The announcement follows the International Investment Summit 2024 which took place in London this week and resulted in pledges of GBP63 billion in private investment to support the UK’s infrastructure, renewable energy and technology projects.

Schroders announced a GBP50 million allocation from Homes England into its Capital’s Real Estate Impact Fund. The fund, which has an initial target of raising GBP200 million with the aim of ultimately delivering 5,000 homes to “address social inequality and deliver an appropriate financial return to investors”, expects to make its first investments before the end of 2024.

Peter Denton, Homes England Chief Executive, says: “This is a brilliant example of how public and private sector organisations can get behind a clear and common aim – namely supporting social justice and thriving communities.”

Meanwhile Man Group will invest GBP100 million in affordable and environmentally sustainable housing for communities across England.

Finally social impact property fund manager Resonance will commit GBP250 million into residential property to help tackle homelessness. Resonance has set a GBP1 billion target by the end of the decade which it says will support local authorities and housing partners across the country to “provide people at risk of homelessness with a stable home”.

Culture Secretary Lisa Nandy says: “These new funds provide a much-needed, fresh opportunity to work in partnership with impact investors, tackling some of the most pressing social and environmental challenges while driving economic growth.”

The government also unveiled significant investments in renewable energy projects including a GBP224 billion commitment to Scottish Power’s wind farms from Spanish firm Iberdrola over the next four years.

Further, Octopus Energy have committed to a GBP2 billion investment in renewable energy generation, including four new solar farms.

Despite declarations of success from UK government following the Summit, there are some who claim the event was a “publicity stunt”.

Douglas Grant, Group CEO of Manx Financial Group, says: “While we welcome the news and the shift in mood, the timing of Labour’s International Investment Summit raises some concerns. It feels like a classic publicity move, coming just two weeks before Labour’s first budget, which is expected to include tax hikes which will take some of the shine off the news.”

Grant questions the decision to “bundle all these positive investment deals together” calling it “contrived [rather] than the natural rhythm of investment”.

Meanwhile Oscar Warwick Thompson, Head of Policy and Regulatory Affairs at the UK Sustainable Investment and Finance Association, accuses Prime Minister Kier Starmer of “using sensationalist language around net zero”.

While welcoming the progress on investment in renewable energy, Warwick Thompson adds: “Also slightly concerning is the shift in political messaging around net zero. While the Prime Minister and his cabinet have been very positive about seizing the economic opportunities of green growth, Keir Starmer appeared to pit British industry against environmental progress, which is a false dichotomy.”

He continues: “The transition must be just, well-managed and in the interest of the public, but demonising climate activists for demanding progress borders on sensationalism. Mixed messages risk undermining the momentum of confidence the government has so far built behind the green transition.”

Of those planning to make increases in investment to renewable energy over the next year, 8 per cent will make increases of 4-6 per cent; 12 per cent say they will raise allocations by 7 per cent; 21 per cent will make increases of 8 per cent and the majority (59 per cent) expect to increase by more than this.

The bulk (45 per cent) of respondents’ current allocations to renewable energy are between 11 and 15 per cent. 21 per cent say they invest 16-20 per cent in renewable energy; 16 per cent of respondents invest 6-10 per cent; and 18 per cent of investors allocate between 1-5 per cent.

In the next three years, UK pension funds and insurers predict allocations will be significantly higher than today. 5 per cent say they will boost allocations by 1-5 per cent; 7 per cent say 6-10 per cent; one fifth (21 per cent) say 11-15 per cent; two-fifths (39 per cent) say 16-20 per cent; while just over a quarter (28 per cent) say allocations will increase by 21 per cent or more.

Looking at returns from unlevered renewable assets net expenses, 5 per cent of UK pension funds expect between 2.5-5 per cent per annum; more than half (54 per cent) say between 5-7.5 per cent; more than a third (38 per cent) expect 7.5-10 per cent; while 3 per cent look for returns in excess of 10 per cent a year.

