From an investor perspective, what makes infrastructure debt attractive versus other asset classes?
It is an interesting time to invest in infrastructure as a maturing asset class, particularly as it compares to sister asset classes such as real estate. We see more and more differentiation within infrastructure debt and equity, with more fundraising for specialist funds that present interesting options for investors. The fundamentals of infrastructure remain very strong, especially given the current difficult macroeconomic and political environment.
The stability that the asset class offers is important compared with other asset classes in investor portfolios, with fundamentals including low volatility of cashflows, diversification away from corporate risk, low defaults and high recovery rates in the event of insolvency. It is also clear that investors are under allocated to infrastructure, which creates an interesting market dynamic going forward. As far as infrastructure debt fundraising is concerned, we are still in a difficult environment. Even though we know that infrastructure debt is very appealing to investors, there remains a lot of space between the mega-funds and everyone else in the broader infrastructure industry.
There has been a bit of a flight to quantity by investors and we see differentiation between the senior and high yield fundraising environment. Investor allocations in infrastructure debt are prevented by insufficient illiquidity premiums compared with fixed income bonds, which are one proxy for senior infrastructure debt. There are also constraints on investors allocating to illiquid assets rather than with infrastructure itself. Those factors make fundraising challenging, especially for senior debt – we see that among our competitors and among direct investors such as insurers. They have much less capital than they used to on their balance sheets.
On the high yield side, the picture is a bit better. There is still a clear advantage to investing in high yield infrastructure debt versus equity, because returns have compressed for infrastructure equity. Returns have also compressed for private corporate debt and are almost equivalent to infrastructure high yield, so, given the lower risk of infrastructure investments, investors are interested in this space today.
Finally, across infrastructure debt or equity there is a huge amount of investment needed to support demographic change, decarbonization, deglobalization and digitalization. For example, despite weaker infrastructure debt transactions in 2023, activity remained strong in the energy transition (e.g., renewables) and telecommunication sectors, as investments exposed to secular trends such as decarbonization and digitalization still remain popular. In our view, it is a good time to deploy funds in this environment and for debt investors to lock in attractive interest rates.