“We are hearing a drumbeat from our investors for infrastructure assets but they want to invest in it differently than in the past. Rather than providing equity-type returns from high leverage they now view the infrastructure asset class as replacing fixed income where yields have fallen to between 2 percent and 3 percent and as a protection against inflation.”
Thus spake Matthew Botein, head of BlackRock Alternative Investors, in an interview with Financial News following his firm’s acquisition earlier this week of Swiss Re Private Equity Partners, the European private equity and infrastructure fund of funds outfit.
And thus, once again, the debate is reignited over just what the infrastructure asset class is all about. Without getting into the whole ‘which side is right’ argument (Is infrastructure essentially private equity-like or fixed income-like?), one thing seems certain: the voices arguing that infrastructure is an ideal replacement for low-yielding gilts are getting steadily louder.
The examples are there for the picking. Just today, Allianz Global Investors, in announcing the formation of a new infrastructure debt team, explained its rationale by highlighting that “investors with long-duration liabilities [are] seeking investments with stable cash flows and risk-adjusted returns that are currently more attractive than government bonds”.
One of the most eloquent, unabashed and inventive arguments for the ‘infrastructure-as-fixed-income-replacement’ debate comes from Mark Gull, the co-head of asset and liability management at pension insurance provider Pension Corporation.
In a May presentation, Gull offered his take on how to get UK pension funds investing in infrastructure, and in the process, outlined how he – and perhaps many other institutional investors – views infrastructure.
According to Gull, the UK government should – instead of initiating yet another round of quantitative easing (just approved, by the way) – set-up a TARP-like programme to help recycle the circa £50 billion (€63 billion; $78 billion) of Private Finance Initiative and Housing Association loans banks have sitting on their balance sheets.
In a nutshell, the government would buy the loans from banks at par and then offload them to pensions at a 20 percent discount – described as the loans’ “real market value”. This solution, as Gull puts it, would be a perfect win-win: banks would be free to lend more to the economy; and pensions would finally be able to access the infrastructure opportunity.
The ‘infrastructure opportunity’ here, it should be noted, equates accessing “these long-dated bond-like assets with a positive real yield to match liabilities, close deficits and provide a measure of inflation protection”. And the main reason for that is that these “bond-like assets” have a “current rate of return of approximately 6 percent per annum versus current gilt yields of about 3 percent per annum”.
This is good news for everybody working on creating an institutional-led global infrastructure debt market, whether it’s governments or general partners dreaming up new products: interest in infrastructure debt is at all-time high and institutional investors are saying they like infrastructure debt, when they can access it at the right price point.
Is infrastructure the new fixed income, then? It certainly can be. But perhaps more importantly, for a growing number of institutional investors, it seems it’s what infrastructure should be.