2014 Predictions: Nick Cleary, Hastings Funds Management

Nick Cleary discusses the opportunities and challenges of the US infrastructure debt market. 

Nick Cleary joined Hastings Funds Management in 2012 to direct its infrastructure debt strategy. He tells  Private Debt Investor  that the bevy of opportunities available to investors in 2014 will force them to pick their spots, albeit with an experienced manager at their side.

What are the biggest challenges for players in the US infrastructure debt market? 

A large challenge for infrastructure debt is going to be deciding where to focus efforts. There’s a lot happening across the US, both in the energy and non-energy infrastructure side. Both offer a range of attractive opportunities, but with varying risk, some of which are new risks that take time to understand to determine if that balance of risk and return is attractive.

One example is the increasing momentum and variety of assets and risk sharing models in the US P3 space. Some of the global experience that infrastructure debt managers have had in Canada, Europe and Australia can offer a lot of value to the US market. But the US market’s been subject to a few stops and starts, so it’s hard to work out how much time and where to dedicate capital and resources.

There’s a lot of excitement about the scale and the potential opportunity in infrastructure related to the energy sector, whether that be LNG, pipelines, or other midstream infrastructure assets. The challenge there will be finding attractive risk-adjusted returns amongst the excitement and competition for the assets in that space.

How does risk differ from space to space? For example, are P3s any less risky than energy infrastructure because you have the backing of a government partner? 

There’s a great diversity of risks across the various federal, state and local government entities and across various private sectors. It’s less a question of, is one risk better or worse? It’s more a question of understanding that risk, then structuring and pricing for it appropriately.

This creates many different risk profiles, and corresponding return profiles. This means choice and diversity across sectors, markets and risk-return profiles for investors. By understand that diversity and subtle yet important differences in risk investors can develop well diversified portfolios that are essential to consistently deliver robust risk adjusted returns.

How are you positioning yourself then? Are you in the process of deciding what spots you want to pick? 

We’re really doing two things.

Firstly, we’re building out deep local pipelines across the full range of sectors and markets. We do this by being local in the key markets and talking to sponsors, banks, advisors, to understand what the full array of the opportunity is in the US.

Secondly, we are assimilating the local perspectives with our global team and our global pipelines, to  establish what we think are the best opportunities for each of our clients.

It’s a simple yet important process of making sure we know what is available in the US, comparing that with what’s available globally, and then delivering the opportunities to our clients that are best suited to their investment objectives.

How do you see investor demand evolving? 

What we’re seeing in the market is a wide range of investors moving quite significantly into private, illiquid credit markets; where infrastructure debt is just one of those. For investors looking for long-term and largely investment grade portfolios we believe infrastructure debt is very well placed given the relatively robust performance, long track record and global availability

Through 2013, we’ve seen the market characterised by large separate account allocations to infrastructure debt out of fixed income and alternative credit allocations to established and experienced infrastructure manager. These are the pathfinder investors that have been laying down the track record of infrastructure in the portfolios of institutional investors, as opposed to banks where it has a c. 30 year track record. We expect that to remain a dominant theme into 2014.

In 2014 we expect to also see managers offering a range of fund solutions to the market. These solutions allows for two things: a wider section of institutional investors participation and efficient access to robust diversified portfolios. These fund solutions are well suited  mid to smaller scale institutional investors looking to participate in a large global infrastructure debt opportunity.