When asked to select their top three reasons for investing in renewable infrastructure assets, the vast majority of respondents (85 per cent) cited income generation. Almost three-quarters (71 per cent) said they use renewable assets to diversify their portfolio, and more than two-thirds (68 per cent) of investors interviewed cited that the asset class is a way to align with their ESG investment objectives. 

Over two-fifths (44 per cent) of respondents say renewable assets are a good means to generate long-term cash flows, while one third (32 per cent) are motivated by the return potential.

In terms of need for immediate yield post investment, 88 per cent of respondents say this is a requirement while 12 per cent say it is not. 

Stuart Hanson, Associate Director, Client Solutions, AlphaReal says: “Pension funds and insurers’ growing appetite for renewable infrastructure recognises that these assets can provide an attractive risk-adjusted return alongside positively contributing towards the transition to clean energy.”

Ed Palmer, CIO and Head of Sustainability, AlphaReal says: “AlphaReal has a long track record in managing renewable infrastructure. We can offer our clients flexibility in how investments are structured and manage renewable infrastructure allocations either within our existing funds or by creating bespoke mandates. By diversifying investment across low carbon technologies such as wind, solar, and energy storage, working with quality counterparties we aim to provide high levels of contracted, index-linked cash flows that match our investors’ liability profiles.”

Complementary expertise combines to offer comprehensive financing solution to projects and players involved in energy transition and climate change mitigation, the firm says.

The Fund aims to support energy transition projects across continental Europe; EUR500-750 million targeted from institutional investors, three investments already secured

BNP Paribas announces the launch of BNP Paribas Climate Impact Infrastructure Debt, an initiative supported by the aligned commitments of BNP Paribas Asset Management (‘BNPP AM’), BNP Paribas Corporate & Institutional Banking (‘BNPP CIB’) and BNP Paribas Cardif to finance climate change mitigation.

Managed by BNPP AM’s Private Assets division, BNP Paribas Climate Impact Infrastructure Debt is structured as a Luxembourg Reserved Alternative Investment Fund (‘RAIF’) and classified as Article 9 under SFDR.  The fund is targeting EUR500-750 million from institutional investors, including BNP Paribas Cardif’s seeding commitment.  It will have an investment grade profile and is expected to allocate to transactions in continental European countries, supporting energy transition projects that are in line with its investment philosophy by focusing on renewable energy, clean mobility and the circular economy, including new sectors such as batteries, hydrogen and carbon capture.

Three investments have already been secured for the fund, with financing for a low-carbon energy producer, a green-sourced district heating platform and a portfolio of onshore wind farms.

The firm writes that the collaboration within the BNP Paribas Group will ensure unique and scalable origination from both the wider market and internal origination teams.  Sourcing capability will benefit from the market-leading origination capabilities of BNP Paribas CIB’s Low Carbon Transition Group, with more than 200 dedicated investment professionals advising on and originating low carbon assets and an annual global origination in excess of EUR20 billion, together with BNPP AM’s track record of investment in infrastructure and sustainable finance.

Karen Azoulay, Head of Real Assets at BNPP AM Private Assets, comments: “Since the establishment of our Private Assets investment division, environmental solutions have been a key strategic focus.  The launch of Climate Impact Infrastructure Debt confirms this and marks a significant step forward in our ongoing efforts to support financing the transition to a low carbon economy and offering our clients BNP Paribas’ unique origination capacity within this asset class.”

Olivier Hereil, Deputy CEO for Asset Management at BNP Paribas Cardif, comments: “As a responsible investor, we are proud to collaborate on the launch of Climate Impact Infrastructure Debt.  Echoing BNP Paribas Group’s energy transition policy, our conviction at BNP Paribas Cardif is that it is essential to manage policyholders’ savings with a long-term perspective by combining financial performance with a positive impact on society.  This new investment is part of our commitment to allocate an average of EUR 1 billion per year to positive impact investments by the end of 2025.”

