Macro headwinds have taken their toll on infrastructure funds lately, and in particular those focused on renewables.
Although the industry has been slightly hobbled, a number of managers are still thriving, as Kobus Cronje, Managing Director – Guernsey, explains.
Interest rates pile pressure on renewables
Successive interest rate hikes and sticky inflation have not been kind to infrastructure fundraising.
Between 2018- 2023, infrastructure managers raised on average $136 billion each year, but this slumped to $95 billion in 2023, and fundraising appears to be on a similar trajectory for 2024, with the industry attracting $70 billion by Q3 [1]. So pronounced has the fundraising drought been that Preqin reports dry powder at infrastructure managers - as a proportion of their Assets Under Management (AUM) - has fallen to 23.9% - or $38.5 billion - down from 34.8% in 2020, and all this in the absence of much dealmaking activity.[2]
The impact here on renewable infrastructure funds has been especially acute. Data from Infrastructure Investor shows that renewable funds accounted for 71% of all inflows going into infrastructure products in 2023, yet this collapsed to just 37% between Q1-Q3 2024[3].
In 2021, there was a surge in demand for renewable infrastructure fund products. However, lingering inflationary pressures and the higher interest rates environment in 2023/4 resulted in a significant shift in capital allocations away from renewable infrastructure towards lower risk interest bearing assets. The higher interest rate environment has also had a significant impact on valuations and the ability for renewable projects to raise capital.
Even though interest rates are slowly beginning to creep down, the long end of the risk-free yield curve remains high and fundraising is yet to fully recover.
Nowhere is the challenge more evident than in the public markets, where exchange traded renewable and infrastructure investment trusts and companies are still trading at a steep discount, say 20% - 40% to their Net Asset Values (NAVs), new IPO’s or fundraising has dried up completely and several structures de-listed, or entered into a sale and wind-up process in recent months.
Facing down energy price volatility
Energy price volatility has also heaped pressure on renewable infrastructure funds.
Fundraising was at its peak in 2021, when energy prices were soaring due to the war in Ukraine and various other geopolitical tensions. This accelerated the demand for alternative energy sources, underlined the importance of the energy transition which led to increased revenues of renewable projects, and with it - significant cash injections.
Since 2022, however, energy prices have fallen off the back of increased LNG supplies, causing a sharp contraction in the returns at renewable energy projects. “The volatility in energy prices and revenue uncertainty in certain sub-sectors has resulted in an increase in the risk premium for renewable projects and put further downward pressure on valuations and fundraising.” added Cronje.
But there is hope…
Renewable infrastructure funds and projects may be going through a bit of a rough patch, but some managers, especially those with scale and diversified portfolios, have been able to navigate the choppy conditions.
Renewable infrastructure funds that are sub-scale or over leveraged, have struggled in recent years. In contrast, the renewable infrastructure funds that have performed well or expanded during this period are the ones which were not over-geared and had the necessary scale to maintain strong yields despite the volatility in revenue generated by the sector. These projects and funds will continue to see solid growth in the current interest rate environment.
Diversification has also been a critical enabler amidst the volatility. “Renewable infrastructure funds which have diversified exposures across different sub-sectors and geographical markets, have largely weathered the storm well. The optimisation of existing renewable assets through ancillary revenue generating tactics and emerging technologies were further themes seen in projects that have done well in recent years.
In the near-term, appetite for renewables is expected to return, especially if Central Bankers persist with their monetary policy easing.
Even more significant is that energy demand shows no sign of slowing down, and will continue to exceed supply, fuelling further investment into the renewables sector.
Getting on top
To flourish in the renewables space, access to a high-calibre service provider is all but essential.
JTC’s considerable experience in the Real Assets space has allowed us to specialise in infrastructure, real estate and renewable energy, drawing on the combined knowledge of our multi-jurisdictional teams.
At JTC, we leverage our extensive understanding of the asset class and vast experience in the sector to deliver comprehensive end-to-end services. Our expertise enables us to support funds in navigating the ever-increasing regulatory and reporting requirements, allowing fund promoters to keep costs low and focus on generating superior returns for investors. Beyond our core administrative capabilities, we offer a range of ancillary services, including ESG consulting and regulatory reporting. These additional services enhance the value we provide and fortify the long-term partnerships we build with our clients.
For more information on JTC's Real Assets and ancillary services, visit our dedicated website here: Private Equity Solutions | PE Admin & Advisory | JTC
[1] Preqin – December 11, 2024 – Infrastructure dry powder as share of AUM falls to record low of 24% in 2024 – Preqin reports
[2] Preqin – January 16, 2025 – Infrastructure in 2025: the outlook for fundraising, deals and performance
[3] Infrastructure Investor – Fundraising Report Q3 2024
