GLOBAL - Investor confidence in unlisted infrastructure funds is slowly returning to pre-crisis levels, but market conditions remain challenging, Preqin has said.

According to Preqin's July Infrastructure Spotlight, a record number of firms are still in the market looking to raise funds, though the total amount sought has fallen since January 2009, something the company attributed to lower expectations among fund managers.

Elliot Bradbrook, manager of Preqin's infrastructure division, said: "There are now more unlisted infrastructure funds on the road than ever before, and these managers are targeting a lower level of capital (due to the impact of the financial crisis)."

Opportunities abound in both developed markets and emerging markets, though challenges remain due to institutional investors' "shifting demand" with regards to infrastructure investment as an asset class, he said.

"Returns tend to be lower for infrastructure assets than in other alternative asset classes, so LPs believe this should warrant a lower level of fees to GPs," Bradbrook said. "Managers that do not begin to address this issue will struggle."

Deal flow also remains relatively sluggish, constrained by high asset valuations and a lack of affordable long-term debt financing, according to the report.

The number of deals completed in 2011 is likely to remain lower than in 2010, Preqin said, pointing to a tentative number of deals completed in first half of 2010 at 78. The total number of deals was 251 in 2008 and 239 in both 2009 and 2010.

While emerging markets have growth potential, GPs prefer the developed market for their lower risk and stable return, Bradbrook said.

"Emerging market activity will certainly grow in future, but the majority of activity will continue to take place in the developed markets - particularly in Europe," he said.

Of those raising funds over the last 18 months, 42% have already reached their initial fund-raising targets, which is 14 percentage points higher than in 2009. The same percentage in 2007 and 2008 were 73% and 62%, respectively.

Despite the improving conditions, GPs without strong track records will find it hard to raise capital in the current environment, Bradbrook said.

"Many of the funds now on the road are brand-new vehicles and will likely be on the fundraising trail for around two years before reaching final close," he said.

"This is because investors are now more conservative and less willing to plough capital into infrastructure funds without certain stipulations in place."