Khoi Anh Berger Luong, Head of Real Assets for EMEA at BNP Paribas CIB, comments: “Benefiting from our powerful integrated bank model, this new fund is further evidence of our accelerating low carbon expertise buildout in support of our corporate clients.  It offers a differentiated strategy to financial institutional investors to deploy their capital in the transition of the real economy.”

Séverine Mateo, Global Head of BNP Paribas’ Low-Carbon Transition Group, comments: “Combining BNP Paribas’ origination, distribution and investment capabilities within low carbon transition is perfectly aligned with the Group’s strategy to accelerate the transition to a lower carbon and more sustainable economy.”

This marks an increase of 22 per cent rise on the amounts invested in 2022 and represents an all-time high for any six-month period.

The potential benefits from such investments are clear: long-term, often inflation linked returns; alignment with ESG strategies; support for the Net Zero by 2050 targets.

Indeed, just last month Gresham House announced the closure of its second British Sustainable Infrastructure fund after securing GBP450 million in investment from 12 institutional investors, including eight separate UK local authority pension funds.

Heather Fleming, Managing Director, Institutional Business at Gresham House, says: “Investors are looking for innovative investment opportunities that support regional levelling up and the green agenda in the UK. We are giving LPs [limited partners] a platform for place-based investment, providing exposure to our portfolio companies and supporting the regions and sectors that most align with their sustainability targets.”

Yet a report from investment consultancy Bfinance – What Is Sustainable Infrastructure Investing Now – warns that labels and classifications, specifically the Sustainable Finance Disclosure Requirements (SFDR), may not provide an altogether reliable indicator of an asset managers’ positive ESG impact.

Anish Butani, Managing Director of Private Markets at Bfinance and co-author of the report, says: “Whilst SFDR regulations have gone some way to standardise approaches, we do not consider the classifications to reflect an impact or non-impact strategy. For example, recent research has highlighted, that only 70 per cent of Article 9 strategies have a formal impact process.” 

Butani continues: “Instead of looking at labels, impact minded investors should vet prospective managers for intentionality, additionality and measurability.”

Bfinance says there is a “very large variability of approaches and differing degrees of commitment” across the asset managers offering sustainable infrastructure, and he advises that, notwithstanding the data challenges in assessing strategies, “investors should still demand high standards from asset managers”. 

Sarita Gosrani, Director of ESG and Responsible Investing and co-author of the report at Bfinance, says: “Strong pre-investment due diligence and post-investment monitoring are key: fund names and regulatory status are poor indicators of a manager’s approach.

Further, the report points to a danger that investors are being shepherded away from putting capital to genuinely good use in helping carbon intensive industries transition to net zero, and towards allocating to funds that might be spuriously labelled sustainable.

Gosrani says: “Amid the increasingly varied manager offerings, we would encourage investors not to disengage too readily from essential infrastructure and services that involve high emissions in the near term. There is a risk that carbon emission/reporting objectives disincentivises investors from involvement in these sectors, despite the overwhelming social and economic importance associated with their transition.”

An estimated GBP40 billion of annual investment in infrastructure is required over the next decade if the UK is to meet its net-zero commitment. Across the EU, this figure is approximately EUR737 billion every year until 2035. 

Demand for infrastructure investments, both listed and private, is at its highest level on record. Assets in dedicated listed infrastructure products have reached USD111 billion globally, while managers of private infrastructure funds have raised capital. In fact, private managers are now sitting on nearly USD350 billion in dry powder—cash on the sidelines, looking for suitable investments.

