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Global Real Assets Report

Executive Summary


The real assets landscape continues to evolve rapidly, with infrastructure emerging as the dominant force within the sector. Key highlights include:


1. Infrastructure fundraising remains robust, with $25.6 billion raised in Q1 2024 across 13 vehicles.

2. A shift towards lower-risk strategies like core, core-plus, and infrastructure debt is observed.

3. Sustainable and digital infrastructure continue to be primary focus areas for new funds.

4. Natural resources, particularly oil & gas, face ongoing challenges in fundraising.

5. The potential for a commodities supercycle presents both opportunities and risks.


Real Assets Market Overview


Real assets fundraising has shown resilience in the face of broader economic challenges. In Q1 2024, the sector raised $26.8 billion across 15 funds, with infrastructure accounting for 95.5% of this capital. While this represents a significant quarter-over-quarter decline from Q4 2023's $106.8 billion, it's important to note that Q4 included two massive $30 billion fund closes (Brookfield Infrastructure V and Lunate Capital Climate Fund).


Infrastructure continues to dominate the real assets landscape, driven by several factors:


1. Intersection with sustainability goals

2. Relatively low volatility

3. Government support through programs like the Inflation Reduction Act and RePowerEU

4. Perceived inflation-hedging qualities

5. Growing importance of digital infrastructure, particularly with the rise of AI


Natural resources, especially oil & gas, have seen a sustained decline in fundraising. This trend is likely to continue as investors pivot towards more sustainable alternatives.


Infrastructure Deep Dive


Fundraising Trends


Infrastructure fundraising has remained strong, with $25.6 billion raised across 13 vehicles in Q1 2024. Notable trends include:


1. Shift towards lower-risk strategies: Over 60% of Q1 fundraising went to core, core-plus, and infrastructure debt funds.

2. Geographic diversification: While North America and Europe remain dominant, Asia is gaining traction with KKR's $6.4 billion APAC Infrastructure Investors II fund.

3. Focus on sustainable and digital infrastructure: 10 out of 13 closed funds in Q1 2024 target sustainable infrastructure, with 9 specifically mentioning renewable energy.


Key Players and Strategies


Several large infrastructure funds are in the market or have recently closed, including:


1. Brookfield Global Transition Fund II: Targeting over $20 billion

2. Copenhagen Infrastructure Partners Infrastructure V: Targeting over $12 billion

3. KKR Global Infrastructure Investors V: Targeting $20 billion


These funds underscore the continued appetite for infrastructure investments among institutional investors.


Performance


Infrastructure returns have remained relatively stable, with a one-year IRR of 9.6% as of Q3 2023. While this represents a slight decline from the post-GFC peak of 18.1% in Q1 2022, it demonstrates the resilience of infrastructure compared to more volatile asset classes.


Sector Focus


1. Renewable Energy: Remains a primary focus, driven by global decarbonization efforts and supportive government policies.

2. Digital Infrastructure: Growing importance, particularly in light of AI advancements and increased data center demand.

3. Transportation: Showing strong returns, with potential opportunities arising from deglobalization and supply chain restructuring.


Natural Resources Analysis


Oil & Gas


The oil & gas sector continues to face fundraising challenges, with only two funds closing in Q1 2024 for a total of $1.2 billion. Key points include:


1. Volatility in oil prices, currently hovering between $75-$85 per barrel

2. OPEC+ production cuts supporting prices

3. Expected slowdown in oil demand growth for the remainder of 2024

4. Significant volatility in returns, with one-year IRR at 3.7% compared to a three-year IRR of 26.0%


Despite private fundraising challenges, public markets have seen significant M&A activity, including Exxon's acquisition of Pioneer Natural Resources and Chevron's pending merger with Hess.


Other Natural Resources


While fundraising remains subdued, there are noteworthy developments:


1. Potential commodities supercycle: Underinvestment in the past decade may lead to supply constraints and price increases across various commodities.

2. Copper demand: Essential for electrification and AI development, copper is experiencing high demand due to past underinvestment.

3. Lithium market volatility: Recent price collapse due to oversupply, but long-term demand outlook remains strong.

4. Government involvement: The U.S. Department of Energy's $2.3 billion loan to Lithium Americas highlights the strategic importance of certain commodities.


