Friday, June 14, 2024

Infrastructure funds draw billions of dollars as energy and supply chains shift

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Demand for infrastructure investments is reigniting after a year of weak fundraising, as businesses seek to profit from transitions to cleaner energy and supply chains that are closer to consumers.

Brookfield, one of the largest private capital groups, closed a record-sized infrastructure fund in 2023, while rivals such as KKR, Blackstone, Stonepeak and I Squared Capital have telegraphed rising ambitions in the nascent investment sector. Two private capital groups, New York-based Global Infrastructure Partners and Sweden’s EQT, are each working to raise $20bn-plus funds next year.

“We are really excited about what is ahead of us in the next two to three years because of the trends of decarbonisation, digitisation and deglobalisation to come,” said Sikander Rashid, chief investment officer of Brookfield’s infrastructure arm, whose new fund raised $28bn.

Infrastructure Investing today spans from toll roads to energy assets and semiconductor factories. Fundraising has been sharply lower in 2023, with Brookfield’s recent raise representing almost two-thirds of the $45bn taken in by all infrastructure funds, according to Preqin, a data provider.

More than $175bn poured into more than 156 infrastructure funds in 2022, mainly early in the year, as investors sought out uncorrelated returns and stable cash flows associated with the sector.

Inflows have accelerated in recent weeks as the Federal Reserve signals that its campaign to raise interest rates has levelled off and may reverse. Preqin forecasts fundraising will almost double next year to $84bn. 

Sadek Wahba, managing partner of I Squared Capital, said investments into infrastructure assets with regulated returns, such as water utilities in the UK, had been hit hardest by rising rates because they were unable to pass on inflation to customers.

But Wahba and other investors said that green-energy initiatives, as well as rising geopolitical tensions that are leading companies to focus on shoring up domestic supply chains, are catalysing investment.

Laws such as the US Inflation Reduction Act and Chips and Science Act, which provide incentives for domestic industry and clean technology, have sparked investment and added to the demand for transport, energy and waste infrastructure across the US.

“Infrastructure is the asset class that is going to capture most of the fundraising for the energy transition,” said Alex Murray, a researcher at Preqin.

Brookfield committed $15bn this year to fund Intel’s manufacturing of a $30bn semiconductor fabrication plant in Arizona and was part of a consortium that bought a majority stake in Deutsche Telekom’s cellular tower business for €17.5bn.

Brookfield, Blackstone, Global Infrastructure Partners and I Squared have also invested in projects that export liquefied natural gas produced in the US, a business that has boomed as western European economies wean themselves off Russian gas.

Scott Nuttall, co-chief executive of KKR, recently highlighted the private equity group’s infrastructure business, including new funds dedicated to the energy transition, as a major source of growth.

EQT, a Stockholm-based private equity and infrastructure investor, is investing in the sustainability of rising US industrial production as a need for waste management is generated by plants manufacturing semiconductors and by renewable energy materials being produced.

EQT recently struck a large deal to acquire family-owned Heritage Environmental Services, which handles waste and industrial by-products from chemical plants, pipelines, rare earths manufacturing and semiconductors.

JD Vargas, a partner at EQT, said the expected opening of large plants by companies such as Tesla, Albermarle, Eli Lilly, Chevron and BASF would add to waste infrastructure demand. The Heritage investment is a bet on both the scale of industrial reshoring to the US and an increased focus on sustainability.

“The need for this capital is not dissipating. In my mind, it is only increasing,” he said.

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