While historic public infrastructure spending programs have raised the public profile of infrastructure as an asset class, we see several fundamental factors driving demand for listed infrastructure allocations, including: 

·       Appetite for infrastructure’s attractive historical investment attributes, including the potential for strong total returns, reduced volatility and inflation protection 

·       Access to critical forces driving economic change, including infrastructure modernisation, digital transformation of economies, decarbonization, and investments in logistics assets 

·       Acceptance that listed infrastructure may be an effective complement to private infrastructure investments, offering diversified exposure with access to assets and industries that may be less available to private investors

A historically attractive return profile 

Listed infrastructure has little overlap with broad equity allocations, accounting for just 4 per cent of the MSCI World Index, and provides access to subsectors and investment themes that are typically under-represented in broad equity market allocations. 

Performance data over the past 17 years indicates that listed infrastructure offers the potential for: 

•      Competitive performance relative to global equities, with total returns averaging 7.2 per cent per year 

•      Lower volatility, supported by the relatively predictable cash flows of infrastructure businesses 

•      Improved risk-adjusted returns, as measured by a higher Sharpe ratio 

•      Resilience in down markets, with infrastructure historically experiencing 74 per cent of the market’s decline, on average, in periods when global equities retreat 

In 2022, in an environment characterized by slowing growth, rising interest rates and high inflation, infrastructure substantially outperformed broader stocks. This was consistent with infrastructure’s history of resilience and relative outperformance in most equity market declines.

Beneficial inflation characteristics 

Infrastructure has historically delivered strong relative returns during periods of higher-than-expected inflation, compared with modest or negative relative performance for stocks and bonds. This positive sensitivity has resulted from inflation-linked pricing mechanisms in many infrastructure revenue models, which provide for contractual adjustments to user fees. These adjustments may be based on fixed increases approximating inflation or on variable increases linked to consumer or producer price changes. Furthermore, certain subsectors—particularly in transportation infrastructure—may benefit from rising throughput in a strengthening economy.

Interest-rate reactions historically followed by strong relative returns 

Rising interest rates can pose a near-term risk to infrastructure performance, as sharp increases in Treasury yields may cause an initial negative reaction. However, following rate-driven pullbacks, infrastructure has historically outperformed global equities over the ensuing three, six and 12-month periods, as the benefits of stronger economic growth and inflation were eventually reflected in revenues.

Providing essential services 

The return profile noted above is the result of fundamental characteristics of infrastructure businesses: Through listed infrastructure companies, investors can gain access to a globally diversified portfolio of infrastructure assets valued at about USUSD4.5 trillion, spread across the Americas, Europe and Asia Pacific. The investment universe contains a broad range of subsectors spanning four main categories:

Active management opportunities 

Each infrastructure subsector has distinct supply and demand drivers, resulting in a wide dispersion in returns in a given period. Since 2017, the difference between the best and worst subsector calendar-year returns were mostly between 30 per cent and 40 per cent. Differences in returns are typically even greater at the security level. This wide range in outcomes offers active listed infrastructure investment managers an opportunity to take subsector-level positions with high conviction—which may enhance the performance of portfolios.

A diverse universe supported by structural growth trends

We believe this asset class is positioned to benefit from four distinct long term investment themes: 

1.     Decarbonization driving a global transition to renewable energy 

2.     Digital transformation affecting nearly every industry 

3.     Logistics assets that facilitate global movement of goods 

4.     Infrastructure modernization in both developed and emerging economies

Decarbonisation 

Renewable energy has strong political and regulatory backing, while declining production costs for solar and wind have allowed these technologies to become cost-competitive with coal, gas and nuclear generation. We believe increased reliance on green power should create opportunities for owners of solar and wind assets, as society maintains a balance of traditional and renewable energy sources, with a “more of everything” approach having become more accepted. 

Wind, solar and biomass’s current share of global power generation is only slightly more than 10 per cent today, but it is expected to rise to 29 per cent by 2040 under current policies. The International Energy Agency estimates that figure could reach 49 per cent by 2040 if additional sustainable policies are adopted. Increased government support could improve potential returns for developers and investors while likely accelerating the pace of the transition.

