Debt funds are becoming increasingly popular in infrastructure and commercial property

Many firms now offer their institutional clients opportunities to gain real asset exposure, but through debt instruments rather than the more traditional route of equity – thus limiting downsides while still providing an attractive yield.

The synergies between private debt and real assets are clear. By investing in tangible projects in the real estate and infrastructure sectors, debt investors are gaining significant protection should things turn sour through the ability to take ownership of physical assets in the form of land, buildings, wind farms and more. As a result, PDI has recorded strong fundraising numbers for both sub-sectors. Figures from the first half of 2019 indicate this year could be one of the strongest yet.

Steady growth

Funds that invest wholly or partially in real estate assets saw several years of steady growth from 2014 to 2017. Capital raised per year went from $27.4 billion to
$41.3 billion over the period, an increase of 50 percent. In 2018 numbers fell back from their peak to $29.6 billion, but this was in line with a broader contraction seen across all types of debt funds that year after a record-breaking glut of fundraising in 2017.

In the first half of 2019, the market appeared to have bounced back with $20.1 billion of funds raised. Not only was this almost double the $12 billion raised in the same period of 2018, it was the highest H1 figure recorded for the asset class. If fundraising momentum is maintained into the second half of the year then 2019 could come out ahead of 2017’s record, or at least very close.

However, the real estate debt business has seen another trend that is being mirrored more broadly across the private debt space: a collapse in the number of funds that have raised capital. The number of funds reaching final close peaked at 73 in 2016 before falling to 61 in 2017 and 55 in 2018. But in the first six months of 2019 only 15 funds closed, and a similar level of activity in the second half of the year would fall well short of even last year’s numbers.

In the infrastructure debt world, there is a less clear trend, with total fundraising numbers fluctuating considerably. After peaking much earlier than either real estate or broader private debt fundraising in 2015 at $14.1 billion, numbers dropped off significantly to just $6.3 billion in 2016, before bouncing back in 2017 to $12.9 billion.

However, there are some notable similarities with the trends seen in real estate. The number of funds raised has been low in 2019, with just four in the first half of the year. In fact, the number of funds has been falling fairly steadily since 2014, when 23 were raised. Despite this, the value collected is almost $4 billion, much higher than in any first half since 2014. With the bulk of infrastructure debt fundraising tending to take place in H2, 2019 could yet be a record year for the strategy.