Though these funds differ in detail, they share common features including specialised investment teams who can engage earlier and perhaps deeper in the origination process than traditional public market investors. This enables them to assess transactions with project or construction elements that typically have been funded in the bank market.
“With the ability to sit between bank and public/private bond markets this new long dated institutional term loan market offers an interesting development for the coming years,” says Parry.
One such provider is Blackrock, though Natixis, Redington and Pinsent Masons among others are looking at how they might structure infrastructure debt into fund structures. “The margins on senior European infrastructure debt assets have become attractive as a risk/return proposition compared to when there was a lot of liquidity in the market,” says Philippe Benaroya, managing director and co-head of European infrastructure debt at Blackrock.
“These are fairly illiquid assets and that’s why they can offer enhanced returns. These instruments generally also offer high recovery rates due to extensive security and covenant packages.”
Liquid options
Focusing on core and essential public infrastructure assets, including social infrastructure, transportation and regulated utilities can provide a potential substitute for more liquid fixed income investments whether sovereign or investment grade exposure, adds Benaroya. This is something most pension funds are seeking to do as they fail to derive the necessary returns from much of their fixed income portfolios.
“These are generally strong credits generating stable cash flows and some transactions will see their credit quality improve over time,” asserts Benaroya, but what exactly are ‘strong credits’?
Credit quality
In some cases, debt is BBB or BBB- quality and at this level may include some construction risk. Brownfield projects that are operational with a track record will tend to be BBB+. Returns are around 250-300bps above Libor for northern and western continental Europe – possibly less in peripheral economies and there are differences across sectors – but compared to sovereign bonds, they will undoubtedly appear attractive.
“Infrastructure, if structured properly, should give the returns we seek and I can see ourselves substituting gilt hedging for it over time,” says Rubenstein. And though he accepts infrastructure debt is attractive, he is keen to emphasise the PIP is “focused on the equity and particularly on low risk and availability of assets”.
“This may even include equity for the construction phase – without the construction risk – if we can make that work,” he says. Though there is great demand for access to infrastructure, fear continues to undermine confidence.
“We have got to get past the fear pension funds have about greenfield investing” , says Rubenstein. “If you think we have problems, the US needs to spend $1trn on roads and bridges in the next three years.”
The other psychological obstacle is liquidity. PIP intends to offer a degree of internal liquidity, where at the end of each month or quarter, buyers and sellers will be matched at an agreed price.
“To my mind, there is plenty of demand for the cash, and an opportunity to shake up the way infrastructure is financed,” says Rubenstein. “We are looking at ways to get pension funds to invest.”
Access all areas
The formation of PIP and the arrival of infrastructure debt funds will undoubtedly open up the market not only to large pension funds, but smaller ones too. “Big funds can look after themselves, but small schemes don’t have the skills or resources,” says Rubenstein.
“A pooled fund would allow schemes with £100m-£200m to participate in PIP when it formally launches.” Anything that gives access to small funds has got to be commended, agrees Dervey. “You don’t want to invest £20m in a local hospital, you want the diversification a pooled vehicle can give you,” she adds. “Infrastructure will no longer be the preserve of the big schemes.”
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