Digital transformation 

Virtually every industry is moving to build out digital platforms, and the expansion of artificial intelligence (AI), in its early innings, appears poised to be the next key long-term driver of this trend, on top of 5G demand. AI automation and broader enterprise and consumer adoption will likely require greater investment in wireless networks. 

The rapid expansion in data usage in the late-4G environment, coupled with the expected urgent demands of the approaching 5G era, will likely require massive investments to expand communications infrastructure capacity over the next decade. Industry estimates show potential for a nearly fourfold increase in global mobile data traffic by 2028, with 5G networks expected to carry more than half of all traffic. This growth will likely support demand for cell tower and data centre services and assets for years to come. 

Access to logistics assets 

The infrastructure universe is well-represented by companies with assets that help move people and goods around the globe—most specifically, railways, marine ports, airports and toll roads operators. They form a critical part of the global supply chain, facilitating the flow of products ranging from semiconductor chips and medical supplies to everyday household items. 

Logistics operators stand to benefit over time from factors such as increased operational efficiencies, e-commerce trends, and the strategic onshoring of industrial activity. Freight railway owners, for example, appear poised to continue to see improvements in operations and higher capital returns, potentially increasing company free-cash-flow generation over the next several years.

Infrastructure modernization and urbanisation 

The need for and provision of critical, essential services can create potential return-generating investment opportunities—and the necessity for infrastructure investment is both substantial and global. In developed markets, critical upgrades are urgently required to address deteriorating service quality, from dangerous lead levels in city water supplies to derailments of freight and passenger trains. Governments around the world have either proposed or enacted infrastructure investment programs approaching USD3 trillion, seeking to drive a sustainable economic recovery and reduce carbon emissions. 

In the US, we see several potential benefits from infrastructure spending: 

•      Direct benefits for renewable energy developers and electric utilities, primarily through tax incentives 

•      Potential for new revenue opportunities for cell tower and data centre companies due to a larger addressable market for wireless carriers 

•      Added boost to economic growth prospects, potentially supporting many segments of listed infrastructure (particularly logistics sectors) 

Meanwhile, emerging economies frequently need critical investment to support demographically fueled economic growth, expand urban capacity and meet the demand for higher standards of living. The UN projects that the world’s population will expand by roughly 10 per cent this decade and by more than 25 per cent by 2050, driving the need for additional infrastructure.

Zenobe provides essential infrastructure that contributes to international power and transport sector decarbonisation targets. In addition to providing electrification solutions for vehicle fleet owners, its batteries help balance the supply of renewable energy on the grid. At the end of their lifecycle Zenobe repurposes the batteries for further use, thus, the firm writes, contributing to the building of a circular economy. Since the company was founded in 2017, it has delivered 435MW of grid-connected battery capacity, and has provided bus operators with c.1,000 electric vehicles under a leasing structure.

The company has fast-growing operations in the UK, Australia, New Zealand and Benelux, with its international headquarters in London. In the UK, Zenobe is a leading owner and operator of battery storage, supporting National Grid with the uptake of renewable power and working with the major bus companies to power the UK e-bus market.

Richard Sem, Partner at Pantheon, PINT’s investment manager, comments: “We are thrilled to announce this latest transaction in a highly attractive sub-sector, which brings more diversification to PINT’s portfolio. Renewables and energy efficiency assets continue to benefit from strong tailwinds, especially given the need to transition to net zero. We are delighted to partner with a high-quality sponsor on this transaction and look forward to working with Infracapital to deliver returns for our investors from this asset going forward.”

