Less . . . and more

Michael Kapoor discusses the new realities of fundraising for the infrastructure asset class.

“Fundraising,” to quote Probitas partner Kelly DePonte, “has fallen off a cliff.” He was talking last month, when the figures his firm had compiled suggested fundraising had tumbled by a third last year. But the latest figures suggest that commitments have pretty well dried up over the past six months.

This threatens to slow the development of a private infrastructure market, with many schemes at least delayed for lack of cash. But the fundraising quest will also force funds to change strategy. The new institutional investors emerging for this young market are demanding a change from the highly leveraged fare of recent years.

Michael Kapoor

Just $1.3 billion was raised by infrastructure funds in the first quarter of this year, down even from the $3 billion raised in the last quarter of 2008 when global financial turmoil brought most funding markets to a juddering halt. Over $20 billion had been raised in the first nine months of 2008, suggesting a healthy market would be trotting along at around $7 billion a quarter on average. The most recent figures suggest that the fund raising pace has slumped by more than 80 percent.

There is little easy money around at the moment so in some ways the problems are expected. Investors are battling with their allocation models and preferring to extend due diligence to buy time as well as comfort. Private equity fundraising has also crashed in the first quarter, to $15 billion from $82 billion in the same period of the previous year, according to Dow Jones. But the youth of infrastructure as an asset class has made the tumble seem more severe.

Many of the funds coming to market are first timers, from the likes of private equity brand names like KKR to newer firms such as Table Rock or Alterna, which are targeting $7 billion between them. New funds can’t tap into existing relationships, making fundraising more difficult in the short term. Some might be forced to delay closes until the market improves – hopefully later this year.

It’s a crucial test for the development of the market. Things could stall if the funding gap makes deals impossible to complete for another year – already evident in some of the schemes stalled for months for lack of credit. On the debt side, frozen lending markets have seen the likes of the UK government being forced to lend directly to some projects, such as Greater Manchester’s waste plan which commercial banks won’t sign off on.

There’s no denying the severity of the short-term issues, but the funding hiccups also reflect a market in flux. We speak to pension funds and others who regard infrastructure investment as a “natural fit”, to quote one. The returns can seem modest compared to other asset classes – such as private equity – but there are secure, long-term cashflows and usefully higher yields than, for example, government bonds. Some big money needs to be thrown at global infrastructure, and instutuional investors in particular are the key to making this happen. 

Fortunately, they’re rising to the challenge. But most won’t go along with some of the more opportunistic, short term moves that, over the past month, have seen companies such as Babcock and Brown hit troubled waters. These new investors are after stable, long term returns. They don’t like deals to be too highly leveraged. And they’re wary of taking market risk, ruling out some of the brownfield investment proposals of recent years.

Perhaps the problems at Babcock and elsewhere would have sounded the death knell for strategies like this anyway, with an inevitable shift towards greater equity stakes and a much clearer risk-reward profile. But the fundraising crisis will force the market to mature much more quickly – and that must be a good thing, as governments around the world look to private finance for essential infrastructure they cannot afford to neglect.