Three key members of Barings’ Infrastructure Debt Investment Team—Emeka Onukwugha, Patrick Manseau and Pieter Welman—discuss, among other issues, the evolution of the global infrastructure debt market, opportunities in today’s environment and how investors can gain intelligent exposure to the asset class.
What types of investors are typically interested in infrastructure debt and with what objectives in mind?
EMEKA: There are really two broad groups, the first being what are called ‘liability-driven’ investors and the second being the ‘yield seekers.’ Liability-driven investors are typically insurance companies, pension plans and other institutional investors seeking long-duration assets to match their long-term liabilities. Because infrastructure debt is by nature a long-term, buy-and-hold investment (with maturities ranging from five to 30+ years), it may offer an excellent fit for these investors’ objectives, without exposing them to the excess volatility that other types of long-duration assets might add to their portfolio. Infrastructure debt has become an attractive extension of core fixed income portfolios, particularly as investment grade corporate spreads have declined over the past five years.
The so-called ‘yield seekers’—for example, sovereign wealth funds or more private equity type investors—are looking to enhance portfolio yield and total return. They include typical equity infrastructure investors who, given the inflated equity prices for quality infrastructure assets, are seeing better relative value in mezzanine and senior debt. Pension plans are historically equity investors in the space, but many now see infrastructure debt as being particularly attractive when compared to today’s lower equity returns and actuarial return assumptions. These investors also like infrastructure debt because it provides steady, predictable cash flows and less sensitivity to economic cycles.
This ‘bifurcation’ of infrastructure debt investors into these two broad groups is one way in which the market has transformed in recent years.