Since the beginning of 2022, the Fed has hiked interest rates 11 times seeking to tackle elevated inflation with tighter monetary policy, resulting in an increase in the cost of capital. Over this same period, the 10 Year Treasury Rate has nearly tripled from under two percent to over four percent. Furthermore, the 30-day Secured Overnight Financing Rate has increased from near zero to over five percent, and the S&P 500 has declined over five percent through the end of November.
The higher cost of capital and the reversal of the post-pandemic supply / demand imbalance in infrastructure allocations has impacted fundraising and investment in our sector. Infrastructure fundraising peaked in 2021 at 162 billion USD as investors found themselves underweight in the category while the pandemic highlighted the importance of connectivity. In 2023, amidst a backdrop of increasing cost of capital, infrastructure fundraising has reached only eight billion USD as of writing this article. Additionally, the initial surge in infrastructure deal-making has slowed significantly, decreasing from a 2021 peak of 522 billion USD to 248 billion USD in 2023 year-to-date. This large slowdown in infrastructure investing activity has led to a build-up of dry powder, which has resulted in ample capital to pursue attractive opportunities. As of the halfway point of 2023, infrastructure dry powder stood at 132 billion USD.
Downside Protection in Focus
The rising cost of capital has negatively impacted asset valuations, tightening the supply side of the market as investors seek to avoid realizing losses and taking markdowns on existing investments. Greater market uncertainty has enhanced investors’ focus on downside protection, thereby increasing the utilization of structured securities in order to balance attractive growth opportunities with risk mitigation. For example, in connection with our transaction involving Shentel’s recent acquisition of Horizon, Energy Capital Partners made an 81 million USD preferred stock investment into Shentel to fund the company’s fiber network expansion. Similarly, in our transaction with GoNetSpeed, we recently raised a 125 million USD preferred equity investment from Ares and Macquarie Capital to accelerate the company’s fiber build.
