In the UK, AMP Capital is hoping to raise £150m for its Infrastructure Debt Fund Limited, scheduled for launch in the first half of this year, while global player Macquarie recently won a £200m mandate from an unnamed UK pension scheme for a new UK inflation-linked infrastructure debt fund. It will target investment grade opportunities on a smaller scale, starting from £10m in sectors such as utilities, renewables and offshore transmission owners (OFTOs).
While larger schemes are dipping their toes in debt, it will take time for smaller pension funds to broaden their horizons.
“One of the problems is that unlike Canadian, Australian or Dutch pension funds where there are large industry or public sector schemes that are grouped together, British pension funds tend to be relatively small,” says Gershon Cohen, head of infrastructure funds at Aberdeen Asset Management. “They tend to lack in-house specific sector expertise and appropriate resource, which is why a degree of aggregation makes sense, as does accessing the opportunity via a focused fund manager. However, there are not that many fund managers with specific experience of investing in the construction phase of greenfield projects or indeed operational assets in social infrastructure, and although the PIP had originally aspired to creating an internal management platform the result is that the PIP has appointed an equity infrastructure fund manager.”
The banks are back
Duncan Hale, senior investment consultant at Towers Watson, adds: “Historically, most investors gained access to infrastructure through equity because it generates inflation- linked steady cash flows and is a better fit to meet liabilities. There are not that many projects with infrastructure debt that can do this because the majority of these assets are Libor linked since the market had historically been dominated by banks. However, debt has more security in the capital structure and its main attraction is that it offers a low risk, reasonable return. The issue at the moment is that pricing is tight because the banks are back.”
It is well documented that the banks retreated from long-term lending in the wake of the financial crisis, but they have suddenly reappeared over the past year. No one expects this to be a permanent trend, but only a phase whereby they are taking advantage of current market conditions and the time lag between now and 2019 when the more onerous Basel III regulations fully take hold. This increased competition combined with the lack of projects on the block has investors mining more attractive opportunities in other parts of the private debt market.
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