Institutional buyers jostle for position in new infrastructure debt market

Louise Bowman
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The much-vaunted institutionalization of the project finance debt market is now under way as asset managers, pension funds and insurance companies pile into infrastructure lending. However, the risks and rewards they find there might take some getting used to.

The project finance market was hit hard and fast by the banking crisis in Europe. When banks found themselves bloated with risk weight heavy assets on their balance sheets, writing new long-term loans on illiquid assets quickly became an expensive luxury. The project finance industry has been in the throes of inventing a new way to fund itself ever since.

There has been a lot of talk over the years about turning to the institutional market. Stable, long-dated cashflows from real assets should be meat and drink to these buyers but progress has been agonizingly slow. In recent months, however, there have been signs that all the talk might be turning into action.

"There is massive institutional interest in owning these assets," says Jim Barry, chief investment officer of renewable power and infrastructure at BlackRock in London. The US-based asset manager announced that it had hired a management team to focus on infrastructure debt investment at the end of November last year. "This is a total change in the market over the last three years," Barry tells Euromoney. "There has been a lot of talk, but we actually started to see movement in the second quarter of last year. The appetite is there and it is real."

BlackRock clearly means business in infrastructure: in July last year it acquired Swiss Re’s private equity fund of funds business for $7.5 billion, primarily because it specializes in investing in infrastructure funds.

The firm’s decision to focus now on infrastructure debt is the latest in a series of announcements from institutional investors declaring their intention to invest in the sector. Last summer, AllianzGI hired a team of five from MBIA subsidiary Trifinium Advisors to initiate debt investment into infrastructure, while French bank Natixis established a €2 billion joint venture with Belgian-Dutch insurer Ageas to co-invest in infrastructure loans.

In October, La Banque Postale Asset Management hired Dexia’s head of infrastructure and launched a $500 million fund to focus on real estate and infrastructure debt; in November reinsurer Swiss Re announced that it had awarded a $500 million external mandate to Macquarie Group to manage a portfolio of investments in senior secured infrastructure debt. There has also been movement on secondary sales of infrastructure loans: PensionDanmark acquired a portfolio of infrastructure loans from Bank of Ireland in June, while in the same month the Irish lender sold a £160 million ($253.8 million) portfolio of UK social infrastructure PFI loans to Aviva Investors at 81% of original face value.

The attraction of infrastructure assets to institutional investors with long-dated liabilities is strong. "Long-term investors recognize the opportunity, and want to access it," says James Wilson, chief executive of infrastructure debt investment solutions at Macquarie in London (Midis). "If you have long-dated liabilities and want to match them, the alternatives are long-dated sovereigns and corporates. Institutional investors can put part of their book in a less liquid form and get superior returns." The asset class is increasingly seen as a diversification play away from government and covered bonds in such a low interest rate environment.

But it is not just yield that is attracting such attention. "Historically, these types of assets were not available investments for us," admits Klaus Weber, managing director and head of external investment mandates at Swiss Re in Zurich. "This was mostly because the market was dominated by banks. Today, with less capital available from banks, this is changing. And infrastructure assets are an interesting fit for liability-driven investors. These are yieldy, relatively safe long-term assets."

The level of interest is not in doubt, but there are many ways to skin a cat. Little consensus has emerged among institutional buyers as to the best way to approach what can be a tricky and time-consuming asset class. "This is obviously a bespoke market where the specific terms of each deal are key," says Weber. "There is not much specialist skill out there, so there was a strong focus to look for an external partner who is in a position to attract and maintain best-in-class skills over the long run." Swiss Re’s partner, Macquarie, has a long enough track record in infrastructure equity to know where to start looking on the other side. "A number of investors are looking at the opportunity and are clearly interested," says Wilson. "But it is not an easy asset class to resource, and it is highly credit intensive."

The most straightforward approach is to hire a team, as BlackRock has done. This was also the route taken by AllianzGI when it hired its team from Trifinium Advisors last July, headed by Deborah Zurkow, formerly head of EMEA public finance at monoline guarantor MBIA. The insurer announced the launch of a £1 billion UK senior debt fund in January.