Why senior debt makes sense for Gravis

Gravis Capital Partners (GCP) – the London-based fund manager of a circa £150 million (€179 million; $240 million) subordinated debt fund, the GCP Infrastructure Fund – is taking advantage of growing demand for long-term debt by lending senior debt at subordinated debt prices.

“When we first launched our infrastructure fund we envisaged being primarily a provider of subordinated debt. However, recently we’ve been moving into the senior debt space due to the increasing lack of long-term financing. It’s a market opportunity: we are able to lend on a senior basis and still achieve our target rates of return,” GCP partner Rollo Wright says.

GCP, which tapped the market late last year to add another £67 million to its fund, is becoming more flexible in the types of deals it does, Wright explains, although providing subordinated debt is still the core of its business.

“Straight subordinated debt, lent to operational PFI projects to allow sponsors to recycle equity, accounts for about two-thirds of our assets,” Wright says. PFI is short for Private Finance Initiative, the UK’s standardised procurement process for public-private partnerships. But GCP is increasingly branching out, Wright adds:

“A second type of deal is where we engage directly with the banks. We are able to provide senior lenders to the UK PFI sector guarantees against losses on portfolios of senior loans. Such guarantees can allow banks to free up regulatory capital and relieve the constraints on their balance sheets. It’s a model we hope to replicate.”

He adds: “Of late, we have been entering the renewable energy sector, advancing loans secured on a senior basis against UK feed-in tariff cash flows.”

According to Wright, this move into the senior debt space is a reflection of the lending appetite of the banks:

“We are making 20-year plus loans against government-backed cash flows, and given that the banks are unwilling or unable to advance debt with terms greater than five to seven years, we are currently one of the most competitive long-dated debt providers in the market. We have had to turn down significant amounts of renewable energy lending opportunities to avoid breaching sector exposure limits – we are not a renewable fund,” Wright remarks.

GCP started raising its debut infrastructure debt fund in 2009 as a Jersey-based, open-ended company offering investors a return of 8 percent in exchange for money to invest in what it calls “quasi-government PFI cash flows”, secure projects providing significant margins over UK government gilts.

According to Wright, GCP saw that there was “no particular retail-focused product in the infrastructure debt space” and decided to go for it. “Retail investors still make up a slight majority of our shareholder register,” Wright adds, pointing out that he believes GCP Infrastructure’s shareholder profile is similar to HICL’s, the London-listed infrastructure fund managed by HSBC spin-out InfraRed Capital Partners.

Low interest rates

In 2010, GCP created a feeder fund, listed on the London Stock Exchange, through which it first raised £40 million via the issue of C shares to help fund the GCP Infrastructure Fund. Then last December, GCP returned to the market and raised a further £67 million, again via C-shares.

That new money, however, won’t stay put for long. “We raised £67 million in December and because we had a strong deal pipeline in place started spending it straight away,” Wright says.

With low interest rates still on the horizon, Wright is bullish on GCP’s – and infrastructure’s – future:

“Two of the primary issues facing investors at the moment are yield and inflation – there is a strong argument that investments in infrastructure address both of these. The size of the market can continue to grow,” Wright argues. And so, as a corollary, can GCP, with Wright forecasting it can increase the size of its infrastructure debt fund from its current £150 million to “several hundreds of millions” in the near future.