Yielding fruit

There are always debates about what constitutes the best barometer of investor appetite for a given asset class. Serious contenders abound: the annual growth in volume or value of deals, the number of dedicated fund managers, the size of investors’ average allocations and the pricing of completed transactions all arguably shed light on investor interest for a particular market.

Yet perhaps one of the least subjective indicators – and one that bypasses issues of data collection, currency and definitions – is the amount of time spent discussing the subject in public forums. By that measure, explains Greg Taylor, a founding partner of Sequoia Investment Management, infrastructure debt seems to be faring pretty well.

“There was a time when you would barely get one panel at a conference that lasted two days. But now you have whole conferences dedicated to infrastructure debt. It’s been gratifying to see it emerge as an asset class,” Taylor says.
Other insiders concur that infrastructure debt, in a relatively short amount of time, has evolved from market seen as theoretically promising to one that has proved itself.

“The first trend we have increasingly observed is simply that compared to year ago there really is the beginning of a market now,” says Deborah Zurkow, chief investment officer and head of infrastructure debt at Allianz Global Investors.
“A year ago we started from scratch to develop the pipeline, whereas now people call us all the time about potential transactions. So we’re much more embedded in the process of sponsors, advisors and even governments thinking about funding
alternatives proactively.”


For James Wilson, chief executive of Macquarie Infrastructure Debt Investment Solutions, the greater involvement of institutional investors is probably down to one major factor: a growing gap in the infrastructure funding market.
“The last 12 months have really demonstrated that banks have largely left the long-term infrastructure debt space,” he says.

Zurkow is not as adamant. Yet she thinks the withdrawal of a significant amount of bank money – in response to financial pressures and regulatory constraints – has opened up fresh opportunities for investors, precisely at a time when the institutional market was looking for new ways to generate long-term cash flows. This is likely to continue – especially as investors steadily progress along the learning curve.

“Infrastructure debt remains a broad church,” explains Gerry Jennings, a former principal in the infrastructure debt team at AMP Capital Investors. Whether it’s greenfield, brownfield, public-private partnerships (PPPs) or M&A deals, it simply takes time for investors to understand what suits their particular investment requirements.

But he thinks this has now been largely achieved. “We’re now starting to see the fruit of that long learning gestation period,” he says. “There is less debate about the merits of closed or open-ended funds, or about what part of the market to address, because investors have now made their minds up. A lot of people, across different geographies, are getting interested – and many of them are committing.”

Zurkow agrees. “What was a vicious circle – with sponsors saying ‘there’s not really a proven institutional market so should I show them deals?’, and institutional investors saying ‘I haven’t seen much of a pipeline so should I gear up for these investments or hire resources?’– has turned into a virtuous one. Sponsors know there is a credible offer out there and investors can see that there is expertise available.”


This peak in interest could come with its own set of problems: some observers worry that there are not enough deals to absorb investor demand. And a relative scarcity of available assets, cautions Wilson, could sooner or later lead to inflated prices and deteriorating lending standards.

Yet worries about deal flow are probably misguided, suggests Dominik Thumfart, a managing director at Deutsche Bank. “We are very bullish that this will be a very brisk, very buoyant market for infrastructure debt in the next two to three years.”

He thinks there will be a large number of new projects coming to market – with infrastructure remaining at the forefront of public discourse in the UK, a seemingly robust commitment to energy transition in Germany, new PPPs in France and other large economies, and fresh renewables initiatives across Europe– as well as capital market refinancings of operational assets.

Jennings agrees. “Deals that were financed back in 2006 to 2008 are now coming within 12 to 18 months of their maturities, so they’re looking to be refinanced.” Upcoming privatisations and corporate restructurings should also add to the pipeline, he argues.

He sees the regulatory climate as more of a challenge. “The last few years have been a wake-up call for general partners (GPs) and LPs that regulation can change, and that it can have an impact on businesses. While that tends to be more associated with equity investment than debt, we can’t ignore it because they are a key part of the capital structure.

”Related to this are tax issues which, Zurkow reckons, continue to complicate a number of cross-border transactions. “Among member states there still remain legislation discrepancies that can make it more difficult for an institution in country A to invest in a transaction in country C, particularly if it is a private placement and not a listed bond.”


Yet perhaps the biggest challenge will consist in making sure the market is well covered, says Tim Cable, investment director at fund manager Hastings Funds Management.

“Banks retain a very important role in infrastructure debt, particularly because they provide a lot of product and services that borrowers need. At a time when new investors are coming in to replace them in the long-term market, making sure there is a well organised transition from one to the other is what everyone wants to see.

”Investors will likely be pushed to look at single or medium-sized assets – the most challenging yet exciting part of the market, according to Wilson. These complex deals will often require additional expertise, but he thinks they can bring better returns, more in line with bank debt rather than the bond market.

Equity investors may also venture into new geographies, thereby creating fresh opportunities for debt deals. “A lot of these funds have defined core infrastructure in the euro, or British pound-denominated area, as their primary investment targets,” argues Thumfart. “Some of them will have to find out that there’s just not enough deals around amidst fierce competition from different kinds of equity investors. They will thus start to branch out a bit, perhaps by looking at some of the peripheral European Union (EU) countries. ”

And with more than $40 billion a year of infrastructure lending, Taylor says, varying sophistication levels among investors will continue to justify the co-existence of different models. “There will be banks continuing to lend directly; banks coming to the table but representing third parties; some investors going direct; creative arrangements like the European Investment Bank’s enhanced project bonds or the PEBBLE scheme; and asset managers such as Sequoia offering fund investments or separate managed accounts.”

The question over the coming months, it seems, will therefore be less about which model ultimately prevails –but about how different structures can work together to make sure the market is functioning well.

“It’s not a bank versus institutional investors configuration,” says Zurkow.“You’ll know we’ve got to the next stage of the market when, instead of having a bank panel and an institutional panel, we have a long-term panel and a shorter-term panel. At the long-term one there will some institutional investors and some banks; and, at the shorter-term one, there will be some banks and some institutional investors.”