Greenfield infrastructure struggles to attract private investment
Source: Infrastructure Monitor (2022), Global Infrastructure Hub based on Preqin data.
Note: This analysis is based on 136 funds that were classified to be investing in only greenfield projects (41), only brownfield projects (47) and only secondary projects (48) within the infrastructure asset class with similar vintage year as of June 2022. The estimates were either reported directly by the fund or calculated by Preqin.
Globally, there is significant capital available for infrastructure projects. Available capital more than quadrupled from USD34 billion in 2010 to USD174 billion in 2022. However, most of the capital that is deployed goes to brownfield and secondary infrastructure projects. Infrastructure funds that target only greenfield projects have accumulated less private capital and have the highest share of dry powder in their Assets Under Management (AUM) over time. In an analysis of 136 representative funds that follow greenfield, brownfield, or secondary investment strategies, we found 43% of the private capital committed by these funds for greenfield infrastructure projects remained uninvested. In contrast, capital uninvested for brownfield infrastructure projects was 19%, and that for secondary infrastructure projects was 18%.
Funds that focus on greenfield infrastructure investment have more volatile returns than funds that target brownfield or secondary infrastructure investments. The risk-return profile of greenfield projects is often not compatible with the risk thresholds or risk-adjusted return targets of most funds, which then limit their investment in greenfield projects and invest instead in opportunities that have no construction risk, such as secondary markets where existing infrastructure assets are traded. In fact, Preqin data show that nearly 70% of assets in the infrastructure asset class that are being managed by private sector funds have no construction risk. This leaves banks to finance most greenfield infrastructure. Our latest Infrastructure Monitor report shows that 63% of private investment in infrastructure projects in primary markets is provided by financial institutions, mainly commercial and investment banks.
Clearly, accelerating private investment in greenfield infrastructure projects remains challenging. There is less capital available for greenfield projects than for brownfield and secondary projects because there is a limited pipeline of greenfield projects with a risk-return profile that is acceptable for most types of private investors, like funds. To accelerate capital flows to develop much-needed greenfield infrastructure that will close infrastructure deficits, project proponents can strengthen infrastructure project preparation capacity to increase the pipeline of investment-ready and bankable projects, and provide credit risk mitigation instruments when the risk-adjusted return profile of a project makes it difficult to secure financing.
Source: Preqin (2022d)
Note: This analysis is based on 136 funds that were classified to be investing in only greenfield projects (41), only brownfield projects (47), and only secondary projects (48) within the infrastructure asset class and with similar average vintage year, as of June 2022. Outlier funds have not been considered, to avoid distorted results. Net internal rate of return (IRR) is the money-weighted return expressed as a percentage. Net IRR uses realised cash flows after fees and carry, distributions, and value of unrealised assets to derive return earned by a fund manager to date. The estimates were either reported directly by the fund or calculated by Preqin. Return is measured by the average of Net IRR earned by funds, while risk is measured by the standard deviation of the net IRR earned by all constituent funds within selected parameters (taken as a single group).