Year ahead: Infrastructure debt goes where the wind blows

Infrastructure is often the overlooked wallflower of debt strategies. A PDI survey into the attitudes of institutional investors last year found infrastructure debt was the least preferred option among all the private debt options in Europe.

On the continent, 14 percent of respondents said infrastructure was one of their preferred options, compared with 86 percent for corporate debt and 18 percent for real estate. In the US, 19 percent of respondents said infrastructure was their preferred choice.

It’s a concern for infrastructure debt fund managers, but doesn’t necessarily correspond with the fundraising successes some strategies have chalked up in recent months. Last year, Macquarie collected €829 million for its first infrastructure debt platform and is now in the thick of raising its latest fund, targeting €1 billion. UBS and Edmond de Rothschild both posted impressive final closes on infrastructure debt vehicles last year and are in the throes of setting up successor vehicles.

However, it is the idiosyncratic qualities of the asset class that serve as barriers to entry. One investment officer at a large French pension fund says there are structural reasons why it does not look at the strategy. “It depends on the project, but infrastructure investments tend to be longer and to invest in this kind of project we have to sell some of our assets. With something like corporate debt, it is fine to switch one kind of loan for another, because it’s duration is between five and seven years,” she says.

Pipeline of opportunities

As governments across Europe wake up to the reality of climate change, opportunities are opening in renewable energy and sustainable projects. The UK’s Green Investment Bank, established in 2012, recently passed $1 billion in assets for its fund specifically targeting offshore wind investments.

Rothschild’s second Benjamin de Rothschild Infrastructure Debt Regeneration (BRIDGE) platform is expected to finalise an investment in renewable energy – evidence of the firm’s focus on the sector.

Jean-Francis Dusch leads the BRIDGE platform and is keen to emphasise the diversity of its portfolio. “There is a big focus in Europe on infrastructure, meaning there are a lot of opportunities for refinancings of assets or projects to finance. This includes offshore wind assets and we try to cover all of these sectors, broadening our approach from traditional to renewable energy.”

Increasingly, public sector pension funds are being pushed into investing in renewable projects as ESG guidelines gain further traction. A report by pension fund advisor bfinance last year found that investors are moving away from simply excluding unethical investments in their portfolios towards more active engagement.

“What started as socially responsible investing, screening out ‘sin stocks’ … has evolved with deeper integration of ESG risks … focusing on areas such as climate change and water scarcity,” the report said.

Infrastructure debt offers inflation-linked returns for investors, which may assuage concerns investors have with locking themselves into a long-term strategy. But while many still baulk at the difficulty of swapping an existing debt allocation in their portfolio to infrastructure, there are opportunities for funds to lure the more ESG-conscious.