Key report facts:

• Fundraising: Despite just USD4.5 billion in capital being secured by funds reaching their final close by the end of Q1 2023, or 16 per cent of the quarterly average since 2016, a similarly slow pace has continued into Q2 2023 which also saw USD4.5 billion secured. However, Preqin interim data shows some welcome signals of a resurgence in infrastructure fundraising. Based on fundraising for interim and final closes in the quarter, USD32.3 billion has been secured, a rate similar to the quarterly average of USD33.7 billion since 2016.
• Funds in market: The slow fundraising market is contributing to a backing up of funds in market. While aggregate capital targeted rose sharply amid the frenzied fundraising of 2022, up 56 per cent to USD342 billion by January 2023, it continued to surge by 43 per cent in the first six months of 2023. Preqin analysts believe managers are keen to secure investor capital, while a disconnect between investors’ commitment intentions and managers’ keenness to raise capital has emerged.
• Performance: Infrastructure assets performed well to the end of 2022, buoyed by confidence around the asset class following the impressive fundraising that year. Unrealised value increased by 24 per cent by the end of 2022, against an 11 per cent increase in dry powder, bringing uncommitted capital’s share of assets under management (AUM) to a new low of 27 per cent.

Alex Murray, VP, Head of Real Assets, Research Insights, at Preqin says:“The optimism in infrastructure from the first half of 2022, that underpinned a doubling of fundraising pace, makes the current fundraising slowdown all the more stark. Having said this, when delving deeper into interim closings, Preqin’s depth of fundraising coverage provides a leading indicator that investors are returning to the asset class. Where the deals market will head remains less certain – if real estate has set a precedent for infrastructure, managers with dry powder may do well hold out for better value assets in future quarters.”

Building on the broad capabilities of the firm’s longstanding infrastructure platform, it will seek to make lasting investments in core assets and aim to create resilient, inflation-linked returns for investors, while creating growth in the real economy. Over half of the strategy will be allocated to Europe initially, with the aim of becoming increasingly global over time.

BlackRock intends to launch underlying open-ended investment vehicles for the new strategy and will be seeking founding partners for these funds later this year. The firm says the open-ended structures will provide the ability to continuously raise and invest capital over the life of the strategy.

The firm believes that the shift toward a green economy is creating a step change across all infrastructure sectors today, opening attractive investment opportunities in several areas. The new strategy will pursue investments in the mega-trends of energy transition and energy security, as well as digital and community infrastructure, sustainable mobility, and the circular economy.

It will seek to deploy capital into fully integrated businesses such as utilities and end-to-end renewable energy infrastructure players, as well as assets such as data centres, grid digitisation technologies, battery storage systems, and natural gas storage and transport facilities that are adaptable to incorporate hydrogen. Through its investments in these businesses, BlackRock will take an active approach in helping companies transition to lower-carbon business models over time.

“We believe the intersection of infrastructure and sustainability will be one of the biggest opportunities in alternative investments in the coming years. At the same time, recent events have sharpened the focus on energy security and further compounded the need for infrastructure investment,” said Edwin Conway, global head of BlackRock Alternative Investors.

“Private markets will continue to play a pivotal role in the energy transition, and we are pleased to offer our clients another way to go beyond simply navigating the transition to driving it forward.”

According to BlackRock, an estimated USD125 trillion of investment is needed globally by 2050 to reach net zero, including more than USD4 trillion per year compared to USD1 trillion per year currently. In addition to financing the transition over the long term, a new driving force has become the near-term issue of energy security, particularly in Europe, a result of the energy shocks caused by the war in Ukraine.

According to the BlackRock Investment Institute, the switch away from Russian energy will accelerate the net-zero transition in Europe over the long term but make it more divergent globally.

“BlackRock is a leader in the energy transition, having mobilised over $55 billion of investments across our infrastructure strategies since their inception,” said Anne Valentine Andrews, global head of BlackRock Real Assets.

“Our ability to convene companies, governments and institutional clients means we are uniquely placed to deploy capital from investors globally into real assets that drive the energy transition and have a positive impact on local communities and economies.”

BlackRock Alternative Investors – which has USD330 billion of assets under management across real estate, infrastructure, private equity, credit, hedge funds and alternative solutions – has a broad range of private market capabilities designed to help drive the energy transition.

