Global private infrastructure fundraising fell off sharply in 2023 despite the convergence of several investment tailwinds, including decarbonization, digital infrastructure expansion and the onshoring of supply chains.

Infrastructure funds raised $87.75 billion in aggregate last year, down 50.2% year over year from $176.08 billion in 2022, according to Preqin. But signs of a turnaround were brewing early in the year, with Preqin reporting $5.67 billion in fundraising as of Jan. 23.

The bearish sentiment that cropped up in the market last year is beginning to fade along with investor concerns about the impact of higher interest rates on infrastructure asset values and deal activity, said Alex Leung, head of infrastructure research and strategy for UBS. A second roadblock to fundraising — institutional investor portfolios overweight in private market allocations after their public holdings were battered by 2022 stock declines — is also less of an issue.

"With public markets being so strong in the last 12 months, things have really changed. The sentiment around the macro has changed as well, with [interest] rates potentially coming down, and fundraising activity definitely looks like it's going to pick up in 2024," Leung said.

Resilient asset values

Infrastructure deal value declined last year, too, falling 26.6% year over year to $308.50 billion in 2023 from $420.40 billion in 2022, according to Preqin.

Leung said an uncertain macroeconomic outlook made it hard for buyers and sellers to agree on valuations. Rising interest rates in 2022 and 2023 threatened to erode future cash flows from infrastructure projects and dent asset prices, but the impact was not significant.

"Performance has held up reasonably well, and we haven't seen any big write-downs in the asset class," he said.

Buyers and sellers are more likely to find themselves on the same page in 2024, particularly if central banks respond to cooling inflation by cutting rates, he added.

Growing allocations

Global private infrastructure funds ended 2023 with $328.9 billion in dry powder available for investment, up 4.8% from the prior year's $313.9 billion, according to Preqin data. Just a few weeks into 2024, the dry powder had climbed to $339.3 billion as of Jan. 23.

The pile of investable capital is growing as private market players eye a widening set of opportunities for infrastructure investment, particularly as programs like the US Inflation Reduction Act create new incentives for energy transition projects.

Two splashy acquisitions in January demonstrate just how eager alternative asset managers are to grow their infrastructure investment strategies: BlackRock Inc.'s $12.55 billion deal to acquire infrastructure investor Global Infrastructure Management LLC and private equity firm General Atlantic Service Co. LP's deal for Actis LLP, which will become General Atlantic's new sustainable infrastructure arm.

BlackRock said in its 2024 private markets outlook report that a build-up of digital infrastructure and the reconfiguration of supply chains amid rising geopolitical tensions were two other key trends driving infrastructure investment. CEO Larry Fink said growing public deficits are an important demand driver for private infrastructure investment as cash-strapped governments lean on the private sector to fund critical infrastructure projects.

– Catch up on January venture capital investment activity. – Read about lower sovereign wealth fund investment activity in 2023. – Scan the latest private equity headlines.

"The unprecedented need for new infrastructure, coupled with the record-high government deficits means that private capital will be needed like never before. That supply-demand imbalance creates compelling investment opportunities for our clients," Fink said in January on the asset manager’s fourth-quarter earnings call.

Scott Nuttall, co-CEO of listed private equity firm KKR & Co. Inc., which in late January announced a $6.4 billion final close for its latest Asia-Pacific focused infrastructure fund, said half that total came from investors new to the firm's Asia infrastructure platform. Previously, Nuttall said many institutional investors are still relatively new to infrastructure investing and are aiming to increase their exposure.

"Most folks created an infrastructure program in the last 10 years, and they're still working to get up their allocation to the asset class," he said.