Infrastructure Debt – Awesome Opportunity or a Cold Duck?

It is a fact that investors of all genres are now piling up to infrastructure debt, which is creating hype in this sector, but also causing a dilemma with low public awareness. While some deem it as an awesome opportunity, others still think it is a cold duck. Let’s explore further.

Infrastructure debt

Infrastructure debt is a new-age avenue, which had quickly established over the last few years on its own to come on top of the asset allocator’s must have list. This in turn left the investment managers in infrastructure sector with huge capital. On the other hand, it had also created a confusing issue to them as to finding adequate projects to invest in by meeting all acceptable terms.

Taking leverage of the hype of infrastructure debt funds, pension funds also went behind this new avenue. Pension funds were struggling for long to identify a real substitute to tackle its low fixed-income issue, where infrastructure debt came up timely by offering a coupon income.

Infrastructure debts now offer solid long-term cash flow, which matches substantially with the fixed long-term liabilities. Moreover, infrastructure debt is highly illiquid so the rates are naturally higher than conventional fixed-income type securities. It also has many other add-on benefits over pension funds. The low bond yields now cause the duration of pension liabilities to increase, which adds to the attractiveness of infrastructure debt.

It’s a matured market

Contrary to common belief, with more than four years of proliferation, infrastructure debt is now a highly matured market with expert fund managers practising proven strategies based on scale, credit seniority, global scope, and the general financial characteristics as inflation protection.

Moreover, deal structuring and credit analysis too rapidly gets sophisticated and the margins are pressured by the huge influx of capital into infrastructure from other funds. As discussed above, the constraint for most of the infrastructure debt managers now is the availability of adequate projects, which can deliver the desired yield.

Not a cold duck of course

It is a reassuring fact while thinking of infrastructure debt that there is significant increase in the capital inflows lately from sectors like pension funds and insurance etc. These are in high need for potential de-risking, where infrastructure debt acts as a perfect sweet spot. Looking further, with the increasing need for infrastructure capital in the UK, and the investors plan to pump in additional €315bn into the European infrastructure over the next three years create a highly welcoming scenario.

Investors’ catch

Securing a more reliable income and achieving diversification are the top priority of the institutional investors, which are tied up innately with infrastructure debt. While 56% of the investors find diversification as their major interest in investing in infrastructure asset class, about 54% also find reliable income as their best catch.

In this matured market, the capability of the expert infrastructure debt managers to gather consistent long-term cash flows from all sources into a highly reliable income stream is the most powerful draw for investors planning for infrastructure debts. It tempts the new-age investors to look so keenly at the relative value of this investment vehicle over other corporate bonds.

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Topic revision: r2 - 30 Apr 2019, AliceForres
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