Infrastructure funds have been quick to scale but slow to sale. While 2023 was a rough year for fundraising, the sector still reached $1 trillion in funds raised in the last five years by the top 100 infrastructure GPs. And the growth isn’t set to slow down – at the end of 2023, closed-end infrastructure funds in market were seeking a collective $420 billion in capital, of which $140 billion was being sought out by the top 10 funds in market alone. It is an unprecedented level of projected growth on the horizon.

Logically, mega-funds are becoming more and more common. Until 2021, Global Infrastructure Partners and Brookfield Asset Management were the only global GPs raising closed-end funds over $10 billion. Since then, EQT, KKR, I Squared, Stonepeak, Copenhagen Infrastructure Partners, Antin and Ardian have all thrown their hats in the ring. While equity tickets may vary slightly between those, that’s some concentration for deals above c.$750 million.

But investors have slowly found that the number of deals in this range is limited. The influx of capital to the top has not led to more large deals. According to CBRE Investment Management’s Infrastructure Quarterly for Q1 2024, deals fell 22 percent in value and 14 percent in volume worldwide for 2023 when compared with 2022. M&A transactions in particular were down 40 percent, to just $336 billion in volume. The ever-rising dry powder in the asset class sits at an all-time high, with a cool $286 billion in the bank for the sector, according to Boston Consulting Group’s 2024 infrastructure strategy.

There are a variety of reasons why transactions are down; higher interest rates and tighter debt markets haven’t been helpful, for instance. But increasingly, the log jam at the top can be explained by the mismatch in the volume of mega-funds and the volume of mega-deals – and that is an issue that won’t change once rates lower.

Due to scarcity in dealflow, there is an immense amount of pressure for mega-deals to go through, which may ultimately incentivise investors to pay higher prices or overvalue assets. These incentives are compounded by the fact that when a big deal falls through – as seen with Origin for Brookfield and Wind Tre for EQT – there are significant cost implications for the funds, coupled with large delays in capital deployment. Going back to the drawing board is difficult when there are only so many drawing opportunities.

And then finally, once these mega-deals do go through, how much value can realistically be added, especially in a high interest rate environment? And if a substantial amount of value is created – enough to meet returns – then who will the buyers for these assets be? Investors should be concerned about exit risk on these large-cap deals. Infrastructure investors only have to look at the depressed exit numbers currently seen in private equity and venture capital to predict what is coming for their own asset class.

All of this begs a question that has been asked many times before, but perhaps has never been more relevant: how much bigger can infrastructure funds get?

Given the amount of capital needed for infrastructure worldwide – specifically for the energy transition – infrastructure as an asset class is poised for more growth. But if that capital can’t find enough deals to back or return the desired DPI to LPs, perhaps those investors will look to the mid-market for a new home.