Following AMP Capital’s record US$6.2 billion fundraise, which brought in commitments from 86 institutions in less than a year, Andrew Jones, Global Head of Infrastructure Debt, explains why infrastructure debt is attracting so much attention.
After years in the background, infrastructure debt has found itself in the spotlight. Its return profile offers solutions that are increasingly challenging to achieve in the current economic climate. The characteristics of infrastructure debt, including long-term contracted cash flows, regulated environments and a low correlation with traditional asset classes, are proving very attractive to institutional investors.
Hunting for yield
The Federal Reserve has cut rates twice in the second half of 2019. The Bank of England has set rates not much above 300-year lows. The Bank of Japan’s 10-year government bond yield has been negative most of the year. In Australia, the official cash rate is at historic lows, and most economists are expecting further cuts will be made. In 2019, it’s tough for investors to find both yield and security.
Enter higher-yielding infrastructure debt, an asset class that has emerged relatively recently, and thus has been less understood. Mezzanine or subordinated infrastructure debt sits between senior debt and equity in the capital structure. It commands a higher yield than senior debt, and the stable nature of infrastructure assets – as well as protections lenders can build into their loan structure – means default rates are generally low.
The asset class has been around for more than 20 years, and now has a track record which demonstrates good, stable returns. It is also not cyclical, which can be advantageous in any portfolio.
Infrastructure assets provide essential services and we prefer to invest in regulated and contractual environments. The asset class performs across market cycles and works best when there is political stability and mature legal, tax and accounting frameworks.
We have found that the investments delivering the characteristics our investors expect tend to come in one of two places. The first is in existing regulated environments such as water utility companies and gas distribution pipelines. When there is only one such asset in a region and the sector is regulated, we can be confident of the returns that business will generate. The second is lending to businesses which have long-term contracts in place. For example, a gas-fired power station might have contracts to sell power to third parties, and have visibility on the price the power will be sold at and the volume that will be sold for the coming years, allowing us to lend with confidence in the asset’s cash flow with low volatility.
Early mover advantage
Existing players in the infrastructure debt market have a comparative advantage, simply because of the high barriers to entry for other players. The investment team must negotiate strong covenants with high protection for investors and implement a rigorous credit process and due diligence on the borrower. A secured infrastructure debt opportunity will typically have very detailed financial covenants, negative and positive undertakings by the borrower and a comprehensive security structure which includes fixed and floating charges over all the assets of the company we are lending to.
Subordinated infrastructure debt’s track record, based on our investments since 2001, shows attractive returns throughout the cycle. But at various points in the economic cycle, the opportunities for our strategy are particularly strong. We are at one of those points now because the amount of capital that infrastructure equity investors are looking to invest has pushed asset prices up; debt is required for these transactions, and there are few managers in the market with the scale to provide significant cheques in subordinated infrastructure debt to a single asset.
The AMP Capital view
For institutional investors looking for long-dated products with stable cashflows and genuine defensive characteristics, infrastructure debt often fits the bill.
AMP Capital’s infrastructure debt strategy has an emphasis on stable long-term yields with low volatility. We prefer to be a lead arranger on deals, as we provide capital for acquisitions, refinancing and ‘alternative to exit’ solutions for asset owners. AMP Capital is the world’s fifth largest investor in infrastructure debt according to Infrastructure Investor’s rankings (considering AUM as at Q3 2018).
Each generation of our strategy makes around 15 investments, which vary in size from $75m to $500 million, with a typical maturity of seven or eight years.
Energy assets across Europe and the United States are currently attracting a lot of investor interest while utilities are stable. The renewables sector in particular offers good opportunities across Europe and the United States.
Communications infrastructure is another attractive sector, spurred on by the roll out of mobile phone towers for 5G networks across the United States, and digital infrastructure, such as fibre networks and data centres, is a significant theme within infrastructure.
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