Infrastructure debt is a growing asset class that may offer a number of benefits for institutional investors - but having the right partner is critical.
In the current low yield and high volatility investment environment, institutional investors have increased allocations to illiquid asset classes, including private debt, in an effort to efficiently meet portfolio needs for incremental risk-adjusted returns.
Many insurance companies and pension funds have recognized infrastructure debt in particular as a distinct fixed income asset class with the potential to offer attractive risk-adjusted cash returns and other portfolio benefits, including:
- Diversification (geographic, sector, currency)
- Long tenors useful for liability matching
- Negotiated structural protections
- Reduced correlation with both economic cycles and other asset classes
- Low ratings volatility
- Low default rates
- High recovery rates
Infrastructure Debt: Accessing the Opportunity highlights the opportunity in infrastructure debt and identifies how the asset class can benefit institutional investors seeking attractive risk-adjusted returns.
Development of the Market: A Growing Need
Historically, most institutional investors gained access to infrastructure assets through alternative allocations to private equity funds. Access to infrastructure debt, however, has been limited for institutions due to a lack of expertise and opportunity, as banks have traditionally provided the majority of debt financing to the infrastructure sector. However, the opportunity and need for institutional investors to provide financing was highlighted during the financial crisis when banks pulled back sharply as a funding source for infrastructure projects. As banks reduced their liquidity, nimble institutional asset managers were able to hire experienced personnel and deliver value to clients by opportunistically purchasing secondary project finance bank loans and portfolios of loans in addition to private bond market opportunities.