Investment opportunities in infrastructure debt

www.globalfundmedia.com

special report

globalfundmedia

May 2017

Why infrastructure

is popular with

investors

Infrastructure

funds can create

a ‘Catch-22’

Global deal value

could exceed

USD500 billion

Investment

opportunities in

infrastructure

debt

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CONTENTS

INFRASTRUCTURE DEBT GFM Special Report May 2017

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In this issue…

03 Why infrastructure investing is proving

popular with investors

By James Williams

06 Global deal value could exceed $500bn

Interview with Michael McCabe, MUFG Investor Services

10 Infrastructure funds can sometimes

create a ‘Catch-22’

Interview with Craig Cordle, Ogier

INFRASTRUCTURE DEBT GFM Special Report May 2017 www.globalfundmedia.com | 3

Infrastructure has become a key area

of focus for institutional investors as

they look to diversify their fixed income

portfolios to access longer term, resilient

credit opportunities for income-like returns.

Within this asset class, infrastructure debt

is on the rise as investment managers

look to construct new debt vehicles: either

to provide direct lending to infrastructure

operators, to access well-established

municipal bond markets, or to structure their

own private lending programmes by issuing

tranches of unlisted bonds.

Last September, Schroders established

a new infrastructure finance capability

designed specifically to help institutional

investors access the asset class.

Commenting on infrastructure finance

as an asset class, Philippe Lespinard,

Co-Head of Fixed Income at Schroders, said

he believed it was set for future growth:

“We believe it is currently benefitting from

increasing demand from long-term institutional

investors due to the increasing supply of

projects, partly attributable to macro-economic

factors and changing regulations.”

Listed or unlisted?

From a structuring perspective, typically an

infrastructure fund will look to enter into

some kind of loan arrangement rather than

making a direct equity investment.

With respect to a listed fund, what

investors tend to find difficult to understand

is that there’s a re-characterisation, in terms

of what the fund does with the debt that it

is buying and selling and turning it into an

equity instrument, which can then be bought

OVERVIEW

Why infrastructure

investing is proving

popular with investors

By James Williams

INFRASTRUCTURE DEBT GFM Special Report May 2017 www.globalfundmedia.com | 4

OVERVIEW

and sold as shares on an exchange. More

popular is the private, unlisted fund.

“A private infrastructure fund will often

be structured as a limited partnership.

If investors wanted to hold equity you

could use a limited company in place of

a partnership or put a limited company

on top of a limited partnership to enable

some investors to hold equity and some

a partnership interest – there really are

multiple possibilities for bespoke structures

depending on investor needs,” explains Craig

Cordle, investment funds Group Partner at

Ogier in Guernsey.

Those thinking of structuring infrastructure

funds will need to consider where the assets

will be located, as well as the target investors,

before determining where best to domicile the

vehicle. The investment manager’s location

will also be an important factor.

“The manager will have to consider the

position under AIFMD and how the fund may

be marketed. Are any EU investors likely to

be targeted? Could they take advantage of

National Private Placement Regimes, which

we see frequently utilised successfully by

funds domiciled in Guernsey, as the Channel

Islands are not part of the EU, or does the

manager require full passporting rights?

“Also, think about what advisers will

need to be appointed and how exactly

investments will be made. Will this require

other entities as part of the overall structure?

If seed investments have been identified,

this will impact the disclosures which will

need to be made to investors and the level

of verification of that information required,”

explains Cordle.

A USD4.6 trillion hole

Doubtless there will be plenty of

infrastructure opportunities in Europe but

right now, it is the US infrastructure market

that appears particularly ripe for investment.

The municipal market supplies 80 per cent

of the capital for US infrastructure projects,

which could grow substantially if Congress

approves President Trump’s USD1 trillion

spending plan. As FTSE Global Markets

reported on 21st April 2017, an estimated

minimum USD4.6 trillion of public spending

on US infrastructure is needed by 2025.

“In general, President Trump has indicated

that he is in favour of projects such as

the Alaska Pipeline and LNG Project.

He wants US-built pipelines using US

suppliers, US steel, etc. Previously, there

was demonstrable opposition to pipelines

but under Trump it is a much friendlier

environment in terms of trying to push these

projects through,” remarks Michael McCabe,

Sales Director, MUFG Investor Services.

