The emergence of institutional limited partners within the infrastructure debt sector has helped facilitate deal flow, said Allianz Global Investors chief investment officer Deborah Zurkow during her keynote speech at Private Debt Investor’s Capital Structure Europe conference on Wednesday.
“We’ve done about three times as much in the last year as we would have predicted a year ago. And I think that comes, in part, because institutional investors are investing and governments have the confidence … to accelerate pipelines,” she said.
The first movers into infrastructure debt were insurance companies and large pension systems, she said. Those investors have typically accessed the market through fund managers or the hiring of a direct investment team, the latter of which is largely a function of their size.
“The first movers tend to be the larger investors,” she said, adding that the preferred method for some has been separately managed accounts. “If you’re dealing with large investors, they want a bespoke portfolio.”
Infrastructure debt products, though highly illiquid, provide investors with the ability diversify their long-term investment portfolios with inherently stable assets, she said, many of which are characterised by lower default rates and higher recovery rates.
“A corporate can disappear overnight, but a road can’t. So it isn’t s a surprise that your recovery is greater,” Zurkow said. “You can’t easily replace it with other things.”
As more investors commit to infrastructure, there may be a knockdown effect on spreads. That may be offset by a proliferation of new deals, however, which should accelerate as more institutional capital becomes available, she said. The pipeline should expand as governments tap private funds for project financing.
“The opportunity in debt is much larger than the opportunity in equity moving forward,” she said. “You can’t open a newspaper without a government saying, ‘The key to the future is infrastructure, we just don’t have any money now’.”