“Infra debt is a fixed income-style play”

Private Debt Investor, Infrastructure Investor’s sister publication, meets Deborah Zurkow on a Friday afternoon, at the end of a long week. Most people would be winding down, but Zurkow proves an animated, engaging interviewee whose enthusiasm for her business is infectious. 

It’s been six months since she and her four-strong team moved from monoline Trifinium Advisors to join Allianz Global Investors (AllianzGI). They’ve spent the time sounding out investors, assembling a pipeline of deals, and building out the team. 

So why the sudden interest in infrastructure debt? “A lot of third party investors are surprised that this market doesn’t exist already,” Zurkow says. “There’s already a global real estate market that features long-dated financing of real assets, so it’s reasonable to expect that, over time, a global infrastructure debt market should also develop.” 

Given the evidence of the past year – with a host of infrastructure debt-focused funds springing up and many asset managers building teams to target the asset class – that process is already well underway. 

“Allianz and other investors have recognised that infrastructure can offer an attractive source of stable long-dated returns,” Zurkow says.  “Around it [an infrastructure asset], if you expect to hold it over its life, you need to have a good funding structure.  At the risk of oversimplifying, a good funding structure cannot make a bad asset good but a bad funding structure can make a good asset bad. So you need to have the expertise to be able to understand and analyse the asset today, but also the structuring skills to look beyond that.” 

Allianz took the view that this market was beginning to coalesce into a genuine opportunity, and that the best way to tap into that opportunity was to build an in-house team. Allianz itself has an asset management division, within which sit PIMCO and AllianzGI. Zurkow’s team resides within the latter. 

Her mandate is straightforward: build an infrastructure debt practice to manage both Allianz’s own allocation to the asset class, and develop products to allow third-party investors to do likewise. 

The team has a focused investment thesis predicated on investment-grade senior debt used to underpin infrastructure deals. “For an investor like us, the opportunity is huge. With investment-grade transactions, you’re talking high leverage, stable cash flows and some structuring around the funding to ensure that we can manage the deal over its life.”  

Long-term, stable yields 

Infrastructure as an asset class comprises a diverse array of asset types. Are there areas that Zurkow’s team won’t be covering? “We look at core assets – fundamentally we’re interested in things like utilities, PFI [Private Finance Initiative] and PPP [public-private partnership] projects, and transportation assets,” Zurkow explains. “There can be some user risk but we want the asset to be quasi-monopolistic and to be operating in a well-regulated environment.” 

She adds: “Where we probably draw a line is when you start to get too much merchant risk, or when you see the hybrids that some people were promoting before. So service stations, for example, probably don't fall within our definition of infrastructure,” she adds. 

These sorts of long-dated real assets, with a 30-year lifespan or concession, are easily levered. “You can apply more leverage to real assets, because they have stable cashflows. We look at somewhere in the 80 to 90 percent debt-to-equity range,” she says. 

The AllianzGI team is targeting returns of between 4 and 6 percent, which proves an attractive fit for many institutional investors from a liability-matching perspective. It’s particularly well suited to pension funds and insurers due to its long-term horizon, stable returns and low risk profile. 

“If as an investor you’re trying to finance your liabilities and you’d like to see some diversification away from sovereigns, infrastructure [debt] is a great place for investors to go because it has so many of the right characteristics and it gives you a pick-up relative to what you’d get buying sovereign debt. The investors we’re working with are looking to take credit risk for which they get an illiquidity premium because these are all very bespoke transactions,” Zurkow explains. 

But allocations to infrastructure debt have to come at the expense of other asset classes, and pitching the proposition correctly is key. “The traditional sources of long-dated investment have been primarily sovereign bonds and then covered bonds,” she says. “You can certainly make the case that sovereign bonds are safe but it is still good to have some diversity away from them.” 

Not like equity 

Zurkow believes that investors should look on infrastructure debt as a substitute for other forms of debt in their portfolio, and not be tempted to parcel it alongside infrastructure equity within an alternatives allocation, for example. 

“We see infrastructure debt as belonging in their safe long-term [debt] asset bucket. A lot of investors are used to investing in infrastructure equity and that generally goes into the alternative asset bucket. Some are moving up the [debt] risk spectrum into mezzanine and so on. But for those looking at the senior end of the spectrum, infrastructure debt is a fixed income-style play. The differential between returns on debt and equity in infrastructure isn’t likely to be as much as on a highly levered corporate play for example,” she adds.  

Having an insurer parent certainly helps to emphasise the alignment of interest between Zurkow’s team and potential third-party investors. 

“We are like-minded thinkers to other pension funds and life insurance companies across Europe who are also looking to make the same kinds of investments. So there is an absolute alignment of interest in terms of what the objectives are of Allianz as investor and of us as a team.  

“We take very seriously our obligation to not just help Allianz and other investors get into the market but also to do it in a way that it is consistent with establishing right standards with the market. We want to help them to fully understand the product they’re getting into. I see that as not just a fiduciary responsibility but also part of what ensures that you have a stable market going forward.” 

Allianz is obviously betting big on this asset class being a long-term area of growth, not simply a short-term bubble created by regulation-addled banks retreating from the market. Laying the appropriate foundations and taking the time to inform and educate investors about the asset class’ merits is obviously of the utmost importance to Zurkow and her team. There’s an evangelical zeal in her enthusiasm for establishing high standards of transparency, for example. 

“I think it also is important that those of us who are experts do our best to ensure that we put the same standards across similar assets in different markets,” she says. “You want it to be sufficiently transparent so that investors can read across one asset to the other. These are responsibilities that first movers in a new market have to take on, and we take that very seriously.” 

*To read the full keynote interview with Deborah Zurkow, be sure to check the April issue of Private Debt Investor