When we looked at the infrastructure fundraising stats in early September, we knew something special was going on: with more than three months to go before the end of the year, 2018 was already the biggest year on record, with $68.29 billion raised by 43 funds compared with the $68.16 billion amassed by 74 funds in 2017.
With closes still happening every other week and some decent-sized funds like Digital Colony’s $3.3 billion offering yet to officially wrap up, it’s likely 2018’s tally will end up near (or maybe even above) the $80 billion mark.
On the one hand, this seems entirely expected. After all, it’s well known that a wall of capital is descending on the asset class, ergo each year will necessarily be larger than the one before it. But there are three things that might make 2018 particularly interesting to asset class historians: one, this year’s total will be achieved without any mega-fund closes; two, there are several vehicles returning to market later this year that could propel 2019 to incredible heights; and three, this acceleration will inevitably bring the ‘infrastructure-like debate’ into sharper relief.
Let’s take them in turn. Without a $15.8 billion GIP-like behemoth closing this year, we are very much seeing the rising tide that lifts all boats, with practically every fund manager out there with a solid track record experiencing a meaningful increase in fund size. Given that trend is showing no sign of reversing, 2019 might end up being a truly extraordinary year.
A quick back of the envelope calculation shows that, between the return of Brookfield and GIP’s flagship offerings and follow-up vehicles by EQT, Antin and Ardian, an astounding $60 billion might be raised by, literally, just a handful of funds. Throw in another $10 billion as Blackstone wraps up the first phase of its $40 billion open-ended fundraising – plus everyone else on the market – and there’s a decent chance 2019 could get to the $100 billion mark – assuming fundraising carries on at the current brisk clip.
If and when that does happen, the question of where all this money will flow to will become even more important than it is today. In a recent article, the Financial Times’ John Dizard looked at this year’s mountain of capital and concluded: “Infrastructure funds break loose from material reality”.
We wouldn’t go that far, but we are pretty sure managers and their LPs will increasingly be confronted with investments entailing a trade-off between the ‘materiality’ of the underlying assets and their contractual characteristics. Or put differently, the infrastructure-adjacent side of the market is poised for further growth, as investors seek a home that can generate a good return.
So, what could spoil the party? At this point, it’s almost certain we are due another financial crisis, even if no one knows where it will originate and how intense it will be. Historically, infrastructure has a good track record in times of crisis. But, as managers are fond of writing in their prospectuses, past performance is no guarantee of future results.
The clear and present danger, though, is populism. A UK Labour government following through on nationalisation or an investigation into the collapse of Italy’s Morandi Bridge that ends up stripping Autostrade of its entire concession would send alarm bells ringing. Add up a few of these occurrences and a serious bout of capital flight could ensue.
Were that to happen, 2018 would go down in the history books not as the start of a golden age of infrastructure fundraising, but as the year this incredible growth story finally began to crack.