Debt funds come of age

With about one-tenth of the close to $10bn raised by infrastructure funds in 2012 allocated to debt funds, these vehicles have finally arrived.

If there’s one quality your archetypal infrastructure investor is absolutely required to have nowadays it’s patience. Infrastructure, so we’ve heard countless times, is a long-term play, its rewards only blossoming fully over the length of a vast holding period.
Attempts to short-circuit this natural order via crude mechanisms such as over-leveraging assets to engineer short-term, inflated returns have landed those foolish enough to try in the same sort of trouble as Phaethon.
Phaethon, a minor Greek deity, convinced his father, the sun god Phoebus, to let him drive his chariot of fire. However, he nearly burnt the Earth in the process and was shot down by Zeus for his ineptness. The moral of the story: the improperly initiated shouldn’t take on roles they aren’t ready for.
Unlike Phaethon and many of the early infrastructure general partners (GPs), pioneers in the infrastructure debt fund arena knew their products were not reckless propositions. On the contrary, they were absolutely in line with what the market needed, especially following the 2008 crisis and banks’ retreat from long-term lending.
But they faced an uphill battle that must have stretched their patience to the limit, as they criss-crossed the world trying to convince limited partners (LPs) of the viability of infrastructure debt funds and their legitimate place in the infrastructure investment pantheon.
This year, however, their patience and perseverance has finally been rewarded.
According to the latest figures compiled by placement agent Probitas Partners, four debt funds being raised by Energy Capital Partners, AMP Capital, Aviva Investors/Hadrian’s Wall and Stonebridge Financial Corporation raised $884 million between them in the second quarter.
That’s almost one-tenth of the $9.9 billion raised by infrastructure funds so far this year. In short, debt funds have finally made their mark in the infrastructure fundraising landscape. In modern parlance, debt funds have arrived.
This is not entirely surprising given that appetite for infrastructure debt is at an all-time high just as yields from gilts are hitting record lows.
As many of you may have noticed, there’s a new catchphrase in town – “Infrastructure debt? It’s the new fixed income” – which is compounding a well-known trend: allocations to alternatives have increased by roughly 15 percent over the last 15 years largely at the expense of fixed interest.
With fixed interest disappointing, it was only natural that a new asset class like infrastructure debt would eventually be successful. But while it has been clear for some time that investors like infrastructure debt, it hasn’t always been clear that they liked infrastructure debt funds.
With their second-quarter fundraising success, that doubt has finally been put to rest.