Week in Review Don't write off the banks

They are taking notice of alternative infrastructure debt providers, as competition finally takes off.

Placement agent Probitas Partners’ latest figures show that debt funds accounted for 12 percent of the $23.5 billion raised by infrastructure funds last year. As the space goes from strength to strength, here are three interesting developments to consider.

Finally, competition

As the alternative debt market grows, it is finally generating some competition.

There is now plenty of variety within the alternative debt space, with products covering a broad spectrum including senior and subordinated debt, bond market solutions, bespoke partnerships, as well as primary- and secondary market-focused vehicles.

But more interestingly, perhaps, banks have begun to take notice of these new upstarts. The intensity of their attention varies with the telling, with some sources stating banks are actually feeling the heat from these new debt sources while others dismiss such tales of rivalry.

Still, banks have infrastructure divisions that need to do deals, and it seems they have started the year with renewed appetite. Fund managers are reporting an increase in the number of phone calls from bankers sniffing around for deal flow and interest in marquee deals like the sale of the TIGF gas network, in France, is said to be off the charts.

If the alternative debt space is helping to generate this competition, the industry has already netted an important victory.

Execution capability

That said, reports of banks’ deaths are greatly exaggerated. Put simply, infrastructure finance is still very much a bank’s world. Institutional investor debt solutions are, at this point in time, an attractive complement – not the be all and end all.

If we had to single out two reasons why the status quo is likely to persist for quite a while longer, we’d narrow them down to nimbleness and flexibility. Banks are still quicker than debt funds when it comes to inserting themselves in deals and executing on them. There’s no magic in this: banks have simply been around for longer and have the advantage of the whole system being geared towards them, at least in Europe.

Importantly, banks also offer more flexibility: want to refinance that debt tranche in two years’ time because you found a better alternative? Not likely to be a problem, if your lender is a bank. If, however, your loan came from an institutional investor, you are likely to be locked in for the long haul.

Of course there are plenty of situations where that long-term lock-in can be a material advantage. If you’re a developer investing in a greenfield project, what you want is to price your debt for 20 or 30 years and be done with it. When it comes to M&A, though, the story is arguably a bit different.

Still, it’s always good to be able to mix and match debt maturities in an acquisition, and in this sense, the alternative debt space again adds value.

Innovation

Have you taken a look at Banque Postale’s new infrastructure and real estate senior debt fund? At first glance, it seems like an unnecessary hybrid structure, especially since, in reality, the vehicle is broken down into two, ring-fenced sub-funds.

Look closer though, and it’s easy to see the synergies. While it’s true that real estate and infrastructure debt have their differences, they also have enough similarities to allow for a little tag-team fundraising effort.

It isn’t a stretch of the imagination to envisage a situation where Banque Postale’s co-heads go into a meeting with a limited partner (LP) pitching one of the sub-funds – let’s say the real estate one, for the sake of argument – only to find the LP inquiring about the other sub-fund, and eventually deciding to commit to that as well.

When you think of the growing appetite real estate LPs have shown for infrastructure, the synergies become very attractive indeed.