The debt settlers

Private infrastructure debt is here to stay – that much we can say with confidence. Whether it will ever supplant bank debt or, indeed, account for the majority of infrastructure debt, is another matter altogether.
A question mark also hangs on what will prove to be the most popular way of allowing institutional investors to access infrastructure debt.


Will unlisted blind pool funds be the way forward? Perhaps listed funds? Or maybe not funds at all, but rather bank-institutional investor partnerships, like the one teaming French bank Natixis with Belgian insurer Ageas? 


Or as John Tanyeri, head of private energy finance, power & strategic investments for insurer MetLife, argued at the Berlin 2013 Summit, “managed accounts are better for infrastructure debt as clients can tailor it to their needs.”


There might even be little need to get bellicose on the subject, with all of these different solutions eventually co-existing in a peaceful, “all roads lead to Rome,” context. 


Still, there’s no denying the popularity of infrastructure debt funds. Last year alone, these vehicles managed to raise some $2.8 billion of the more than $23 billion collected by infrastructure funds globally.
So if you are thinking of raising a debt fund, or, perhaps, investing in one, here are testimonials from three infrastructure debt fund managers who are either gearing up to go on the road for the first time, are on it, or are going back for round two.


The pioneer


Say what you will about Marc Bajer’s Hadrian’s Wall Capital (HWC) and the success of the Aviva Investors Hadrian Capital Fund 1, but Bajer is truly one of the pioneers of the infrastructure debt space.
As far back as 2009, the HWC founder was touting the need for institutional investors to get back into infrastructure financing and in 2010 he hit the road, with partner Aviva in tow, to raise his fund cum bond market solution.

In fact Bajer, a former monoline man, bet the house on devising a fund which would use money raised from investors to credit-enhance infrastructure bonds into A-rated territory. The fund would do this through fully-funded subordinated debt positions within senior-ranking infrastructure bonds. In addition, Hadrian’s Wall would also offer comprehensive managing creditor services. 


Perhaps because of the originality – some would argue complexity – of the Hadrian’s Wall concept, Bajer has been on the road for well over two years trying to sell his idea to limited partners (LPs). In the process, he’s acquired some of the world-weariness of your typical frontiersman.


“The hardest of all the lessons I’ve learned [over the last two years] is that to implement a value proposition with a market changing impact takes a lot of patience and takes much longer than I had expected,” Bajer says. Still, like a prospector who believes there is gold to be found, he adds: “But the rewards [if successful] are unparalleled.”


The European Investment Bank (EIB) – a seed investor in Hadrian’s Wall which then went on to create its own very similar (and similarly untested) project bond solution – notwithstanding, Bajer’s vehicle is pretty much peerless among emerging debt funds.


“We are a capital markets access fund,” Bajer states. “We are designed to allow the bond market, which offers vast liquidity, to buy into investment grade infrastructure paper. Many of the other debt solutions out there are essentially offering private placements, which, when combined, number in the billions of dollars. There is no trading, no transparency and no comparators, like there are in the bond market.”


Unsurprisingly, the Hadrian’s Wall proposition comes with its own particular remunerative package attached, but Bajer, without disclosing figures, insists it is competitive – both when it comes to origination fees and fund management fees.


“If you combine the whole package, our origination and ongoing fees for borrowers are far less than comparable bank fees. When it comes to fund management fees, they are also substantially less than your typical private equity infrastructure structure,” although the Hadrian’s Wall boss admits “we have performance-based compensation, but again, less than your average fund”.


With a £150 million (€175 million; $227 million) first close under its belt, all Hadrian’s Wall needs now is to clinch a deal.


The listed fund


London-based Gravis Capital Partners was one of the underdogs at this year’s Infrastructure Investor Awards, racing ahead of time-honoured industry names like the Netherlands’ DIF and France’s AXA Private Equity to take the crown for European Infrastructure Fundraising of the Year – an accolade that, with typical British understatement, “pleasantly surprised” partner Rollo Wright.


That it beat well-established equity players with what is essentially a UK-focused, listed infrastructure offering just makes that achievement even more remarkable.


“A new fund broadly needs two things to launch successfully and grow: a supportive investor base and a pipeline of investments with suitable risk/return profiles,” Wright offered. “We launched in 2009 in a volatile economic environment with low interest rates – a state of affairs that, to an extent, still persists – and a resulting investor appetite for dependable, low-risk yield. On the investment side, we saw a significant demand in the infrastructure sector for long-dated debt which wasn’t being satisfied.”


