Institutional investors are increasing their investments in core infrastructure and aggressively competing with funds. This increased appetite has forced fund managers to search for riskier assets outside of the mainstream.

Over the past seven years, institutional investors and funds have been battling each other for the most prized infrastructure assets. This competition has led to a steep increase in both European infrastructure M&A and a corresponding drop in returns from such assets.

In the main, these contests have been over "core" infrastructure—defined as regulated, monopolistic energy, transport and environmental assets. These are viewed as the safest and most attractive way for institutional investors to secure the types of long-term yield required to match their liabilities.

As a result, infrastructure funds that have traditionally been active in the sector are being pushed to work harder to source the types of deals that will generate the returns that they have enjoyed in the past—and that their limited partners have come to expect.

Corporate-owned, neglected core infrastructure assets can still provide some of the deal flow for infrastructure funds, but the search for an adequate level of exit potential that provides robust returns has increasingly pushed asset managers into areas of "non-core" infrastructure. These assets are seen as having greater market risks, such as power price exposure, short-term contracts, geopolitical risks, less sophisticated regulatory regimes and/or contract renewal risks, but they often offer better returns than core assets.

Although this recent trend towards non-core investing by infrastructure funds has been noted, the maturing nature of the non-core infrastructure space has now opened the door for institutional investors to move into the space. Institutionals have, like their more nimble asset manager counterparts, increased their risk appetites and are now prepared to acquire non-core assets and to do so in an increasingly competitive fashion. With allocations to the infrastructure asset class projected to double over the next decade and the competition for core infrastructure showing no sign of receding, this non-core shift will only accelerate in the coming years.

This report, developed with the Inframation Group, explores the shift in infrastructure dealmaking by institutional and infrastructure investors alike in the non-core infrastructure space. We investigate where the key battlegrounds are in the increasingly competitive infrastructure landscape; the opportunities and challenges for both sets of investors; and we ask how funds can survive and thrive in this brave new world of infrastructure dealmaking.