“The energy infrastructure sector seems

particularly deal rich. Our clients are buying

into existing pipelines, they are building wind

farms. We see interest both in brownfield

sites and greenfield investments, depending

on the risk appetite of the end investor.”

Approximately USD150 billion in

dry powder was ready to invest in US

infrastructure at the end of last year and

another USD50 billion or more was raised in

Q1 2017. From a supply/demand perspective,

infrastructure managers are scrambling to

keep up with investors and put their capital

to work. It is a nice problem to have.

“Unless the global economy collapses,

then I do believe there will be continued

demand to invest in these assets, not just

in renewable energy but core infrastructure

assets: roads, bridges, ports, tunnels. A lot of

these were built more than 50 years ago in

the US and need upgrading,” says McCabe.

Grande Prairie Wind project

Some asset managers are investing directly

into global infrastructure on behalf of

their clients by issuing unlisted bonds, as

opposed to locking investors into quasi-PE

fund structures.

This was evidenced recently by Allianz

Global Investors, which made an investment

of over USD400 million into the Grande

“We believe infrastructure

finance is currently

benefitting from increasing

demand from long-term

institutional investors due

to the increasing supply of

projects, partly attributable

to macro-economic factors

and changing regulations.”

Philippe Lespinard, Schroders

www.globalfundmedia.com | 6INFRASTRUCTURE DEBT GFM Special Report May 2017

MUFG INVESTOR SERVICES

The demand for infrastructure funds remains

evidently strong. Last year, these vehicles

raised USD62.9 billion in aggregate based on

figures provided by Preqin*. In Q1 2017, that

number had already reached USD29.5 billion;

nearly twice the amount raised in Q1 2016

(USD16 billion).

“We’ve seen increasing interest in

infrastructure deals, both listed and unlisted,”

states Michael McCabe, Head of US Sales,

MUFG Investor Services, the global asset

servicing arm of Mitsubishi UFJ Financial

Group. “The number of deals in Q1 2017 for

the US totalled USD50 billion and was fairly

concentrated in the energy sector; natural

resources, utilities, power plants. This year

we should see north of USD500 billion

committed to infrastructure deals, globally.”

Asia recorded the highest level of

financings, globally, in 2016. Some 552 deals

were completed for a record USD131 billion.

Europe recorded the highest number of

deals (555), worth USD97 billion, while North

America attracted USD96 billion.

“Australia is one of the key infrastructure

markets. There has been an increase of

pan-Asia deals in that country along with an

increased presence of Chinese development

banks. Between the China Development

Bank and the Export-Import Bank of China,

they are becoming major investors in this

space,” observes McCabe.

Then there is the Asian Infrastructure

Investment Bank (AIIB), a regional investment

bank proposed as an initiative by the Chinese

government that can lend up to USD250

billion for infrastructure. Doubtless that figure

will rise over time, especially if one considers

that China has USD900 billion of infrastructure

projects lined up to connect Asia with Europe.

The US infrastructure market grew 14.4

per cent from 2015 to 2016, says McCabe.

With the administration trying to get a USD1

trillion spending package through Congress,

there is reason for optimism.

“There are thousands of failing bridges,

roads and railways that need to be repaired

so even without the spending package,

infrastructure spending was still a necessity.

The question is, where does the money

come from? Will it be fully government

financed? Will the taxation regime be

reappraised to help attract more private

infrastructure funds to enter into public

private partnerships? And if so, what are the

risks associated with that?

“There are lots of questions that

require answering to address America’s

infrastructure needs,” says McCabe.

One clear trend that has emerged in this

asset class is infrastructure debt. USD11.5

billion in infrastructure debt was raised in

2015, compared to USD4.5 billion in 2014. In

2016, the unlisted infrastructure debt market

sought $25 billion in target investor capital

for a record 43 unlisted infrastructure debt

funds, mainly in North America and Europe.

Such is the level of growth in infrastructure

that one of the main considerations for

investors is determining the level of risk.

Do they commit longer term to greenfield

sites with no immediate revenue streams, or

invest in existing assets? Projects such as

the Fort Mojave Solar Project and the Alaska

Pipeline are operational assets while the

Chicago Union Station Redevelopment, for

example, currently has no revenue stream.

