Since becoming an independent asset class nearly 20 years ago, infrastructure has been touted as the one that has no correlation to GDP and protects against inflation. Those claims have now been put to the test in the current macro environment and “overall, the asset class is holding up pretty well”, Campbell Lutyens’ Gordon Bajnai tells affiliate title Infrastructure Investor.
“This is the first time infrastructure has been properly tested against its original promise and we hear LPs say ‘yes, this is an asset class we want to come into and grow our allocation to’,” Campbell Lutyens’ global head of infrastructure, says, as he walks us through the placement agent’s recently-published H2 Infrastructure Market Report.
The proof can be found in the secondaries market where LP-led transactions have soared and are expected to increase 200 percent by the end of 2023, reaching a value of $6 billion-$7 billion, according to Campbell Lutyens’ estimates.
The driving force behind that is LPs’ need for liquidity.
“[LPs] want proof of realisations, not just investing… They want some market proof that your strategy stacks up”
“Liquidity is very important to everyone in this market,” Bajnai says. And while that’s a major contributor to the spike in secondaries transactions, there is also another factor: “Infrastructure is the asset class that maintains its value best in the secondaries market,” he says. “You need to write down zero to minimal discount compared to when you sell assets in the venture capital, buyouts or real estate space. With infrastructure you can stay close to NAV and still create liquidity.”
Bajnai’s claim is borne out in the data. According to a report by investment bank Greenhill, infrastructure fund stakes traded at 93 percent of NAV during the first half of the year, making it the least discounted private asset class in H1.
That need for liquidity is likely to persist as long as inflation and interest rates remain high, but so it seems is investors’ desire to allocate capital to the asset class. According to Campbell Lutyens’ report, which is based on a survey of roughly 130 LPs, 57 percent said they plan to increase their infrastructure allocation, while only 20 percent said they would be reducing it. The remaining 23 percent plan to leave it unchanged.
Access points and exit routes
The subsector that is at the top of practically all investors’ wish list is the energy transition with 75 percent of those surveyed identifying it as the most attractive, followed by digital infrastructure (56 percent), social infrastructure (34 percent) and transportation (19 percent).
“Within the broad universe of infrastructure, energy transition is the fastest-growing segment,” Bajnai says. “We expect it will become as big as the rest of infrastructure over the medium term.”
Aside from being the most popular investment theme, the energy transition is also shaping other trends within the industry including a shift in LP sentiment towards specialist funds. But that doesn’t necessarily mean LPs will prefer to invest with specialist GPs.
“It’s more about LPs wanting to add to their portfolio, sometimes with a smaller ticket, just to learn and gain experience in those new sectors,” Bajnai explains, referring to the newer technologies and business models related to the energy transition – as opposed to traditional renewables – such as hydrogen, sustainable fuels, EV charging and geothermal energy among others.
Something else LPs want to add to their portfolios is mid-market strategies with 94 percent of those surveyed expressing an interest in this market segment. However, that’s not an indication that LPs are turning away from large-cap GPs, but rather a desire to diversify their portfolio. They also view it as attractive in terms of exit routes, according to Bajnai. Other perceived benefits of the mid-market include platform-building strategies, an abundance of managers, smaller LP commitments carrying more weight and a “top-up play” complementing large-cap positions.
But, regardless of whether we’re talking about investing with a large-cap or mid-cap fund manager, what LPs want is mature funds that speak to a manager’s track record.
“They want proof of realisations, not just investing and that usually happens by the time a GP is raising its third fund and has realised its first,” Bajnai says. “They want to see your exit track record. They want some market proof that your strategy stacks up.”
LPs also want more US exposure. Again, the energy transition is a driver but so are the country’s economy, which has proven the most resilient in the current environment, as well as recently passed legislation: the Inflation Reduction Act, the Infrastructure Investment and Jobs Act and the CHIPS Act. Combined, “they create another tailwind for the US”, Bajnai says. “And LPs want to be part of that story.”
Could the stronger investor appetite for specialist and mid-market strategies evident in the market then be signalling a reversal of the increasing consolidation we’ve been witnessing in infrastructure since its inception? Probably not.
“I see two parallel tendencies going in opposite directions. There is a consolidation with the 10 largest GPs targeting $220 billion at the moment through multiple strategies. That’s more than 40 percent of the capital being raised in the entire market, so there is concentration there.
“On the other hand, we see a lot of newcomers in new subsectors like the energy transition, where deals are typically smaller and which require specialist knowledge,” he says. “And then there is another kind of consolidation – an important new feature – non-infra players, typically private equity or real estate stepping into the market often through buying established GPs.”
That trend is expected to continue. “Asset managers who are successful in other areas realise that infrastructure is a hot and growing asset class and they want to have a foothold there,” Bajnai says.
It is safe to assume then that 2024 will be a busy one for the industry and one that will continue to experience increasing competition. Campbell Lutyens’ advice to GPs: “Consider multiple LP-friendly fundraising solutions to attract and retain capital.”