Despite fundraising flight, open-ended infrastructure still has its place as portfolio anchor: bfinance

While last year saw a dramatic 50% year-on-year fundraising retreat from open-ended infrastructure funds – a significant turnaround from a bumper 2020-2022 period – these funds are “weathering the change of climate well so far” and are like to continue delivering strong value for investors, according to analysts from investment researcher bfinance, with significant interest remaining in ‘core’ and ‘core plus’ assets.

“With less capital available to chase core or core plus assets and discount rates edging higher, there is likely to be a downward impact on pricing, presenting more attractive opportunities for buyers,” says Anish Butani, who heads bfinance’s infrastructure manager research.

He added: “Managers are very keen to deploy right now, with pricing definitely looking attractive, but they are deploying more slowly in a weaker fundraising environment.” He did, however, note highly anticipated launches from BlackRock, Macquarie and M&G.

The open-ended infrastructure funds landscape has transformed markedly over recent years, according to Butani, “shaped by evolving investor expectations, strategic fund management and market dynamics”.

This recent turmoil of “Covid lockdown, high inflation, higher rates”, however, has allowed these strategies to “demonstrate resilience”, he said.

He added: “While the pace of fundraising (and fund launches) has slowed, the sector continues to attract strong interest.”

Butani urged open-ended investors and managers to stay the course, remaining “vigilant and adaptable over the coming years, [and] ensuring that strategies align with ongoing shifts in investment conditions”.

He added: “Open-ended funds typically target returns that are broadly in line with investors’ expectations for infrastructure allocations (around CPI plus 4-5% net of fees), which helps to affirm a role at the heart of portfolios.”

After 2023 turmoil, open-ended infrastructure still core to portfolios

The last 12 months have no doubt proved challenging for open-ended infrastructure funds – in line with private infrastructure assets more broadly – with a nearly three-fold spike in redemptions (from $894 million in 2022 to $2.5 billion last year), an ‘implied’ 50% drop off in fundraising year-on-year (up from a record net positive increase of $24.7 billion across 2022), and average fund performance slipping by 100 basis points (in the 12 months to October 2023) following the post-Covid bounce, according to data from bfinance.

This redemptions spike could have also been worse, according to the bfinance analysts, were it not for the more than 46% funds still in their lock-up periods – in large part owing to their relatively recent launch dates.

Private infrastructure funds managers also appear to have reduced the pace of deployment activity over the last year – down by a one-third, according to the analysts – despite the net inflows.

Open-ended infrastructure funds, which have become increasingly popular investment vehicles in recent years, offer investments that are evergreen and on perpetual terms, with effectively no set date at which the fund closes and must return investor capital.

On the other hand, closed-ended infrastructure funds typically exist for a predetermined period, normally spanning a decade, with the fund returning capital and accumulated returns to the underlying investors.

Butani underscored the significant advantages of open-ended funds.

“Open-ended funds do still offer faster deployment of capital: funds are typically called within 12 months, in contrast to the three-to-four-year period often seen with closed-ended funds,” he said.

“Furthermore, open-ended funds often have an existing seed portfolio that investors can evaluate before deciding whether they would like to be involved, as opposed to the blind pool risk associated with closed-end funds.”

However, he does note some key disadvantages with these funds also.

“The pressure on managers to deploy capital can be intense, especially if fees are based on Net Asset Value (NAV), potentially leading to a rush in deployment and exposure to vintage concentration and early-year pricing trends for newer funds.”

“Additionally, performance fee structures based on unrealised NAV can be problematic, although clawbacks and carry ceilings can help.”

It is in many ways a ‘horses for courses’ endeavour, with certain infrastructure assets better suited to evergreen vehicles, while others may be more appropriate for a closed-end vehicle.

“As first-generation (closed-end) infrastructure funds matured in the mid-2010s, it became evident that certain assets, such as utilities and operational renewables with long-term contracts, would be better suited for a permanent capital structure.”

This, he said, has led to the development of the ‘supercore’ vehicle, “which focuses on assets that don’t necessarily require an exit strategy, delivering low-risk predictable cash flows”.

“Today, the majority of open-end funds are still core-focused, emphasising stable and predictable cash flows, though there has been a shift towards core+ (e.g. platform buildouts and renewables development) in search of higher returns.”

Butani noted that investors still look to core and core plus infrastructure investments “as a bedrock of allocations in this asset class”, adding that “we don’t see the allocations to core/core+ changing meaningfully going forward.”