“Built assets appear to be more favoured

right now but as a consequence this is

pushing up valuations. That means there are

risks to infrastructure managers potentially

buying frothy assets,” says McCabe.

“Pipelines, wind farms, oil storage

facilities. Those are areas our clients are

involved in right now, raising funds with

USD10 billion or more in assets.” n

Global deal value

could exceed $500bn

Interview with Michael McCabe

Michael McCabe, Head of US

Sales, MUFG Investor Services

*The 2017 projections and

deal volumes / projects were

from Preqin’s Quarterly

Update: Infrastructure Q1

2017 published in April 2017.

The infrastructure debt –

listed and unlisted – stats

were from a September

2016 Preqin spotlight on that

asset class.

INFRASTRUCTURE DEBT GFM Special Report May 2017 www.globalfundmedia.com | 7

OVERVIEW

Prairie Wind Project; a 400-megawatt wind

farm in Holt County, Nebraska – the largest

wind energy project in the state’s history.

The financing consisted of unlisted bonds

with a 20-year term that were privately

placed with US and European investors via

AllianzGI’s established infrastructure debt

platform. The operator in this instance is

BHE Renewables, a subsidiary of Berkshire

Hathaway Energy, which owns one of

the largest renewable energy portfolios in

the US. The subsidiary was specifically

created to support BHE’s expansion into the

unregulated renewables market, including

wind, solar, hydro and geothermal projects.

Jorge Camiña is Director, Infrastructure

Debt, Allianz Global Investors. He confirms

that after first establishing an infrastructure

debt team in Europe in 2012 (first investment

took place in 2013), where it initially focused

on P3 and transportation assets, AllianzGI

expanded its reach by targeting the US

infrastructure space in 2015.

“Our first US transaction was the Indiana

Toll Road. We made a USD700 million long-

term investment and that quickly put us on

the map in the US,” says Camiña.

“Since then, we have a had a good run

in transportation and have made three

transactions in total: the Indiana Toll Road,

Chicago Skyway, and most recently (Q4 2016)

the Pocahontas Parkway in Virginia.”

He says that from a deal flow perspective,

a large number of P3 and transportation

assets are covered by tax-exempt financing,

which means the actual number of

transportation deals is quite limited.

“We realised that most of the infrastructure

investing opportunity in the US lay in the

power and energy space. That’s where

we’ve been increasing our focus over the

last 12 to 18 months. Since then we’ve

closed two transactions in the power space;

the first of which was the Grand Prairie Wind

Project in December,” says Camiña.

A lot of power assets, in the renewable

energy space, are also able to enjoy tax

incentives that require more complex

structuring to monetise such benefits,

meaning there aren’t many that are suitable

for an institutional investment grade profile.

There are some cases, like the Grande

Prairie Wind, where the sponsor (in this

case BHE Renewables) has its own tax

capacity and that facilitates the access to

institutional investors to such deals. “They

monetised the tax incentives and that helped

to create a straightforward debt structure,”

confirms Camiña.

“The second transaction we recently

closed in February was also in the wind

space: the Balko Wind Project based in

Beaver County, Oklahoma. We are confident

we’ll be able to close a few more deals in

our pipeline by the end of the year. That

said, tax reforms could possibly push back

on the timing of some of these transactions,

when there is more clarity on what those tax

reforms look like.”

Affiliates of DE Shaw Renewable

Investments LLC (DESRI) own Balko Wind. The

way the deal was structured, AllianzGI agreed

to provide the necessary funding to refinance

Balko Wind’s existing bank financing. The

transaction was executed as a “back-leverage”

loan in order to tailor the solution to the

structure that DESRI had in place.

Both of these investments differ slightly in

composition. With respect to Grand Prairie,

this was becoming operational close to the

same time that AllianzGI was making the

investment. BHE financed the transaction

with its own internal resources and then

opened it up to institutional financing, close

to completion.

“Balko is slightly different. Several banks

were providing the trade finance and we

stepped in to take over the refinancing of

that debt. Balko has been operational for a

little over a year now,” says Camiña.

