What fundraising trends can tell us about infrastructure investment opportunities in 2025
A sharp decline in capital raised that was most pronounced in Core and Core+ strategies and the mid-market points to potentially attractive entry points for investors.
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Over the past several years, Schroders Capital has published a Fundraising Indicator focused on private equity, which captures and compares trends in capital formation and returns based on industry-level data. A key finding from this research has been that, in general, a negative correlation can be observed between fundraising and vintage year returns, which in turn implies fundraising can be seen as an early indicator of potential industry-wide performance.
Now for the first time we have applied this thinking and methodology to infrastructure fundraising, both specifically in Europe and globally. In this article we analyse the key takeaways from this and complementary industry data, to highlight underlying themes that are driving the market currently and the implications for strategic portfolio construction.
Fundraising hits decade low in 2024, but poised for recovery
The most obvious observation is that, having been on a steady upward trajectory, infrastructure fundraising slipped in 2022 – and again in 2023, to a decade low (see chart). This was the result of several contributing dynamics:
- First, ‘denominator effect’ issues caused by falls in public portfolio performance in 2022 and 2023, which increased the relative allocation to private markets, in some cases to above target thresholds
- Second, more recent ‘numerator effect’ challenges caused by reduced realisations, and so distributions, from private market portfolios that have put a squeeze on liquidity
- Third, investor caution that resulted from the sequential impacts of multi-decade highs in inflation, historically rapid run-up in central bank interest rates, and heightened geopolitical and economic volatility.
Our Fundraising Indicator notes that the 2022 and 2023 fundraising totals were 15% and 40% below the predicted trend based on historical averages, respectively, further emphasising the scale of the slowdown. Turning to 2024, where the industry fundraising run rate is pointing to a modest recovery, our Indicator suggests capital raised will be in line with historical patterns – and could be poised for a more comprehensive recovery in 2025 (see chart).
Mega funds dominate, leaving a gap in the (mid-)market
A second, but related, trend, is that the largest funds in the market have consolidated a significant share of global infrastructure fundraising. Specifically, the top 10 funds in the market have raised $45.4bn so far in 2024, accounting for 55% of total funds raised (see chart). For 2023, the figures were $57.6bn raised for a 62% market share.
This is intuitive in the context of a cautious market environment, which has led to a flight to brand names by capital-constrained investors that need to be more selective in their allocation choices. Re-upping into larger funds enables investors to maintain key fund manager relationships – and blue-chip names are typically (although not necessarily accurately) seen as a less risky bet.
On the other hand, the fact that mid-market strategies have borne the brunt of the fundraising slowdown has investment implications, as there is less capital searching for deals at the smaller end of the spectrum, and so less pronounced competitive dynamics.
Demand for yield has shifted focus away from the Core
Delving into strategy-specific trends, data for Core and Core+ infrastructure funds, which target the classically lower-risk, steady return profile associated with mainstream infrastructure assets, mirrors wider trends. These segments saw a substantial fundraising slowdown in 2023, with a similar recovery shaping up in 2024.
By contrast, the trend for Opportunistic and Value Add strategies, which target higher returns for commensurately higher risk, showed the same pronounced slowdown in 2023, but a much stronger rebound in 2024, with the full year total already having been passed at the time of writing. These sectors thrive due to demand for higher return profiles amidst a changing interest rate landscape.
Taken together, these trends suggest a strategic reallocation by investors hunting for higher yields, resulting in a shift up the risk curve and a corresponding relative decline in available capital (dry powder) for Core and Core+ managers. However, there are signs of investor re-engagement in particular for Core+ strategies.
Fundraising patterns build case for Core return potential
As noted above, our private equity Fundraising Indicator has highlighted a historic and persistent negative correlation between excess capital raising relative to historic averages and vintage year returns. This reflects the potential for excess capital to create competitive pricing pressures, and so dilute returns.
On a global basis, our data points to a similar trend for infrastructure, with a negative correlation between excess fundraising and median net IRR (see chart). We have not been able to recreate this analysis for European infrastructure specifically due to data limitations, but from our own historic and anecdotal observations we see evidence that similar supply-demand dynamics apply.
For instance, our longest running Core infrastructure strategy within Schroders Greencoat, which is underpinned by substantial deal flow data, has seen performance hurdles increase as a result of moderated entry pricing related to reduced competitive dynamics, with returns re-rated by up to 300bps.
Overall, at a time where capital is more scarce, Core and Core+ are now achieving significantly higher absolute returns. This builds on historical performance data showing that these lower-risk strategies have consistently achieved superior risk-adjusted returns, with similar net performance to Value Add strategies achieved in the 10 years between 2011 and 2020, but with materially lower volatility (see charts).
What all of this tells us: Strategic portfolio insights
We continue to believe in the importance of diversification in infrastructure strategies, with Core and Core+ funds offering foundational stability, and selective incorporation of Value Add and Opportunistic strategies providing enhanced upside potential.
In the context of immediate allocation decisions, our data clearly points to the potential for the low levels of recent fundraising, and so dry powder, for Core and Core+ strategies presenting an opportune entry point in the current market. This positions investors to capitalise on potential market corrections and stability in long-term returns.
Mid-market opportunities, frequently overlooked, also present promising niches for investors at a time when large-cap funds have dominated recent fundraising, with funds targeting investment sizes of between €50-100 million potentially primed to benefit from a wide funnel of deal opportunities and favourable competitive dynamics.
Thematically, the mega-trends in infrastructure that have been prevalent over recent years continue to command the lion’s share of fundraising. This is one area where the correlation between capital formation and performance may operate differently, however, as these are also the areas with the strongest flow of deal opportunities. For example, renewables may have accounted for more than 70% of fundraising 2023 (see chart), but it also accounted for a similar share in deal volumes.
At Schroders Greencoat, we have established strategies focusing on Core and Core+, mid-market opportunities, targeting assets and companies that support the global energy transition. We therefore believe we are well positioned in the face of these converging industry trends, and the compelling investment environment they have created.
Please note that this paper is for informational purposes only and should not be construed as legal, tax, investment, or financial advice. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
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