Institutional investor interest in infrastructure has grown steadily in recent years, but with more opportunities in renewable energy coupled with economic incentives borne out of the Inflation Reduction Act, more institutions are steering dollars to the asset class in a trend experts and managers expect to continue.
“In a period of uncertainty like this, investors seek out relative predictability, and predictability is the hallmark of the asset class; because of that, we continue to see a lot of interest,” said Benjamin Morton, New York-based executive vice president, head of global infrastructure and a senior portfolio manager for Cohen & Steers Inc.’s infrastructure portfolios. “And then you layer on some of these opportunities created by themes like energy transition that have been boosted by the (Inflation Reduction Act) in the U.S. that should help sustain higher growth rates for longer for some utilities.”
Democrats in August passed the Inflation Reduction Act, or IRA, which included tens of billions of dollars for loans and grants related to emissions reductions and climate resiliency, and a host of new and expanded tax credits for renewable energy projects, such as wind and solar farms, electric vehicles and carbon capture initiatives.
“Without the IRA, I think there would have been significant development of renewables in the U.S., but with the IRA it’s even higher because now you’ve taken projects and made them more economic,” said Jehangir Vevaina, a Toronto-based managing partner in Brookfield Asset Management‘s renewable power and transition group. “That means a lower power purchase price for buyers, so more buyers are interested.”
Brookfield manages $161 billion in infrastructure assets, and an additional $77 billion under its renewable power and transition group, as of March 31. As of Dec. 31, it managed $20.2 billion in U.S. institutional, tax-exempt assets internally managed in infrastructure, according to Pensions & Investments data.
Last year, the firm made several plays in renewables, including acquiring Scout Clean Energy, a national utility-scale renewable energy developer-owner- operator; Urban Grid, a solar-focused utility-scale renewable energy project developer; and solar company Standard Solar.
While Brookfield was keen on each of those acquisitions prior to the IRA, since the bill’s passage, the opportunity has grown exponentially, Mr. Vevaina said.
“Within their pipelines we thought there were projects that were great investments previously, but now there are even more projects in their pipelines and even more growth coming out of these companies,” he said, adding that the IRA is “supercharging” development in renewables.
Paced by renewables, money flowed into infrastructure in 2022 at a torrid rate, according to data from Preqin, a London-based investment data company. Infrastructure funds raised a record $181 billion in 2022, up from $136 billion in 2021.
However, infrastructure fundraising slowed to $5.3 billion in the first quarter, a number Alex Murray, Preqin’s London-based head of real assets and vice president of research insights, chalked up to a correction from global interest rate increases and rising costs of primary infrastructure development assets due to inflation.
“There’s still a huge wall of dry powder in the asset class at $316 billion,” Mr. Murray said. “A lot of investors that allocated last year to funds in a record fundraising year, they still have commitments in funds from earlier years, from 2021 and 2020, because those funds may not have fully deployed yet. Typically, it takes a fund about three to four years to fully deploy their capital.”
He added, “It would be quite easy for an investor in this environment to look at the commitments they’ve already made to infrastructure funds and say, ‘Yes, we’re keen on the asset class, but until these funds are fully deployed, we’re happy to wait and see in terms of additional commitments this year.'”
In the first quarter, investments in the renewable and conventional energy sectors accounted for 77% of all deals, a new quarterly high, according to Preqin data.
Mr. Murray said he still expects more than $100 billion in infrastructure funds to close in 2023 based on a number of particularly large funds in market, and buoyed again by renewables.