DIF eyes €1.1bn for maiden debt fund – exclusive

DIF Capital Partners has launched its first infrastructure debt fund, targeting €1.1 billion via a dual sub-fund structure.

The Netherlands-based manager began fundraising in the summer following preparatory work last year, with the strategy being led by London-based Paul Nash. Nash has been with DIF since 2008, although he previously worked in project finance roles with XL Capital and Helaba.

DIF is targeting €750 million for DIF Investment Grade Infrastructure Debt Fund I, a senior debt strategy, while providing investors with a junior debt strategy under DIF Enhanced Return Infrastructure Credit Fund I with a target of €350 million. A first close on the strategy is anticipated for either the end of this year or the beginning of 2021, Nash told Infrastructure Investor.

Both funds will be pan-European in focus, Nash added, which will include exposure in the UK and Nordics. INGRID has a 30-year lifespan and targets returns above 200 basis points. It can invest in BB+ rated assets, Nash explained, although will on average have an investment-grade portfolio and will provide debt of both 20-plus years and shorter-term tranches. Meanwhile, ERIC, a 10-year fund, will aim for a gross internal rate of return of 6-7 percent and can invest up to 20 percent in OECD markets outside of Europe. It will invest in BB-rated projects down to B- but could also include some senior debt.

Explaining the debt strategy, Nash said: “A good example being an undersea broadband cable where you have a very defined demand for the bandwidth but no contracts in place.

“The senior debt for construction probably wouldn’t be investment grade. Once this is built and it is contracted, the higher yield debt could be swapped out for higher rated senior debt.”

Similarly, the INGRID fund will be able to invest in BB+ rated projects.

“The reason we think INGRID can do BB+ is because you can get quite a big pickup in returns without a commensurate pick up in risk, once you move down one notch from BBB- to BB+,” Nash explained. “Infrastructure has proven to be a very strong place to invest and expected losses are lower than from corporate debt of the same rating.”

DIF will be primarily targeting European and Asian investors for the capital raising. LPs will be able to choose whether to invest in one strategy or both. The funds will not be able to invest where DIF is an equity shareholder.

‘Logical step’

DIF was one of the earlier investors in the infrastructure space, having begun its equity strategy in 2005 and now fundraising for DIF Infrastructure VI and DIF Core Infrastructure Fund II. However, Nash said the launch of a debt fund is a “logical step” for the firm.

“We think we can bring a different product to the market than the established players,” added Allard Ruijs, partner at DIF. “Most of the other infra debt players are parts of bigger groups whereas we’re an independent platform with local office networks. We bring relationships and networks that are different than the players only based in one of the main hubs like London or Paris.”

DIF’s debt team currently numbers four, although Nash said he hopes to raise this to about 10 over the next 12-18 months. Recruits have included Samantha Shepherd as senior director from MetLife and Warda Ali and Emma Martucci as associates from BlackRock and Sequoia respectively.

While DIF’s conception of a debt strategy pre-dated the covid-19 pandemic, Nash was confident some of the consequences could play into its favour, in addition to pre-existing factors.

“The main lenders in infrastructure are still the banks and they’ve still got ongoing issues with Basel,” he said. “A lot of the banks are hoarding capital at the moment as a buffer against potential losses in their wider loan book due to covid. That’s making lending more difficult across the piece for them, particularly for more longer-dated debt. Covid has demonstrated the robustness of infrastructure. There’s obviously some lower revenue for assets like toll roads but even those are surviving and still doing pretty well in a lot of cases.”