He continued: “If you look at why the banks have pulled back from the long-dated debt space, it’s mainly due to liquidity concerns – the dangers of borrowing short and lending long were starkly highlighted by Northern Rock – and regulatory pressures resulting from Basel II/III that make lending long expensive from a regulatory capital perspective.” 


“What they didn’t do was pull back as a reaction to the credit quality or underperformance of infrastructure assets in general. Thus, we thought it would make sense to create a vehicle that could focus entirely on the merits of any given investment proposition without getting distracted by liquidity or regulatory constraints.”
Gravis’ bet has paid off handsomely. Last year alone, the fund manager raised some £230 million, with a fall bumper fundraising that started off targeting £80 million and ended up at £140 million. More interestingly, while Gravis begun life as a subordinated debt provider, it now has both feet planted in the senior debt market.


“Our early investments consisted of subordinated debt secured against UK PFI projects.” explains Wright. “However, we have recently been providing senior loans in the renewable energy sector that still hit our return requirement, particularly to developers of smaller projects that are really struggling to get hold of long-dated debt.”


That focus on small-scale renewable projects is proving to be a real niche for Gravis. “The very few other long-dated debt providers are not usually willing to back smaller developers, preferring much larger projects. Given the interest we’ve seen from potential borrowers, it sometimes seems we are almost alone in this space,” which pleases Wright, considering the very significant control and security associated with senior debt positions. 


Gravis decided to go the listed fund route because “investors like the liquidity and transparency provided by a London Stock Exchange listing”. And in case you’re wondering, Gravis doesn’t plan to get rich on fees.


“We charge a management fee of 90 basis points and no performance fee. As a debt fund manager, we see our job as making sure the debt is serviced and repaid on time – the concept of outperformance seems slightly inappropriate,” argues Wright. 


The hybrid


With the infrastructure debt fundraising space getting increasingly crowded, differentiation – having an angle, a unique approach – will be paramount. 


On that front, La Banque Postale Asset Management’s (LBPAM) debut infrastructure and real estate senior debt fund is already a winner. 


After all, at the time of writing, it holds the distinction of being the first infrastructure/real estate debt fund. More importantly, it holds the distinction of being the first infrastructure/real estate debt fund to have reached a first close on €500 million – a not inconsiderable amount for such an innovative structure.
Look beyond the surface, though, and you’ll find some strong pedigree. 


LBPAM is France’s fifth-largest asset manager with €137.5 billion under management; the new debt business is headed by Rene Kassis, the long-time Paris-based former head of infrastructure at Dexia and a veteran banker with over two decades of project finance experience; and it’s structured in a way that actually separates the capital raised into two asset class specific sub-funds.


“The common theme here is real assets; that the underlying assets are either physical assets, like buildings, or essential infrastructure services” Kassis explains. “We thought there were obvious merits in combining a dual approach while offering investors the choice of two asset classes. So far, we have found that many investors like the idea of being able to invest in the two sub-funds.”


He continues: “Investors who want shorter maturities can invest in real estate debt, which has an average life of about six years and won’t go beyond 10. Those in search of long-dated debt can target the infrastructure sub-fund, which has a legal maturity of 30 years, although the weighted average life of the debt we plan to invest in is around 12 years.”


Roughly speaking, the fund will offer an average net return of circa 4 percent. “If you’re focusing in infrastructure, then you get a bit more and if you’re more interested in real estate then you get a bet less,” Kassis said.


Despite the two asset class specific sub-funds, when it comes to fees, the vehicle is treated as a single package, Kassis pointed out.


“We are offering the same remuneration package which involves a fixed element and a variable component,” the debt boss explained. The latter is not, however, an outperformance fee: “The variable portion is tied to whether we exceed a certain spread, after which there is a sharing mechanism.”


Kassis would not be drawn into revealing how the team is charging in management fees, but sources familiar with the fundraising have suggested the management fee is well below 1 percent.


With nine months on his fundraising timetable still to go, Kassis said he would like to attract “more international LPs, including pensions and sovereign wealth funds. We already have a very strong French institutional investment component, although not all of the investors in our first close are French,” he pointed out.


And what is the fund’s target size? “The more the better,” Kassis answers with a laugh.