By Michael Watson ,
Partner, Head of Finance and Projects and Head of Climate Change Advisory, Pinsent Masons LLP
Infrastructure funds raised over US$61.3 billion for both operational and new-build infrastructure at final close in the first six months of 2021, with nearly two-thirds of funds closing above their initial target size1. Almost 75% (US$45.6 billion) was equity and a further US$8.7 billion was debt. A total 39% of Limited Partners (LP) commitments were from public pension funds, with a further 15% from insurance companies and 11% from asset managers. Geographically, 18% of the capital raised was solely focused on North America, 17% solely on Europe and 8% on Asia-Pacific. The remainder was targeting multiple regions or was globally focused.
Significant equity is usually allocated to infrastructure by major construction companies and developers, using their own corporate balance sheets. Equity capital is used in the development of new infrastructure assets. In addition, direct investment is also allocated by pension fund managers and sovereign wealth fund managers.
Number of LP commitments by Investor Type — Final Close H1 2021
Fundraising for unlisted, closed-end funds during the first half of 2021 was dominated by a surge in dedicated renewables strategies, accounting for about a third (US$19 billion) of the total raised. This compared with just US$1 billion in dedicated renewables for the same period in 20202.
The increase came at the expense of strategies targeting both ‘traditional’ and ‘renewable’ energy, which amounted to US$1.1 billion in the first six months of this year, compared with $14.7 billion in the first half of 2020.
Geographic targets of capital raised — final close H1 2021
Green investing is a central theme among funds currently in funds raising mode, with green, clean, sustainability, and energy transition increasingly appearing in fund names, according to IJ Finance analysis3. Such funds are also looking beyond the power sector to energy efficiency and wider decarbonisation of other infrastructure sub-sectors, such as transmission, clean transport, and digital infrastructure.
Research in the clean energy investment space by consultancy bfinance4 found that while 47 renewables funds are currently in market, a further 15 are dedicated to energy transition investments.
The figures confirm the belief that renewables and digital infrastructure are two of the most promising and resilient growth sectors in the post-pandemic environment. Infrastructure Investor established that all top five funds which closed during the first half of 2021 were specialised vehicles, either focusing on sectors such as renewable energy or digital infrastructure, or regions, notably Europe and Asia Pacific. This should come as no surprise, given the Net Zero pledges and government plans to ‘build back better’.
McKinsey estimates that energy transition will require US$3 trillion to US$5 trillion per year in capital expenditures by 2030, a total far above current capital invested.
In private markets, ESG impact has now reached an inflection point according to McKinsey5, becoming crucial for a variety of stakeholders including regulators, LPs, consumers, and employees.
Capital flowing into ESG-related investment strategies saw unprecedented growth in 2020: nearly US$400 billion in cumulative ESG-focused private capital was raised from 2015 to 2020, with over a quarter (about US$100 billion) being raised in 2020 alone.
ESG-related capital grew by 28% per annum in infrastructure with a large part of the increase due to a flow of infrastructure fundraising into sustainability-related strategies.
The trend is set to continue, with a recent PGIM survey6 finding that 58% of global investors are actively incorporating climate change commitments into their investment processes. However, the figure hides some geographical disparity, with only 47% of North American investors doing so, compared to over 80% of investors in Europe.
For many investors, the rise in attention paid to ESG will require a steep learning curve in terms of developing new skill sets, such as being able to source, organise, analyse, and report ESG data. One approach is simply to buy the analytics, with ESG software and data provider Sphera being acquired by Blackstone for US$1.4 billion, for example.
Until recently, one of the main barriers to investors making a major move into sustainable investing was the lack of commonly accepted reporting standards. However, the ongoing consolidation of standards organizations and the growing acceptance of frameworks for measuring ESG criteria is leading to increased momentum from investors to ‘get into the game’.
It is not just developed nations such as the US that offer opportunities for infrastructure investment. Whilst President Biden’s spending package aims to put infrastructure front and centre to boost the economy and upgrade crumbling roads, bridges, and dams, demand for infrastructure in areas like Asia-Pacific is seen by some as a huge opportunity for large institutional investors and private equity firms.
According to the Asian Development Bank, developing Asia will need to invest $26 trillion from 2016 to 2030, if the region is to maintain growth momentum and respond to climate change. Of the total, climate-adjusted investment needs over 2016-30, US$14.7 trillion will be for power and US$8.4 trillion for transport. Investments in telecommunications will reach US$2.3 trillion, with water and sanitation costs at US$800 billion over the period.
Recent analysis of ‘alternative assets’ in Asia Pacific by Preqin7 suggested that “the alternative investment market in Asia is set to experience explosive growth in the coming years, with private capital assets under management (AUM) on course to reach $6 trillion by 2025.” It adds that private capital is playing an increasing role in asset allocations across Asia-Pacific, with AUM of Asia-Pacific-focused private capital reaching US$1.7 trillion as of September 2020 — a six-fold increase over the past decade.
Meanwhile, figures from Refinitiv show that in China, Hong Kong, and Taiwan, about 41 sustainable bond transactions worth US$19 billion were recorded in first six months of this year, compared to 23 deals worth US$7.6 billion in all of 2020.
Aside from the renewable energy focus in Asia Pacific, where utilities should be encouraged to develop as much renewable energy as possible, the infrastructure around digitalisation and data is becoming increasingly important in the region too. Countries such as China and India had no real mobile phone network 20 years ago but major rollout of 3G and 4G coverage in recent years has seen exponential growth in the take-up of data.
As Asia Pacific economies grow and with it the size of the middle-class grouping, we’re likely to see rising demand for assets such as cell towers and data centres, followed by future investments in smart cities and electric vehicle charging.
While there are positive undertones to the fact that if asset managers understand the impact of climate change on their portfolios, it will encourage a sustainable built environment and support the drive to decarbonise, there remains a significant challenge around stranded assets.
Lawrence Slade, CEO of the Global Infrastructure Investor Association (GIIA) perhaps summed up this best earlier this year when he said: “Many investment opportunities will arise from increased digitalisation, green gas, electric vehicles (EVs), clean power, and other areas of innovation. However, companies must carefully manage these opportunities alongside challenges from stranded assets.”
The pace of change continues to accelerate with investors having to combine mitigation strategies in relation to their existing portfolios and an aggressive focus on Net Zero or indeed net positive impact in respect of new investments and capital allocation.
1 Investor Funds Report, H1 2021, IJ Investor, 15 July 2021 — Source: IJInvestor Funds & Investors Report – H1 2021 | Research & Analysis | IJGlobal
2 H1 2021 Fundraising Report, Infrastructure Investor, 27th July 2021
3 Investor Funds Report, H1 2021, IJ Investor, 15 July 2021 — Source: IJInvestor Funds & Investors Report – H1 2021 | Research & Analysis | IJGlobal
4 Renewable Energy Infrastructure: Lessons from Manager Selection (bfinance.co.uk), March 2021
5 A year of disruption in the private markets — McKinsey Global Private Markets Review 2021, McKinsey, April 2021
6 Climate change investment approach has North American investors trailing the world: PGIM survey, April 2021
7 Markets in Focus: Alternative Assets in Asia-Pacific 2021, Preqin, 17th June 2021