‘Not much value in infra debt until crisis’

There’s no denying the popularity of infrastructure debt these days.

Just look at the latest figures from placement agent Probitas Partners: in the second half of the year, debt funds managed to raise $884 million, almost one-tenth of the close to $10 billion raised by infrastructure funds so far this year.

Australia’s Industry Funds Management (IFM) is something of an old hand when it comes to infrastructure debt. It’s been doing deals in the space for the last 13 years, mostly in Australia, and has A$1.5 billion (€1.2 billion; $1.6 billion) invested in long-term debt on behalf of institutional investors.

New hire

Not one to miss an opportunity, IFM decided to extend its infrastructure debt operations to the UK and Europe, recently hiring David Cooper, Barclays’ former head of infrastructure and structured project finance team in London, to build out a presence in these markets.

Cooper had been in charge of raising Barclays’ debut £500 million (€622 million; $812 million) UK infrastructure senior debt fund, which has been on ice for the better part of a year.

“There wasn’t much value in the infrastructure debt space in the years leading up to the global financial crisis because of the credit bubble,” Robin Miller, IFM’s global head of debt investments says. 

“Now infrastructure debt has become much more attractive. Fixed income is offering lower returns and if you invested in risky Spanish or Italian bonds, you’ll be concerned about credit and market risks. High quality, income-generating credit risk assets may offer a partial substitute for some traditional defensive asset classes,” he adds.

IFM’s decision to head to the UK and Europe then, is motivated by a mixture of demand from existing clients and a desire to attract new ones.

“We are always looking to access a bigger deal pipeline and a more diversified range of assets for our Australian clients,” Miller points out. “And we think the case for infrastructure debt is appealing to UK and European pension funds.”

“But we don’t believe in conducting fundamental credit analysis remotely, which is why we are hiring local expertise, despite our own lengthy experience of infrastructure debt investing,” he explains.

In case you’re wondering, you probably won’t see IFM start off by raising an infrastructure debt fund.

“Everyone talks about funds, but that is not the only vehicle for managing investments.  We would raise a fund if we thought that was the best way forward. But when it comes to non-conventional asset classes, we’ve found that investors often prefer customised solutions. These assets are illiquid and investors don’t want to be dependent on other people’s exit strategies,” he argues.

Asked what type of deals we can expect from the nascent UK and European business, Miller answers:

“I have to be cautious about generalising. In Australia, we are used to working alongside major banks. We have partnered with them in several ways: via traditional syndications and club deals for new assets, and through secondary market trades. All else being equal, we prefer loans to bonds, but that is not exclusively the case. In the new environment, banks are now seeing institutional investors as natural partners, not rivals, but we are used to that in Australia,” he explains.

Pressed for an example of a recent deal, Miller answers that “most recently, we participated in a self-arranged refinancing for an Australian toll road. We provided the long-term portion of the debt, with banks refinancing the shorter tenors”.

While he didn’t specifically name the deal, Miller is probably referring to July’s A$1.2 billion refinancing of the debt backing Melbourne’s ConnectEast motorway, spread across four tranches with tenors of two, three, five and seven years. In addition to IFM, eight other lenders participated in the refinancing, most of them banks, but with one other institutional investor also in the seven-year tranche.

Miller says Cooper will be joined by at least a second team member in the immediate future, although he suggested IFM has not yet decided whether to make a new hire or second someone to London from the Australian debt investments team.

But the new hires won’t necessarily stop there.  “We stand ready to further expand the London team to meet the need,” Miller adds.