The credit profile of these renewable

energy deals is the operational asset itself.

These projects usually have a highly rated

creditworthy counterparty (typically a utility)

that buys the power and green energy

certificates from the project under a long-term

“We realised that most of

the infrastructure investing

opportunity in the US lay in

the power and energy space.

That’s where we’ve been

increasing our focus over

the last 12 to 18 months.”

Jorge Camiña, Allianz Global Investors

INFRASTRUCTURE DEBT GFM Special Report May 2017 www.globalfundmedia.com | 8

OVERVIEW

Also, infrastructure operators like the idea

that they can borrow at a fixed rate, long

term, as it gives them certainty of funding

costs and avoids having to use swaps.

“Beyond solar and wind, I think there is

growing activity in other areas of energy

such as biomass and new energy efficiency

technologies – smart grids for example.

These require more in-depth analysis

before structuring deals but they provide

an interesting opportunity for future fund

investing. I think this more interesting area of

energy infrastructure will continue to grow,”

suggests Albanese.

The third way

As UBS and AllianzGI have demonstrated,

investors have the option of investing in

dedicated debt fund vehicles such as

Archmore, which provide a co-investment-

type opportunity, or by taking direct exposure

to the operational assets by holding long-

term private bonds.

These solutions are not always the most

optimal for institutional investors. They might

not necessarily want to be in a fund but

at the same time they might not have the

in-house expertise to source deals directly.

Secondly, a number of investors require

advice before allocating: the asset class is

incredibly complex and offers many different

risk/ performance mix to investors that

may be difficult to differentiate and assess.

Pedagogy should be a cornerstone of

infrastructure investment.

“Thirdly, risk monitoring is top of their

agenda and they want a close relation with

their asset manager to understand how the

risks change following the initial investment,

and reporting that is as bespoke as

possible,” comments Charles Dupont, Head

of Infrastructure Finance, Schroders.

contract (PPA – Power Purchase Agreement).

“Since the Borrower is a special purpose

vehicle that actually owns the Project, the

credit profile of these transactions is typically

ring fenced from the Sponsor. We finance

specific assets so it’s just project risk that

we are taking. Our financing is specifically

tailored to the capacity of the cash flows of a

particular project,” adds Camiña.

Archmore infrastructure debt platform

In Europe, UBS Asset Management has

established the Archmore Infrastructure

Debt Platform to cater to institutional

demand, specifically targeting private lending

opportunities in the mid-market sector.

“This is a part of the market that we

identified as lacking the necessary capital,”

explains Tommaso Albanese, Global Head of

Infrastructure, Real Estate & Private Markets,

UBS Asset Management. “We thought there

was an opportunity to focus on the private

side of the market rather than the public

market, to provide debt financing and build

investments for our clients with attractive risk

return profiles.

“Infrastructure represents the most

conservative, but equally a very attractive

area of private debt. Investors are looking for

alternatives to fixed income investments and

infra debt offers them a yield pick-up thanks

to the illiquidity premium. These are assets

with long-term, stable cash flows, typically

secured with a pledge on the underlying

physical assets. This is the ‘real asset’

aspect to the asset class and that gives

institutions a lot of comfort.”

To date, Albanase says that the team has

invested in a ferry and port transportation

company in Scandinavia, a solar company

in Spain and an energy company in France,

to name but a few. He says the plan is to be

fully deployed in Archmore by the year-end,

“so that we are in position to prepare for the

launch of our next fund”. The platform has

raised USD630 million from 17 institutional

investors across Europe and Japan and as

Albanese states: “There is plenty of demand

and we think it is a trend that is here to

stay. Infrastructure companies appreciate the

benefits of working with long-term investors

and, equally, investors are interested in keeping

capital invested over a longer time horizon. So

there is a strong alignment of interests.”

“Investors are looking for

alternatives to fixed income

investments and infra debt

offers them a yield pick-

up thanks to the illiquidity

premium.”

Tommaso Albanese,

UBS Asset Management

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ogier.com

www.globalfundmedia.com | 10INFRASTRUCTURE DEBT GFM Special Report May 2017

From a structuring perspective, infrastructure

funds are most frequently established as

either a limited partnership or a limited

company. Partnerships are the familiar

vehicle for private funds, whereas companies

will be used for listed vehicles.

