With rising equity return expectations and tight credit markets, one Chicago-based investor is sensing the perfect opportunity to do something different in the infrastructure space: raise an infrastructure debt fund.
William Fitzgerald, former chief investment officer and 19-year veteran of municipal bond powerhouse Nuveen Asset Management, has founded Global Infrastructure LLC to do exactly that. The firm will create a product line of funds that provide debt to infrastructure projects and companies in North America and Western Europe, he said.
An initial fund of $200 million is being contemplated by Global Infrastructure, though Fitzgerald declined to discuss fundraising.
Fitzgerald says he got the idea for the business after witnessing a tremendous decline in capital available for public-private partnership (PPP) projects.
“By my estimate, the capital has declined by about 50 percent since the middle of 2006, so there’s a gap in debt financing that all parties in the PPP market would like to see filled,” Fitzgerald said.
He believes an infrastructure debt fund, which would buy senior debt on the secondary market and provide direct mezzanine debt to PPP projects, could help plug that gap.
I think there will be room for mezzanine debt on an attractive level
In its attempted long-term lease of Chicago’s Midway Airport, Citi Infrastructure Investors sought mezzanine debt in an attempt to raise the $2.5 billion upfront rent fee, but the deal ultimately fell apart.
Still, Fitzgerald remains positive that mezzanine financing will become an increasingly attractive option for investors in the future.
He said that previously, the spread between debt and equity return expectations for projects had been narrow, leaving little room for mezzanine debt financing. “But with the rising cost of capital on the equity part of the capital structure and the senior debt part of the capital structure, I think there will be room for mezzanine debt on an attractive level,” Fitzgerald said.
Market data indicates that end-investors, such as pension funds, find infrastrcture, debt and mezzanine funds to be attractive in the current market. The latest survey of end-investors, or limited partners, conducted by San Francisco-based placement agent Probitas Partners indicates that 41 percent would target distressed debt funds in 2009, 33 percent would target infrastructure funds, and 17 percent would target mezzanine funds as investment opportunities.
On the senior debt side, he said the secondary market offers an opportunity to buy debt with bond-like risk characteristics and equity-like returns. “It’s a dislocation in the current marketplace because of the contraction of the banking system,” Fitzgerald said.
Nearly 21 percent of limited partners said they would target secondary funds in the Probitas survey, though secondary market-makers at Probitas, Adams Street and Cogent partners have previously told InfrastructureInvestor that the opportunity is at this time mostly limited to private equity. A mismatch between buyers' and sellers' price expectations for infrastructure equity holdings is one reason why the asset class still doesn't have an active secondary market.
But on the debt side of infrastructure, buyers and sellers may be able to find common ground since infrastructure loans have also held up better during the credit crisis thanks to the stable nature of the asset class. For example, from January 2007 to May 2009, a portfolio of infrastructure loans tracked by Fitzgerald has had a positive 1.37 percent annualised return, versus a negative 4.64 percent annualized rate of return for the Credit Suisse leveraged loan index, which measures the investable universe of loans to risky borrowers. That’s a 6.01 percent outperformance on an annualized basis, according to his estimates.
“During an entire credit cycle, investing in strategies that have lower volatility can work really well,” Fitzgerald said.