As an early mover in the energy transition, its first investment in renewable power on behalf of its clients was a wind project in Europe in 2012. Since then, the firm’s USD75 billion Real Assets business has continued to evolve its strategies with the broadening market opportunity through its diversified infrastructure and climate infrastructure businesses.

BlackRock today manages one of the largest climate infrastructure franchises globally, investing in renewables across developed markets. The firm recently partnered with the governments of France, Germany, and Japan, together with a number of institutional investors and leading foundations, to raise the Climate Finance Partnership, a flagship blended finance vehicle focused on investing in climate infrastructure across emerging markets.

Most recently, the group established Decarbonization Partners, a partnership with Singapore’s Temasek focused on late-stage venture capital and early growth private equity investing in decarbonisation solutions.

The significant oversubscription of almost 50 per cent to the fund – which had an original target of USD3 billion – underlines the degree of global allocator appetite for infrastructure and real asset investments as a protection against soaring inflation and as a source of stable long-term returns at a time of intense market volatility and rising geo-political/macro-economic risks.

Macquarie’s latest fundraise – for the Macquarie Asia-Pacific Infrastructure Fund 3 – brings total capital managed under firm’s Asia-Pacific Infrastructure Fund series, which is dedicated to investing in Asia-Pacific infrastructure, to over USD15 billion.

The firm said the new fund had received commitments from a diverse range of returning and new institutional investors from around the world, including pension funds, insurance companies and sovereign wealth funds.

“The infrastructure markets across Asia-Pacific have been maturing at a particularly fast rate, and our clients continue to value the investment merits brought by infrastructure. We are also pleased to see a diverse and international investor base as the asset class matures,” says Frank Kwok, head of Macquarie Asset Management’s Real Assets business in Asia-Pacific.

Verena Lim, head of investments for the Macquarie Asia-Pacific Infrastructure Fund series, says: “While the markets within this region are truly diverse, the investable landscape has broadened materially as we see some common themes driving new opportunities, including digitisation, decarbonisation and sustainability. More importantly, the positive long-term outlook for the region will continue to drive demand for high-quality infrastructure.”

The latest fundraise takes Macquarie Asset Management’s total global infrastructure capital-raising over the last three years to more than USD40 billion. In July last year the firm closed its sixth Americas infrastructure fund with USD6.9 billion in commitments – comfortably exceeding its USD5 billion target. A global leader in infrastructure and real assets investing, Macquarie now manages almost AUD200 billion in global infrastructure assets.

In its Q1 2022 Infrastructure Quarterly Update, alternative assets data provider Preqin said the infra asset class had experienced its most active fundraising quarter on record – with some 20 funds raising a record USD70 billion in the first three months of the year (including new mega-funds from KKR and Stonepeak), representing a 40 per cent increase on the previous peak quarter in Q4 2019.

“With an IRR return of 8.5 per cent over the 10-year period to Q3 2021, investors will continue to be drawn to the asset class, with the prospect of defensive inflation protection in many assets,” said the report’s analysts.

Alex Murray, vice president of research insights at Preqin, commented: “This latest quarterly update illustrates how fast the infrastructure asset class is growing. With a record USD70 billion secured by funds to close in Q1 2022, it’s clear the largest funds are benefiting from investors’ growing appetite for the asset class. However, geopolitical events such as the ongoing conflict in Ukraine are raising concerns about European energy independence risks. Investors and managers globally will be looking for opportunities to help speed up the energy transition and development of renewable capacity in the region.”

In its 2022 Global Infrastructure Report published at the start of the year, Preqin analysts said infrastructure asset under management were expected to reach almost USD1.9 trillion in 2026 – with infrastructure overtaking real estate as the largest real asset class.

Investors are considering the future for allocations toward Chinese and Asian assets, including bonds and equities, as China’s heavily-indebted Evergrande sparks fears over the health of the world’s second largest economy.