Critical Analysis and Investment Implications


1. Infrastructure as a Core Allocation


The continued strength in infrastructure fundraising, even in challenging economic conditions, underscores its importance as a core allocation for institutional investors. The sector's relative stability, potential for steady cash flows, and alignment with global sustainability goals make it an attractive option for long-term investors.


However, the shift towards lower-risk strategies (core, core-plus, and debt) in Q1 2024 suggests that investors are becoming more cautious. This could be due to concerns about valuations, rising interest rates, or general economic uncertainty. As such, we recommend a balanced approach, combining core infrastructure investments for stability with selective value-add or opportunistic plays to capture higher returns.


2. Sustainable Infrastructure: A Long-term Secular Trend


The dominance of sustainable infrastructure in recent fundraising highlights its position as a long-term secular trend. Investors should view this not just as an ethical choice but as a strategic necessity. Government support, changing consumer preferences, and technological advancements all point to sustained growth in this area.


We recommend increasing exposure to sustainable infrastructure, with a particular focus on:

- Renewable energy projects in emerging markets

- Energy storage and grid modernization initiatives

- Sustainable transportation infrastructure


3. Digital Infrastructure: The Next Frontier


The growing importance of digital infrastructure, particularly in light of AI advancements, presents a compelling investment opportunity. Data centers, fiber networks, and telecom infrastructure are likely to see continued demand growth.


Investors should consider:

- Partnerships with leading tech companies for data center development

- Investments in edge computing infrastructure to support 5G and IoT

- Opportunities in markets with underdeveloped digital infrastructure


4. Natural Resources: Selective Opportunities Amid Challenges


While the broader natural resources sector faces headwinds, selective opportunities exist:


a) Strategic Commodities: Focus on commodities essential for the energy transition and technological advancement, such as copper, lithium, and rare earth elements. The potential commodities supercycle could lead to significant returns, but careful timing and risk management are crucial.


b) Oil & Gas: While not aligned with ESG goals, the sector may offer value opportunities. Focus on companies with strong balance sheets, low-cost production, and clear transition strategies towards cleaner energy.


c) Agriculture and Water: These essential resources are likely to become increasingly valuable due to climate change and population growth. Consider investments in water infrastructure and sustainable agriculture technologies.


5. Geopolitical Considerations


The growing importance of infrastructure and strategic resources in geopolitics cannot be overstated. Investors should be aware of:


- "Friend-shoring" trends in supply chains

- Government interventions in strategic sectors (e.g., U.S. support for domestic lithium production)

- Potential for increased regulation or nationalization of key infrastructure assets


6. Valuation and Return Expectations


With the influx of capital into infrastructure, there are concerns about valuations and future return potential. Investors should:


- Carefully assess entry valuations, particularly for core assets in developed markets

- Consider emerging markets for potentially higher returns, balancing this with increased risk

- Focus on value creation through operational improvements and strategic positioning rather than financial engineering


7. Liquidity and Exit Strategies


Given the long-term nature of many real asset investments, liquidity and exit strategies should be carefully considered:


- Explore the growing secondaries market for infrastructure assets

- Consider open-ended fund structures for more liquid exposure

- Be prepared for potentially longer hold periods in challenging economic environments


8. Risk Management


Key risks to monitor include:


- Interest rate risk: Higher rates could impact project economics and valuations

- Regulatory risk: Changes in government policies could affect renewable energy subsidies or infrastructure concessions

- Technology risk: Rapid advancements could make certain infrastructure assets obsolete

- Climate risk: Physical risks to assets and transition risks as economies decarbonize


Conclusion and Recommendations


The real assets sector, particularly infrastructure, continues to offer attractive opportunities for institutional investors seeking stable, long-term returns with inflation protection. However, the landscape is evolving rapidly, requiring a nuanced and forward-looking approach.


We recommend the following strategic priorities for our global investors:


1. Increase overall allocation to infrastructure, with a focus on sustainable and digital subsectors.

2. Maintain a balanced portfolio across risk/return profiles, combining core assets for stability with selective higher-risk investments for enhanced returns.

3. Explore opportunities in emerging markets, particularly in Asia, to capitalize on long-term growth trends.

4. Selectively invest in strategic natural resources, focusing on commodities essential for the energy transition and technological advancement.

5. Enhance risk management practices, particularly around interest rate, regulatory, and climate risks.

6. Consider innovative fund structures and co-investment opportunities to enhance returns and maintain liquidity.

7. Stay attuned to geopolitical developments and their potential impact on real asset investments.



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