Obviously there will be nuances,

depending on the asset class and the

type of investors being targeted. “You can

give limited companies characteristics that

resemble a limited partnership, particularly

in offshore jurisdictions like Guernsey, but

generally it will be one of the two options

described,” says Craig Cordle, investment

funds Group Partner from Ogier in Guernsey.

There are some inherent difficulties with

infrastructure funds, given the incubation

period for setting up one of these vehicles.

Cordle notes that ideally, investors want the

fund vehicle to have a seeded portfolio in

place or at the very least identified target

assets – they will want to be confident that

the capital will be deployed and, particularly

in the case of listed funds, that their

investment will not be subject to extended

cash drag.

Not all managers, however, can come to

the table with a book of seed assets which

are lined up and ready for investment by the

new fund vehicle.

This creates a bit of a Catch-22 for many

of these funds. How does the investment

manager balance investor expectation for

capital deployment with the need for a long

enough runway to identify the right assets?

Time is not always on their side.

“Some have fallen down because of the

difficulty of raising a book of capital from

investors given that the investment period

may potentially be over multiple years,” says

Cordle. “Identifying and vetting investments

takes time – this is one of the reasons

why the largest infrastructure funds tend to

launch in the private space.

“There are some notable listed

infrastructure funds but it remains easier to

raise a private infrastructure fund given the

ability to draw down commitments gradually

and because of the size of investment which

investors would prefer to make.”

Private funds generally raise higher

amounts of capital than listed funds. What a

private fund provides, in a limited partnership

arrangement, is the ability to use capital

calls and draw down capital as and when

required, whereas a listed fund would need

to have all of its shares fully paid up before

listing on the London Stock Exchange or

elsewhere.

A listed fund could potentially decide

to invest in a single or limited number of

infrastructure assets, thereby making it easier

to put the capital to work, but the difficulty

with this is that the fund may not then be

considered suitable for listing in the eyes of

the listing authority.

“The regulator will expect to see a

spread of investment risk for a premium

listing on the LSE and that the portfolio

will be comprised of a sufficient number

of assets. What investors will be looking

for is disclosure in the prospectus on the

nature of those assets. Fortunately, there are

alternatives in the form of the Specialist Fund

Infrastructure funds

can sometimes create

a ‘Catch-22’

Interview with Craig Cordle

Craig Cordle, investment funds

Group Partner, Ogier

OGIER

www.globalfundmedia.com | 11INFRASTRUCTURE DEBT GFM Special Report May 2017

OGIER

projects in the energy sector will require a lot

of diligence by fund managers.

“For private infrastructure funds investing

in the energy sector, there will likely be

added regulatory complexities that could

increase costs for the fund; especially if it

requires working with advisers, lawyers and

specialist valuation agents in local markets.

“These are specialist investments.

Investors will want assurances that their

capital is protected and being managed

appropriately,” says Cordle.

Cordle says that in terms of structuring a

private fund, the most frequently used option

is to have a limited partnership where a

group of investors band together as limited

partners under a partnership agreement.

“The general partner of the partnership

then appoints the investment manager. This

is the tried and tested model and is generally

no different for private equity and real estate

funds,” adds Cordle.

In Europe, there are various markets to

consider for setting up limited partnerships.

There is the English limited partnership

and each of the Channel Islands has a

partnership regime too. In addition, in

recent times, jurisdictions like Luxembourg

have updated their legal regime to better

support global private equity, real estate

and infrastructure managers with the

introduction of a Special Limited Partnership

(SCSp), which unlike the SCS, has no legal

personality and therefore more closely based

on the Anglo-Saxon LP model.

“As a limited partnership will not typically

have a legal personality, the LPs should be

taxed on a look-through basis.

“The team structuring a new vehicle will

look to minimise tax leakage within the

fund structure, which one of the reasons

why we see fund promoters heading to

Guernsey. The aim will be for investors to be

taxed principally in their home jurisdiction,”

says Cordle.

He notes that structuring teams will look

to take advantage of jurisdictions with good

double taxation networks, as well as those

jurisdictions which are familiar to investors.

