Out with the old, in with the new

Investors keen on infrastructure have their eyes on future projects as well as assets that appear to stretch definitions. Andy Thomson reports

It’s the tail end of a long hot summer and, as infrastructure debt practitioners return to their desks, Karen Azoulay, head of infrastructure debt at BNP Paribas Asset Management, thinks there’s plenty coming around the corner. “Usually the market is closed for a while in August before starting again in September. Actually, the market is already quite active even though we are still early [in] September,” she says.

Hopes are high. Fundraising for both infrastructure equity and debt has been generally strong – even if, as our data show, it’s been a little inconsistent on the debt side – and there is a sense that infrastructure has gone a long way towards proving itself as a viable investment option.

“The environment is at its most interesting,” says Jean-Francis Dusch, global head of infrastructure finance at Edmond de Rothschild Asset Management. “There is competition but there is also a track record building, which draws attention to the asset managers who have chosen the optimum investment themes and have a clean portfolio… while delivering the returns they have promised.”

“Investor appetite seems strong and institution-backed asset managers have, for the best in class, established themselves as an alternative to traditional infrastructure bank lenders,” adds Dusch. Edmond de Rothschild has launched into the space through its BRIDGE platform, which has expected returns of 3 percent-plus for senior infrastructure debt and 5-7 percent for junior infrastructure debt.

Dusch believes that European dealflow is strong, with the need to finance new projects in areas such as energy transition, the trans-European network and broadband access, as well as updating ageing infrastructure such as modernising utilities. Not everyone, however, is quite as optimistic that the level of fundraising will be matched by opportunity to put the capital to work.

‘Strong networks’

While describing the appetite for infrastructure debt from a range of organisations as “exciting”, Tom Sumpster, head of infrastructure finance at Legal & General Investment Management, goes on to say: “The biggest challenge to the sector is the disparity between the volume of assets available and the significant amount of equity and debt being raised. It is more important than ever for investment teams to have strong networks to ensure appropriate opportunities for deal origination. It’s very competitive with asset prices increasing year on year combined with spread compression.”

Because of this, he sees greater diversification, with different organisations delving into different types of investment. “We are seeing value higher up the risk curve than previously and each year we have seen acknowledgement from financial sponsors that it can be valuable to split the capital stack to maximise liquidity and financing efficiency. In areas such as offshore renewables and rolling stock we’ve seen deals where institutional lenders are committing long-term debt capital and others are looking to play in the mezzanine and junior capital space.” Infrastructure debt has seen something of an invasion of institutional investors, all with a sense that it offers a good match with their expected risk/return profile. “We are seeing more and more institutional investors investing directly,” says Azoulay. “But you need to be well equipped. Not all have sufficient in-house credit analysis capabilities to be effective at what they are trying to do, not to mention the need for dedicated middle and back-office resources to manage distinctive features such as multiple drawdowns.”

While Europe has seen activity in traditional areas such as energy and transport, it is telecom that has become today’s favourite sector. “We’ve seen a lot in telecoms, more than in previous years,” says Vincent Guillaume, a senior fund manager at BNP Paribas Asset Management. “The equity funds are keen to expand into telecoms as they see relative value there and we’re aware of a lot of acquisitions being undertaken.”

As well as reaching into telecoms, infrastructure debt players are also spreading across the European mainland. “A decade ago, you would have said the UK was the benchmark for European infrastructure procurement, but we’ve seen decentralisation of energy networks and significant amounts of energy dealflow across Europe,” says Sumpster. “Procurement processes are well run and international investors have come in over the last decade as the European investment environment has matured.

“Regulatory risk raised its ugly head in the renewable energy sector in Spain, but deals are being done there again now and investors are more receptive to the new regulatory environment. They definitely think it’s taken a turn for the better.”

Man with a plan

In the US, meanwhile, hopes were high when Donald Trump entered the White House promising a $1 trillion infrastructure plan that – according to his State of the Union address – would “build gleaming new roads, bridges, highways, railways and waterways across our land”. It’s not the first time a bold vision has run up against the practical difficulty of financing such projects.

“The Trump manifesto has taken a step back from the original vision,” says Sumpster. “But that’s not to say the cities and states are not alert to the infrastructure need.”

Indeed, although the wilder infrastructure aspirations may struggle to be realised, observers say they have seen a number of New York-based funds seeking to grow both the size of teams and assets under management in anticipation of an increase in dealflow. Although the energy sector is now quite mature, with many assets already in private hands, the US is finally seeing significant take-up for public-private partnership projects.

Back in Europe, and market players are wary of the PPPs’ ability to deliver the return they need. “PPPs in Western Europe are looking aggressively priced generally in terms of the absolute return, but we could be interested in PPPs elsewhere,” says Azoulay.

Because of the competitive pressures in mainstream areas of infrastructure finance, fund managers and other investors have been increasingly prepared to stretch the definition of what constitutes an infrastructure asset – allowing them to fish in less crowded waters.

Indeed, fish is the current talking point – namely, whether Antin Infrastructure Partners’ recent acquisition of Norwegian salmon transportation firm Solvtrans truly qualifies as an infrastructure deal. Or, for that matter, Brookfield Infrastructure Partners’ purchase of Canadian air conditioning firm Enercare.  With appetite for infrastructure debt continuing to grow, more testing of the definition’s boundaries can no doubt be expected in the years ahead.