up – but more of these strategies are straddling private equity and venture capital-style returns.
“They might say, for example, that they want to invest in service companies that support the decarbonisation of assets, which may not have predictable cashflows but are heavily linked to the infrastructure sector. Those strategies are strikingly different and have different risk profiles, so it makes sense that there is a separate bucket for it.”
This move up the risk curve for some types of assets is not a new trend for the sector, though. The growth of infrastructure investment has often been accompanied by handwringing in public forums about whether certain types of strategies should really be classified as ‘infrastructure’ – a discussion now heard far less frequently as the sector has evolved into a broader church.
For example, what was once considered a nascent sector, renewable energy, is now a core part of many investment strategies that produces very reliable, ‘infrastructure-like’ returns.
And the way in which investors access these assets has changed, too, as PSP Investments senior vice-president and global head of real assets investments Patrick Samson says: “If you look back 10-15 years, people wanted to invest in hard assets, through single deals – and very often the management of that would be dissociated from the asset itself. People saw the asset class as hard asset investing.”
Now, platforms are much more common, Samson says, with integration of the asset’s management with the asset itself and mandates to invest in several assets of the same type under the same banner.
“Investing in platforms is now a relatively standard thing investors do, whether a GP or an institution,” he says. “Within the span of 10 years, you’ve seen a tremendous amount of change from single-asset investing to platforms, to then include diversification into things that weren’t considered infrastructure 10 years ago.”
Samson anticipates this change will continue: “I’d expect as much change in the next 10 years as we’ve seen in the previous 10 years, because more money will keep flowing. People will see emerging technologies at an earlier stage as a form of investing in infrastructure, more private equity-style, expecting more return and being willing to take more risk.
“With the structural challenges that interest rate hikes create for some other asset classes like real estate, can I see a lot of allocation flowing away from real estate and into infrastructure? That’s a real possibility.”
MAM’s Harrison says the macro trends behind the sector remain “very positive”. “The decarbonisation and digital thematics among others are driving a lot of investment opportunities, and these trends still have a very long way to run – that’s very encouraging.”
For this flow of capital to continue, though, and for the asset class to double in size again and reach its next $1 trillion of growth, almost everyone we spoke with said a variation of the same thing: that the asset class will have to keep performing strongly.
“As GPs, we have to deliver what we promise to deliver,” says Actis’ Vakilian. “We have to hit our target returns and be good value relative to what else is on offer beyond infrastructure.”
Stonepeak’s Kupchak agrees: “We have to prove that we are responsible stewards of capital and prove that we can invest those dollars in a sensible way. That’s what it really comes down to. Fundamentally, infrastructure is a great sector. There’s a ton of opportunity here, still, and there’s a ton of room for growth. It’s a pretty exciting place to be. I’ve been in it for a while but I’m still pretty bullish on where infrastructure can go and what the opportunity is even with all the growth that we’ve had.”
Additional reporting by Kalliope Gourntis, Anne-Louise Stranne Petersen and Isabel O’Brien