“The ultimate structure of a fund will

depend on a combination of factors – where

the assets are located, where the investors

are based and how investment will be

structured,” concludes Cordle. n

Segment of the Main Market of the LSE for

vehicles which will invest in fewer assets or

may not satisfy all of the rules comprising

Chapter 15 of the UK Listing Authority’s

Listing Rules.

“By comparison, those considerations

may be seen to fall away for a private

fund. Spread of investment risk will be for

the manager to determine (based on the

investment proposition agreed with the LPs),

not the listing authority by reference to the

relevant rules,” explains Cordle.

Given the sheer depth and breadth of

infrastructure projects to choose from, one

might be forgiven for understanding why

the investment manager, looking to launch

an unlisted fund, might want to attract what

are known as ‘blind pool’ investors. In short,

these are investors who commit to investing

in a vehicle with no seed assets or identified

target assets.

This is a much harder sell, however.

“Unless you are a particularly high-profile

fund manager with an extensive track record,

investors will want to know upfront what

the portfolio is expected to be composed

of,” states Cordle. “If the infrastructure

investments you are planning on making are

in an area of the market where there are

significant investment opportunities, then

investors maybe more minded to invest blind.

“It could be that the fund itself doesn’t

invest directly in infrastructure but rather is

exposed to the asset class – for example, a

fund-of-funds.

“You could see how a listed vehicle

would be attractive from a manager’s

perspective. The listed vehicle provides the

investment manager with a pot of permanent

investor capital to seed a portfolio of private

infrastructure funds.”

Getting the seed capital and the initial

traction is critical, after which it becomes

easier to attract other investors.

Aside from the sheer number and variety

of infrastructure projects, another element of

complexity that managers have to consider

is the regulatory and political vicissitudes of

the countries they invest in. This creates a

range of potential risks.

“Investing in a wind farm, for example,

might be predicated on the operator selling

electricity at a particular price, which could

be affected by regulation. Infrastructure

INFRASTRUCTURE DEBT GFM Special Report May 2017 www.globalfundmedia.com | 12

OVERVIEW

While returns are very much deal-specific,

the common denominator is that most

institutions are looking to get a pick-up

(a spread) premium over the price of the

equivalent bond of the PPA off-taker; that is,

the utility company taking the power being

generated. This involves looking at how

that utility’s bonds are trading in the capital

markets and applying a premium for the

operational risk and more limited liquidity of

the project financing.

“Let’s say that the bond of the utility off-

taker for a similar average life as the project

is trading at 4% yield. If one then prices in

wind risk, operational risk, liquidity premium

and so on, this will lead to adding a pick-up

premium to that coupon. This pick-up varies

a lot depending on the deal and the sponsor.

“Ultimately, there are three ways for

institutions to invest in long-term resilient

credit: sovereign debt, utility bonds, and infra

debt. If you want a pick-up over sovereigns

you buy utilities, and if you want a pick-up

over utilities you buy infra debt, which is

where we come in,” explains Camiña.

RV opportunities

Within the senior secured debt arena,

Dupont points out that there are a number

of sub-segments that offer differing relative

value opportunities to investors. There

are, he says, four different sub-segments:

long duration credit, short duration credit,

brownfield sites and greenfield sites.

Brownfields are existing operational assets,

greenfields are new projects with significant

construction risk and no proven track record

in terms of operational performance.

“Let’s first consider lower RV opportunities

in the market. For example, long duration

greenfield projects have seen evident

Dupont joined the firm in 2015 to set up

its infrastructure finance division, since when

it has gone on to raise more than EUR1.1

billion of AUM.

What Schroders has done, says Dupont,

is develop a third way of investing by

creating tailormade solutions by combining

the benefit of investing in a closed-end fund

and keeping the proximity with the fund

management team as if it were in-house.

As Dupont explains: “That EUR1.1 billion

in AUM has been sourced from 12 investors,

with whom we have developed five distinct

funds, ranging from senior secured debt to

junior debt and equity solutions. Every time

we structure a dedicated investment mandate,

it is based on the investors’ specific demand

in terms of absolute return, on average

maturities, on geographic diversification,

sector diversification, etc. All of these criteria

are taken into account to build a mandate

that is unique to the investor.”

