Money pours into funds targeting solar power, cell towers and data centers

Infrastructure funds have raised about $130 billion this year, already outpacing the record of $125 billion set last year, according to Preqin, a data provider. Contributing to that total were a $17 billion fund raised by KKR, a $15 billion equivalent from Brookfield and a $14 billion fund from Stonepeak Partners LP.

Investors include state pension funds from Alaska and New York, as well as other institutions such as China Life Insurance Co., according to the data provider and documentation from the pensions. Meanwhile Sweden’s EQT AB is aiming to raise the equivalent of $5.2 billion in a new infrastructure fund, touting inflation protection and low volatility as among the fund’s advantages. The fund will invest in core-infrastructure projects, such as utilities and telecom towers.

Such funds can take months to raise, meaning that much of this year’s record-breaking haul isn’t directly related to the recent surge in inflation. But that backdrop is likely to increase the demand for infrastructure investment.

If current trends continue, “allocations to infrastructure funds will continue to increase for protection against inflation and price volatility in the public and private-equity markets," said Gordon Bajnai, head of global infrastructure at Campbell Lutyens & Co., a firm that helps buyout shops raise money.

The global transition to greener energy and the increasing digitization of the world economy will also help drive industry growth, Mr. Bajnai said, by pushing up demand for certain kinds of infrastructure.

Pension funds and insurers have long been attracted to assets such as utilities, toll roads and ports, because their predictable income streams match up well with investors’ longer-term liabilities. While these investments typically offer lower returns than technology and other growth companies, they are usually well-equipped to pass through higher costs to customers. That is a big advantage in the current environment.

U.S. consumer-price inflation hit a four-decade high in June, at 9.1%, and remained elevated in July at 8.5%, while prices are also rising rapidly in other economies, such as the U.K. and continental Europe.

In May, KKR struck a $2.1 billion deal to acquire the U.K.’s ContourGlobal PLC. The alternative-asset manager noted that revenue from about 90% of the power-generation company’s contracts was inflation-linked.

The MSCI AC World Infrastructure Index, which tracks publicly traded utilities, telecom operators, healthcare facilities and others, has beaten the broader market. Including dividends, the benchmark has generated a total return of 2% measured in U.S. dollars this year through Monday, according to FactSet. That compares with a 11% decline in the broad MSCI AC World Index.

The investment focus of many funds is on digital-economy assets, which also promise growth as demand rises for technologies such as superfast data networks and cloud computing. Another focus is lowering carbon emissions and developing renewable energy sources, partly to take advantage of the billions of dollars being invested in these areas.

The International Energy Agency estimates that annual investments in energy infrastructure and technology need to increase from more than $1 trillion to more than $4 trillion by 2030 to achieve net-zero emissions by 2050.

Last week, buyout firm Actis LLP sold a wind- and solar-power business in India for almost $1.6 billion to Shell PLC, generating a total return of more than 20% for its investors, according to people familiar with the matter.

One risk is that funds overpay, as rising demand for assets pushes up valuations. Another is that some infrastructure businesses prove less reliable than expected, perhaps in the face of an economic downturn or a changing regulatory backdrop.

To gain an edge, the infrastructure arm of Canada’s Brookfield focuses on big deals where it faces fewer competitors. Last month, it joined forces with Florida-based rival DigitalBridge Group Inc. to acquire a majority stake in Deutsche Telekom AG’s GD Towers business for $6.6 billion.

The buyers get 30 years of inflation-linked, contracted payments, plus the opportunity to boost the future cash they receive, said Sikander Rashid, head of Brookfield’s European infrastructure group. Cell towers generate recurring revenue by leasing space to carriers, broadcasters and other users. Demand should increase as mobile carriers move to close 5G coverage gaps, he said.

This story has been published from a wire agency feed without modifications to the text