In many asset classes, regulation and contractual environments often seem like the enemy of investors hoping the invisible hand of the free market will keep pushing asset prices higher.
But in infrastructure debt it is often the opposite that is true.
The case for regulation
When we invest in infrastructure, we often seek out regulation and contractual environments.
This is because if we are investing in transport or energy or utilities and the telecommunications sector, we are looking for risk environments we understand alongside stable, consistent cash flows.
Generally, we find the best deals in one of two places.
The first is in existing regulated environments. We have some great examples of investing in water utility companies and gas distribution pipelines, where there are monopolies for a region and the infrastructure is regulated by local authorities. We have greater certainty in our returns and have more security around the asset.
The second is in deals which already have existing contracts. An example is a gas-fired power station that has a contract to sell its power to a third party. Under that contract you know the price the power will be sold at and the volume that will be sold. These deals provide stable cash flows with low volatility.
Attractive investment characteristics
For AMP Capital, we target a gross internal rate of return of 10 per cent for our infrastructure debt portfolios with an emphasis on stable long-term yields with low volatility.
In the vast majority of assets, we are the lead arranger or cornerstone lender and our focus is on high-yielding subordinated debt of defensive companies. Each fund has around 15 investments in the US$75-500 million range and debt maturities typically of five to eight years.
We target developed countries across transport, energy, utilities and telecommunications.
Transport has been a prominent asset class for AMP Capital, particularly in airports and ports that have been sold by governments.
Energy is a hot sector at the moment right across the US and Europe. Utilities has been very stable. Anything that is an essential service normally generates regulated pricing.
Telecommunications is another attractive sector. The roll-out of mobile phone towers for 5G networks is a big focus in the US as the 5G network requires many more towers than 4G.
Key attributes of infrastructure debt
Infrastructure debt investing has several key attributes. There are high barriers to entry for other players. It performs across market cycles and works best when there’s political stability and mature legal, tax and accounting frameworks in place.
A critical component of the investment process is negotiating strong covenants with high protection for us as lenders and undertaking rigorous credit processes and due diligence on the borrower.
AMP Capital’s infrastructure debt fund series has invested in a range of assets from wind farms in Europe through to power generation and waste water processing in the US, and data centres around the world.
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