The addition of infrastructure to PE firms’ playbooks is part of a broader embrace of adjacent private market asset classes
After a difficult year in which unlisted, closed-end infrastructure funds raised US$112 billion—down 35 percent from the record US$172 billion in 2022—the infrastructure sector has begun to turn a corner. In a February survey by Infrastructure Investor, 41 percent of investors said they intend to put more capital toward infrastructure in the next 12 months, while only ten percent said they would invest less. They have good reason to increase allocations: 86 percent of infrastructure investors said their portfolios had either met or exceeded their benchmarks in the past 12 months.
Today, what were once pure-play private equity firms are showing a keen interest in adding infrastructure to their platforms—seen, for example, in US PE firm General Atlantic’s acquisition of UK-based infrastructure investor Actis, announced in January 2024. General Atlantic will incorporate Actis into its global investment platform as its dedicated sustainable infrastructure branch, with assets under management of around US$12.5 billion.
Just a few months earlier, in September 2023, global private markets manager CVC announced it would acquire a majority stake in global infrastructure fund manager DIF Capital Partners, which focuses on mid-market infrastructure projects and businesses, especially within energy transition, renewable energy and digital infrastructure.
PE’s interest in the space should come as no surprise. For investors, infrastructure offers dependable cash flow yields from critical assets that are well insulated from economic downturns. In particular, the asset class’s inflation pass-through benefits came to the fore in the past two years. Regulated inflation-linked contracts allow for the adjustment of fees and tariffs, ensuring that revenue streams from these assets maintain their real value over time. For PE firms, these conditions have given rise to lucrative fundraising opportunities, and a path toward diversification and strategic expansion.
Energy in transition
The energy transition and the passing of the Inflation Reduction Act in August 2022 present significant opportunities for infrastructure funds. With nearly US$400 billion dedicated to clean energy advancement, the bill aims to drive the decarbonization of power grids, enhance energy efficiency, and support the electrification of transportation alongside related infrastructure investments such as charging stations.
The IRA extends and enhances tax credits for renewable energy development, including extending the 30 percent investment tax credit for solar and other renewable sources through at least 2025, and creating new credits for cleaner electricity generation. These measures, along with additional credits for projects in energy communities and tax credit extensions for standalone energy storage facilities, are expected to spur increased development in renewable projects.
Infrastructure funds, including European outfits targeting the US mid-market, are well positioned to benefit from these tax incentives.
Data needs
The surging demand for artificial intelligence applications also represents a big opportunity for infrastructure funds. As AI becomes more sophisticated, its data storage and computational power needs will increase, driving demand for data centers. AI’s sharp growth trajectory implies a steady, long-term requirement for these services, aligning with infrastructure funds’ strategy of backing physical assets with stable returns.
In January 2024, EQT’s Infrastructure VI fund invested in data center operator EdgeConneX. This marks the Swedish firm’s second investment in the company, having taken a majority stake in a co-investment made from its fifth infrastructure fund in 2020. Since then, EdgeConneX has more than tripled its capacity and global reach, including in Asia, Latin America and Europe.
In early April, following a US$587 million capital fundraise to close out Q1, Shanghai-headquartered data center operator GDS announced a partnership with Hong Kong-based PE firm Gaw Capital to construct a 40-MW campus in the Greater Tokyo area. The project marks GDS’s first foray into the Japanese market and comes less than a month after the company announced it was looking to sell stakes in some of its international operations, with Asia-Pacific PE firms Boyu Capital, Hillhouse and CDH all reportedly interested in investing.
In the US, the Midwest is becoming a popular destination for data center campuses, thanks to lower power and land costs, state tax incentives and a colder climate that lowers cooling costs. Indeed, several new projects were green-lit or proposed in the last week of March alone, including a data center in Chicago, an AI-centric center in Milwaukee, Wisconsin, and a 640-acre campus in Indiana.
Lastly, it is worth noting that data centers’ acute energy demands are spurring on ancillary projects. A combination of optics, shareholder pressure, and evolving regulation around sustainability is seeing operators push for investment in clean-energy sources to power data centers. Even existing nuclear energy and fossil fuel generation assets, which might otherwise have been wound down, are being thrown a lifeline and can help to fulfill data centers’ rising energy demands.
One-stop shops
PE’s interest in infrastructure, heightened as it is, is not exclusive, but rather part of an ongoing expansion into adjacent, complementary private asset classes. In November 2023, for instance, buyouts mainstay TPG Capital paid US$2.7 billion to acquire Angelo Gordon, expanding into private credit and real estate, while in March 2024 venture capital firm GGV Capital Asia—now branded as Granite Asia after separating from its US counterpart—announced it was considering expanding into private debt investments for the first time.
Driving this trend is the consolidation of capital in the private markets industry. Preqin data shows that total fundraising in 2023 declined by 11.5 percent year on year, from US$909.1 billion to US$804.1 billion. But the real story lies in the collapse in fund count: Last year’s 1,936 final closes represented a 46.5 percent year-on-year contraction from the 3,618 funds raised in 2022.
In short, major LPs are making large allocations to fewer funds, demonstrating a preference for established firms with proven track records. This consolidation in fundraising is prompting big PE firms to diversify their offerings to include a range of private market strategies, including infrastructure, to solidify their market position.
By expanding into these private asset classes, PE firms are better placed to attract more capital from LPs who are looking to allocate sums to fewer, more versatile managers. This expansion allows firms’ investor relations teams to cross-sell fund products, keeping their most valued clients from going elsewhere to meet their allocation needs. The quickest way of achieving this cross-strategy scale is through acquisitions, rather than building from the ground up, which can take years. It is a “one-stop shop” approach that shows little sign of losing steam any time soon.
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