Carts and horses(2)

The world’s largest fund managers are betting big on infrastructure debt. Too early or too late?

The word ‘gap’ is one that’s often used in infrastructure. The concept handily captures how the shortage of a particular resource, capability or equipment can act as a bottleneck on economies; it can be easily associated with large numbers, strengthening the case for political action as well as sizing the market opportunity for those able to come up with solutions. The term is also popular with the media, depending on whether the gap is waiting to be “filled” (water or transport), “plugged” (power) or “bridged” (anything infrastructure related).

One such gap has lately proved equally popular with fund managers: that of infrastructure financing. Acting on the belief that projects still struggle to find sufficient debt to get financed or refinanced on terms that suit their main shareholders, two industry heavyweights have made bold moves in the space over the last couple of weeks.

First emerged the news that New York-headquartered Global Infrastructure Partners (GIP) was seeking to raise a $2.5 billion infra debt fund – which would rank it among the largest vehicles dedicated to the asset class so far. The firm, of course, is already a major equity investor, having successfully closed the world’s largest equity fund on $8.25 billion in 2012. The launch of its debut debt fund shows its intent to make an equally big splash in the debt scene.

The strategy it will follow is not yet quite clear (the firm did not respond to our requests for further details on the vehicle’s mandate before press time). What we were able to gather is that the vehicle will be scouting for brownfield and greenfield assets in the sectors GIP already targets: energy, transportation, and water/wastewater (admittedly quite a broad remit).

This week Allianz Global Investors (AllianzGI), the asset management arm of Germany’s Allianz, also announced the launch of its first infrastructure fund. The insurer has had a very active infrastructure debt team in place over the last 18 months, but it so far invested mainly via separately managed accounts. Its maiden vehicle will continue to focus on core infrastructure assets – while limiting itself to the UK – and aim to broaden Allianz’ institutional client base.

The rationale underpinning both launches follows a well-known narrative – albeit one that remains largely valid. New regulatory constraints, in the form of Basel III and Solvency II, have pushed a number of traditional lenders out of the long-term lending market at a time when cash-strapped governments can’t step into the void. Institutional investors, meanwhile, see in infrastructure debt a low-risk, long-term asset class that can generate better yields than bonds.

What is more questionable is how long this rationale will continue to hold. Industry insiders reckon that the “financing gap” was much more of a reality two or three years ago, when regulatory scrutiny, the after-effects of the Great Financial Crisis and troubles in the Eurozone led many lenders to contract their balance sheets. Since then, they argue, banks have (partly) come back: some, in a healthier shape, are happy to start lending long term again; others have found new ways to get themselves involved through new types of instruments or partnerships.

Debt capital markets have also gained prominence, while programmes such as the European Investment Bank’s Project Bond Initiative or the UK Guarantee Scheme have sought to alleviate liquidity constraints. Finally, a number of global fund managers, be it AMP Capital, Hastings Funds Management, IFM Investors or more recently BlackRock, have already developed sizeable infra debt programmes. And they started doing it some years ago. Some observers thus wonder if the general enthusiasm for infra debt is not getting a bit ahead of itself – coming on strong before a consistent dealflow has had time to develop – and whether Allianz and GIP’s initiatives are not arriving a tad too late.

Amid intense competition, it is indeed true that the biggest challenge facing both firms will be finding the right investment opportunities. AllianzGI will continue to run its managed accounts alongside the fund, so it will have to create a pipeline for both. It is also unclear whether GIP intends to invest debt in deals sourced by its equity teams – but precedents suggest fund managers, constrained by regulation or investor agreements, are seldom willing to do so.

On the plus side, both firms can count on solid resources to help them in their new endeavours. Allianz’ team has already sourced more than €2 billion of debt transactions, while Steve Cheng and Reiner Boehning, who are to lead the charge at GIP, were previously co-heads of global project finance at Credit Suisse. They also have excellent execution capabilities, a loyal base of investors and a track record at generating good returns for them.

With GIP’s fund due to reach first close in the near future, it shouldn’t be too long before the firm can demonstrate how fast it can deploy the money. In the meantime, the bets made by two industry giants suggest strong faith that the infrastructure debt asset class is made to last – even in a climate increasingly conducive to rising interest rates.