Alberto Matellán, chief economist at MAPFRE Asset Management, says that Evergrande continues to be the “main focus of investors’ attention” after a mounting debt crisis at the company emerged last week. 

Evergrande, one of China’s largest property developers, has been struggling to service a USD305 billion debt burden. 

The property firm missed a payment deadline on an overseas bond last week, leaving global investors to face the possibility of swallowing large losses if the group defaults. 

“At the moment, there is a tense calm because it looks like the company will be able to meet its forthcoming debt payments,” says MAPFRE’s Matellán. 

MAPFRE AM is the asset management arm of the Spanish insurance group, and has over EUR40 billion in assets under management.

Evergrande’s main property business in China has privately negotiated a settlement with domestic bondholders, and the firm agreed a separate USD1.5 billion deal to settle its debts with a Chinese bank this week.

Matellán believes that the Evergrande effect could be contained within the Chinese real estate bond market, making its overall impact on markets “more limited” because the “exposure of foreign investors to these assets is not very high”. 

Nevertheless, two of the world’s largest asset managers, BlackRock and Vanguard, have already posted large losses on their stakes in Evergrande, whose shares have lost 80 per cent of their value this year. 

The developer’s downfall could set off a broader contagion affecting the rest of the Chinese economy, explains Matellán. He notes that the Chinese economy is “already showing signs of moderation”.

August data showed that China’s economic growth is slowing, with consumer spending and industrial production falling behind official forecasts amid renewed outbreaks of Covid-19.

Matellán recalls that the Chinese authorities are aware of the recent growth slowdown and have “already hinted at the possibility of applying stimuli if required”. 

This could lead to further policy easing, with People’s Bank of China already boosting liquidity by cutting the reserve requirement ratio for banks in July.

Evergrande’s demise could also have a severe impact on foreign portfolio allocations, with investors perceiving higher risks in China and “strongly readjusting portfolios of all Asian assets, mainly bonds, but also indices”, according to Matellán. 

Investor allocations toward China have been on the rise until recently, with an Invesco survey finding that 86 per cent of global asset owners have grown or maintained their China exposure in the past 12 months.

“This is the most dangerous option but it’s not the central scenario because although mistakes may be made, the Chinese government has no interest in allowing this to unfold,” says Matellán.

Meanwhile, Rob Brewis, fund manager at Aubrey Capital Management, says that Evergrande’s downfall will echo throughout China’s property and financial sectors.

The USD1.6 billion Edinburgh-based asset manager noted in September that it had slashed its positioning in China to just over 30 per cent, from 55 per cent at the start of 2021.

“It certainly won’t be the only Chinese developer to fail. No doubt there will be plenty of pain across the financial sector, especially in smaller banks and the murky world of “shadow banking,” says Brewis. 

The decreasing status of the property sector means China’s GDP growth is losing “one of its biggest props”, says Brewis.  

“Potentially, Evergrande is a symptom of the last gasp of one of the greatest property booms known to mankind,” says Brewis, noting that this was driven by the urbanisation of China’s vast population, which is rapidly ageing.

This is not necessarily a “systemic risk” to China’s economy, which has been moving away from its reliance on property sector for some time, according to Brewis.

“Who knows where Chinese property prices are going, but one would suspect this is not an overly positive development,” says Brewis. 

“But the broadening of the Chinese household balance sheet, (which, on aggregate, is under-leveraged) away from its heavy reliance on property and cash, into other wealth management areas (equities, mutual funds perhaps) is an area of huge potential growth. This can only accelerate this trend.” 

Brewis believes that many sectors including electric vehicles, dairy consumption, athletic wear, mass market cosmetic brands, convenience shopping and food delivery, will continue to see growth. 

“And the best companies in these sectors, which are ungeared and cash generative, will continue to thrive. As it happens, valuations of these have just got a lot more attractive,” says Brewis.