Infrastructure managers are fashioning specialized investment strategies they hope will provide investors with higher returns in what has become a competitive playing field.
Even though fundraising for infrastructure funds worldwide appears to be slowing from the record $85 billion raised in 2018, Preqin data show, there's still plenty of available capital. Some 19 infrastructure funds globally raised $8.4 billion in the quarter ended Sept. 30, down from the record $44 billion raised in the third quarter of 2018.
Moreover, in recent years, private equity firms such as The Blackstone Group Inc., Apollo Global Management Inc. and Carlyle Group LP are expanding into infrastructure. In July, Blackstone Group closed its first open-end infrastructure fund with $14 billion.
All of this capital, in turn, is driving up prices.
"There's plenty of equity coming into infrastructure," said Juan Angoitia-Grijalba, Madrid-based senior managing director, Ardian Infrastructure, a unit of private equity manager Ardian. The manager's infrastructure team had $16 billion under management or advisement as of mid-July.
Past returns, as well as the stage of the economic cycle, is fueling the interest, industry sources said.
Overall, infrastructure has produced double-digit returns over most time periods, according to Preqin data. For periods ended Dec. 31, 2018, infrastructure produced a 12.8% internal rate of return over one year, 14.3% over three years, 11.8% over five years and 8.7% over 10 years.
Today, investors are most interested in investments with stable, predictable cash flows that are less risky than other investments as the economic recovery enters its twilight years. To do this, managers are taking more risk, focusing on returns rather than steady cash flow, industry insiders say.
"It's the part of the cycle where there are difficulties ahead of you," Mr. Angoitia-Grijalba said.
Infrastructure fits the investment profile and is quite resilient, he said.
In March, Ardian closed its latest infrastructure fund, Ardian Infrastructure Fund V, at its hard cap of €6.1 billion ($6.7 billion) after only four months of fundraising, Mr. Angoitia-Grijalba said.
"The fund was oversubscribed because performance was very, very good (in prior funds) and there is plenty of demand for the product," he said.
Infrastructure can be defensive or aggressive, he said. "It depends on the type of asset," Mr. Angoitia-Grijalba said. Some existing infrastructure projects are more like bonds in that they provide steady income. "Those types of assets are not for us," he added.
Ardian executives prefer to invest in projects where they can add value and earn higher returns than mature assets.
Ardian will invest in both new construction as well as existing projects that need improvements in energy, including renewable energy, oil and gas, midstream, cell towers and other telecommunications assets and sea ports, Mr. Angoitia-Grijalba said.
He said Ardian executives are not concerned that the amount of capital will overwhelm the opportunity set for infrastructure. "There is plenty of infrastructure to be developed in Europe and the Americas, we believe," Mr. Angoitia-Grijalba said.
However, he acknowledged there is also plenty of competition, which pushes up prices.
"Even for the assets we invest in, you have to be smarter and find a different angle," Mr. Angoitia-Grijalba said.
Competition is part of the game, he said. "Compared to a few years ago, there is more liquidity, more players and more competition."