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Why the US needs to change the debate

Q: IFM Investors as well as other Australia-based fund managers have been investing in infrastructure debt for years. How would you compare the US infrastructure debt market with markets in other jurisdictions?

RR: There are two big differences. There has been more infrastructure debt investing by institutions outside the US primarily because most of the social infrastructure and transportation infrastructure in the US is owned by municipalities or state agencies. So you don’t have the volume in the US of private ownership of core infrastructure that you do in other countries. That’s the main driver.

Furthermore, all that state-owned infrastructure is financed in the tax-exempt market. In the US you don’t have private ownership of infrastructure and you already have a financing mechanism that’s very well established in the muni debt market. That’s the primary reason.

The US market for infrastructure debt is approximately a $40 billion to $50 billion a year market right now. That’s almost all energy. So it’s a very large market – one of the largest in the world – but whereas the UK, Europe and Australia focus more on social infrastructure and transportation infrastructure, the US focuses on energy. It’s quite robust and larger in some instances but it’s a different type of market.

And I think it will remain that way in the near future, at least. There’s lots of talk obviously and you see certain state-level activities but we don’t see a large volume of deals coming through.

Q: President Obama has put forward a proposal to create Qualified Public Infrastructure Bonds (QPIBs). These bonds would provide tax exemptions to private sector partners involved in public infrastructure projects similar to those the public sector enjoys through the muni bond market. Do you think that would help?

RR: Leveling the playing field as to cost of debt capital available to private sector partners in public-private partnerships (PPPs) should in theory spur additional investment, but I don’t think that would make a big difference because to me the issue about infrastructure in the US and how we’re going to build it all is not so much a question of financing. There is an abundance of financing available both for equity and debt for all the infrastructure that needs to be built in the country.

It’s not an issue of financing; it’s an issue of who’s going to pay the revenue stream for these projects. Is it going to be the government that does it through the tax base? Is it going to be user-based like Europe and the UK? However, there’s not a culture of user-pays and tolls in the US. The powers that be should be focused on this problem. So sticking that in a bill is not going to change anything until the ownership of these assets goes to the private sector and the efficiencies that the private sector and the risks that they take is more built into the culture. And I do think that’s more likely to happen at the state level, rather than the federal level.

Q: You think ownership of public assets should go to the private sector?
RR: I don’t know that it should or it shouldn’t. I’m saying that’s the debate that needs to happen. It’s who owns the asset; not how it’s financed. Who owns and who pays for it.

Q: Some industry experts have raised the issue of education, claiming US pension funds do not have the necessary expertise internally to invest in the infrastructure debt space. Do you agree?

RR: I don’t know that I would go that far. I would say that if anything US pension funds are more sophisticated because the US capital markets for debt are much deeper than anywhere else in the world so they have a lot of different options to invest in. They can invest in high-yield bonds, in leveraged loans, in convertibles, public 144As, private placements, distressed debt – they have a myriad of options. So, structured debt investing has to offer good relative value compared to those other asset classes in order to be accepted. That’s the story that needs to be told – how does this stack up against the other asset classes?

I would not call it an education. It’s about awareness and getting the relative value story out there.

Q: Turning now to IFM. The firm has added six investment professionals to its UK and US debt team over the past two years, including yourself. What does IFM expect from the asset class, particularly in the US?

RR: We primarily run a business focused on individual accounts. We sign individual account agreements with our clients. Currently, outside of Australia, we have about $1.8 billion of capital that is managed and invested by the New York and London teams, as well as our founding team in Melbourne.

IFM obviously has a much larger amount of funds available than that but mostly focused in Australia. We’re constantly in growth mode. We’re speaking to pension plans and other insurance companies looking to increase the mandates that we have and we’re getting pretty good traction.

Q: Last July, Global Infrastructure Partners, a New York-based fund manager, launched its debut infrastructure debt fund. Do you think that’s an indication the US is warming up to the asset class?

RR: Most debt funds in the US are mezzanine funds. They have equity-kicker components and are further down the risk spectrum. We ourselves are a bit different. We are senior-secured debt so we’re trying to play in that $40 billion to $50 billion volume of commercial bank loans and bonds that comprise the core of the market.

Mezzanine funds have more risk components to them, seeking yields that are more high single-digit or low double-digit type returns for their clients. As a result it is a more of a niche asset class with less deal volume.

We’re straight debt investors, so what we’re trying to do is integrate ourselves into the market alongside the banks and the insurance companies and be a relevant player in that market for our clients.

That’s the pedigree, the background of IFM Investors. That’s what we’ve done in Australia and that’s what we intend to do in the UK, Europe and the US.

I joined about a year ago in the US. The team was up and running around summer of last year and we did 10 transactions worth roughly about $300 million last year.

Our UK/Europe team had about the same deal volume last year. I feel we’re off to a pretty strong start in terms of being able to deploy capital. We did 20 deals internationally last year as part of our global platform – close to $1 billion of investing. So we feel like it’s a very good market and we’re just getting started. It’s really our first full year of operation on a global basis. We feel the fundraising effort is going strongly and we see the investment opportunities.