Scores of deep-pocketed infrastructure investors that have helped fuel the booming renewables market over the last decade are feeling the pressure from growing competition in the industry as they are crowded out of deals by aggressive corporate investors and changing market dynamics.

The number and value of renewable energy deals involving private infrastructure funds managed by alternative investment giants such as Macquarie Group Ltd., Brookfield Asset Management Inc. and BlackRock Inc. have broadly stagnated in North America over the past five years while rising slightly in Europe and dropping off in Asia, according to data from Preqin.

Buying into operating wind and solar assets has become so low-risk in certain markets that the more conservative financial investors, such as pension funds and insurance companies, have moved in en masse. Infrastructure funds are now competing for higher-risk, higher-return projects at the pre-financing and construction stage with utilities, oil majors and other corporate investors — not to mention a growing cadre of listed infrastructure funds, particularly in Europe.

"There is a squeeze on the infrastructure players," said Amir Sharifi, a managing director in the infrastructure team at French asset manager Ardian, who looks after the company's global renewables investments.

To be sure, individual fund managers are bucking the trend and deals continue to be done. The mixed picture for infrastructure fund activity comes as broader spending on green power continues to surge globally: Total new investment in renewable energy during the first half of 2021 reached an all-time high, according to Bloomberg NEF.

Some asset managers and analysts also predict investments by infrastructure funds will start creeping up again as part of the natural cycle of the renewables industry, and they point to a long-term decarbonization trend that will also boost spending from institutional investors. Two new climate funds, including one managed by Brookfield, recently raised a combined $12.4 billion.

Staying competitive

Still, industry insiders say one reason why deal activity by dedicated infrastructure investors as a whole has stagnated of late is that the market is simply evolving.

While major utilities used to provide a steady stream of post-construction projects looking for minority investors, many have started to scale back on asset rotation. France's Engie SA said in May that it would keep a higher share of projects on its own balance sheet in the future, and executives at EDP Renováveis SA suggested they could also sell less capacity after seeing valuations for their wind farms surge in recent deals.

"It's become very difficult now, for many of the infrastructure peers in the space, to be competitive," Sharifi said in an interview, adding that decisions like Engie's will keep "pressure in the system" and are forcing investors to up their game.

"You need to build the capabilities that industrials have, too," he said. "You need to introduce complexity and scale to be able to play in the field."

That can mean assembling management teams that are comfortable with more complex assets, such as unsubsidized projects or hybrid developments combining multiple technologies. More sophisticated data management and forecasting capabilities, for example, to estimate future power prices, can also help to level the playing field, Sharifi said.

Transactions on the horizon

The 10 largest alternative infrastructure investors are sitting on more than $87 billion in dry powder, according to Preqin estimates.

With cash to spend, some in the industry predict an uptick in deals involving infrastructure funds in the coming years as early-stage renewables projects start to seek financing. Many of these assets will be unsubsidized and, in some cases, will be exposed to power price volatility, bringing with them greater risk but also higher returns.

"I think many of these investors are placing themselves in the market [right now], achieving agreements with local developers. But the transactions will be seen in two, three years," said Víctor Cánovas, head of M&A at Exus Management Partners, which originates and structures deals for clients including infrastructure funds. "Nowadays there is not [a] huge volume because the assets are not there."

Damien Ricordeau, founder and CEO of Finergreen, a financial advisory firm, said he sees the market for renewable energy companies moving in waves: For some years, financial players pour money into mid-size developers, then big utilities sweep in and consolidate.

Indeed, some utilities have snapped up smaller developers at a record pace. Spain's Iberdrola SA has struck at least a dozen deals for project portfolios or independent developers over the past 18 months.

"At the moment, there is a wave of consolidation," Ricordeau said in an interview, drawing parallels to a similar trend in the French power market several years ago. "When that ended, you had a [fresh] wave of financial investors," he said.

"Working day to day on transactions, I clearly don't see ... less commitment from financial players. On the contrary," Ricordeau said.

Oil, gas investment

While the trend in renewables has been mixed, investments by infrastructure funds into coal- and gas-fired power plants have broadly declined in recent years as the economic case for fossil fuels has worsened in many jurisdictions.

Still, as utilities have embarked on a decisive shift out of coal, some have found buyers in private equity: Riverstone Holdings LLC, a U.S.-based investment firm, bought a 2.3-GW portfolio of European coal plants from Engie in 2019. And just this month, SSE PLC sold its gas distribution network to investors including a private fund managed by Brookfield.

Equally, some infrastructure funds see value in oil and gas infrastructure, such as pipelines and storage facilities, either to diversify their portfolios or to replace the assets with greener alternatives that align with their environmental, social and governance mandates.

Sharifi said pipelines can be used to transport green gases such as hydrogen in the future, for example. Ardian, which owns both fossil fuel power plants and oil and gas infrastructure, is also building solar panels on land connected to some of those assets, he said.

"It makes a lot of sense from an ESG perspective," Sharifi said. "If I had money available and wanted to play the green game, I would include oil and gas infrastructure as part of that."