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US investors are pouring money into funds that finance infrastructure projects from wind farms to data centres, only to find their fund managers are worried they cannot quickly sign attractive deals.
A cool-down in infrastructure deal activity is being blamed on uncertainty over the outlook for green energy subsidies and tariffs, ahead of a US presidential election that looks too close to call, according to market participants.
Fundraising by asset managers focused on infrastructure has come back to life, beginning with the launch last December of a record $28bn fund by Brookfield that ended a drought of almost 18 months.
In the first half of 2024, North American infrastructure funds raised a further $10bn, compared with $4bn in the same period last year, according to Preqin data. The third quarter has also started strongly, with almost $7bn raised in July and August so far, compared with just $2.5bn in the same period last year.
And the numbers are expected to climb further after rising equity markets gave pension funds and endowments the ability to increase their allocations to alternative, illiquid investments. Infrastructure funds are pitching themselves as a way to lock money in high-yielding assets before interest rates start to come down.
This month, Los Angeles Fire and Police Pensions approved reallocating 2 per cent of the $31bn fund to infrastructure investments from commodities. Infrastructure “may provide the plan higher expected returns in periods of stable and falling inflation and would have a lower correlation to public equities”, the pension fund’s adviser, RVK, said in the meeting agenda.
The $274bn New York City retirement system also said its funds have increased their exposure to infrastructure by up to 2 per cent since late last year.
The global energy transition away from fossil fuels is driving investor interest, becoming the fastest growing subsector in infrastructure, according to Campbell Lutyens, another advisory firm.
“We count at least 110 energy transition specialist private funds in the market now trying to raise some $170bn,” said Gordon Bajnai, Campbell Lutyens’s chief executive. “That by far outstrips any other areas of specialisation, like data [centres] and transport.”
But actual infrastructure deal flow this year has not risen to match the inflows, and the projects that have come to market this year have tended to be smaller. The total value of deals remains far below 2021 and 2022 highs. Despite being flush with cash, infrastructure fund managers are proving cautious.
Former president Donald Trump has stated his intention to dismantle large parts of the Biden administration’s Inflation Reduction Act, which provides incentives for domestic industry and clean technology, if he is returned to the White House in November. He has also vowed to introduce new tariffs on imports.
“We can’t accurately cost a project, therefore we can’t price it,” said David Scaysbrook, co-founder of Quinbrook Infrastructure Partners, which raised $3bn for its renewable energy fund earlier this month.
“We have to be more cautious over the next 12 months on committing to projects. There’s a bit of a stalling of momentum until we have more certainty around costs.”
The looming election means more delayed deals or projects taking longer to come to market, said Mark Widmar, chief executive of First Solar, the largest US solar manufacturing company. “You’re going to be in this window with a lot of uncertainty for a period of time. It will be very disruptive for the industry.”
Some asset managers are banking on a surge in deals after polling day in November when the political make-up of the White House and Congress becomes clear.
Steven Meier, chief investment officer for New York City retirement system, said if Republicans win, “there may be some pullback in some of the infrastructure initiatives”, but the long-term outlook remains positive.
“The demand and the need is there.”