AXA is mulling a commitment of up to $500 million to an emerging markets-focused infrastructure debt platform launched by the International Finance Corporation, according to a document published by the latter, Private Debt Investor's sister publication Infrastructure Investor reported.
The insurer would join Allianz Global Investors and Eastspring Investments, the Asian asset management unit of the UK’s Prudential, to become the third institution worldwide to back MCPP Infrastructure. That would take the amount raised by MCPP, which will invest in assets in developing countries pre-selected by the IFC, to around $1.5 billion just nine months after launch.
The next $3.5 billion could be raised in various ways: either by bringing new players into the structure, or by accepting further commitments from initial backers. Either way, $1.5 billion is “enough for us to launch and cover the needs over the near term”, Bernard Sheahan, the IFC’s global director for infrastructure and natural resources, told II prior to the disclosure of the third investor’s identity.
He added the IFC expects to be deploying this initial sum within 18 to 24 months, during which time it will raise the remaining $3.5 billion, aiming to reach its $5 billion target within about a year.
Once formally launched, MCPP’s assets will be generated through the IFC’s normal business, with transactions executed by the institution automatically picked up by the platform. MCPP’s portfolio is expected to have a 10- to 12-year weighted average life, with assets spanning power, water, transportation and telecoms. It is set to comprise between 30 and 40 loans, with renewables eligible for up to 40 percent of the total investment.
Essentially, “the insurance companies are acquiring preferential rights to co-finance alongside the IFC”, Sheahan explained.
Crucial to the viability of the structure is a three-fold credit enhancement feature. For one, investors benefit from the “implicit political risk mitigation that you get in a co-investment with an international institution”, Sheahan said. “The IFC and the World Bank Group are able to [have a] dialogue with the government should issues arise in any way. For a normal bank it’s more difficult.”
MCPP also features a first-loss structure under which the IFC covers the first 10 percent of potential losses – approximately, as this varies depending on the investor – borne by each of the $500 million capital pools. This credit enhancement allows assets slightly sub-investment grade – typical of loans to infrastructure projects in most markets – to rank just above investment grade. “It becomes much easier for insurers to access those assets, which would otherwise be expensive from a due diligence and aggregation perspective,” Sheahan said.
The last piece of risk mitigation is internal to the IFC. The novelty of MCPP means its first incarnation is a costly endeavour that does not allow the institution to meet its usual return target. The government of Sweden, an IFC shareholder, thus created a further first-loss element, whereby the Swedish International Development Cooperation shares any potential losses with the IFC arising from the main credit enhancement structure.
Bottom-line? Insurers stand to collect returns commensurate with comparable investment-grade loans plus 20 to 50 basis points, Sheahan pointed out. For its part, the IFC will typically receive returns usual to mildly sub-investment grade assets plus 50 to 100 basis points. “Through MCPP, insurance companies can add diversification to their portfolios while generating slightly better yield. And it allows them to do that on the back of one IFC due diligence, as opposed to making the effort on individual assets,” he concluded.