Each fund is for one investor or group of

investors. Once each of the funds is closed,

no other outside investors can come in. They

are, in very simple terms, funds-of-one that

are made available just to the investor club;

in this case, 12 institutions. Dupont says

that most of the allocation has gone into

the senior secured loan infrastructure fund,

specifically because most of the investors

are European insurance groups.

“Under Solvency II regulation, the rules

offer a discount on the Solvency Capital

Ratio to those insurers who allocate to

infrastructure debt, provided investments meet

a number of criteria; they can gain a 30%

discount on capital requirements, compared

to corporate bonds of similar rating.

“If you also consider that the premium

for holding infrastructure debt, compared

to corporate bonds, is 150 basis points or

so – we have actually generated 200 basis

points over comparable listed bonds – then

it creates a very attractive relative value

opportunity,” explains Dupont.

The pick-up premium

This ties in with Camiña’s assessment of the

return potential in infrastructure debt.

As mentioned, the deals that AllianzGI put

together involve a single tranche of bonds,

which are amortised over the life of the deal

contract.

“If you also consider that

the premium for holding

infrastructure debt,

compared to corporate

bonds, is 150 basis points

or so, then it creates a

very attractive relative value

opportunity.”

Charles Dupont, Schroders

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OVERVIEW

Sterling, it becomes more difficult for non-UK

investors because of the currency risk and

the lower price of Sterling, which has fallen

significantly since last June. In turn, there is

also more political uncertainty. At Schroders,

our client base is Euro-denominated and

we are recommending them to invest in

Sterling-denominated infrastructure at a later

stage when the impact of Brexit will become

clearer,” explains Dupont.

Strength of partnership

For all of the excitement surrounding

infrastructure investing, be it in the US or

Europe, investors and managers alike have

to take confidence in those servicing the

assets. In that respect, fund administrators

play a vital role in terms of validating assets

and providing a much needed layer of

independence to ensure that the fund is

doing exactly what it should be doing.

“One of the areas we can support

infrastructure managers is by providing

finance for subscription lines to minimise

capital calls,” says McCabe.

“Investors want the assurance that

someone other than the investment manager

has looked at the calculations related to the

fund, looked at the management fees and

that their returns have been verified and

calculated by a third party.”

In addition, MUFG Investor Services will

do independent reconciliations and from a

cash flow and investor perspective, perform

all the necessary AML/KYC checks to make

sure everything is in order.

“Factor in that there’s also an annual audit

and it gives the investor the assurance that

fraud risk has been minimised.

“Look through reporting is another key

strength of ours. We work with some of the

largest pension funds in the US who want to

pierce through the fund down to the portfolio

company or investment level to understand

their exposures in those portfolios. We

are a clear market leader in the industry

with respect to the accuracy, depth and

breadth of reporting available to our clients,”

concludes McCabe.

Regardless of how institutions choose to

invest in infrastructure, it is clear that the

dynamics continue to look favourable. It’ll

be interesting to see if total inflows for 2017

break the record books. n

demand from investors looking for asset

liability matching instruments. But with a

lack of pipeline investments, and significant

investor capital to deploy, this is supporting

low rates relative to corporate credit.

“By contrast, in short duration brownfields,

where companies are offering loans of

five to seven years, they have consistently

offered 200 basis points above Euribor over

the last five years. The team at Schroders is

very focused on brownfield projects rather

than greenfields in the senior secured fund,”

explains Dupont.

In total, Schroders has made 19 individual

transactions across the five funds over the

last 12 months including offshore wind, energy

grids, oil pipelines and storage facilities.

Infrastructure risks

There are many risks to investing in

infrastructure of which investors will need to

be mindful – although these are applicable in

varying degrees to any investment. Regulatory

risks, political risks, economic risks – these

could all potentially play a role in affecting the

performance of operational assets and the

future cash flows they generate.

By way of example, Cordle says that

a risk to the economics of a fund can

be introduced if additional infrastructure

projects are envisaged. He cites the Dartford

Crossing, just outside London, which faces a

second tunnel being built under the Thames,

reducing the volume of traffic. Infrastructure

investors would look to see how their

investment is safeguarded in this scenario.

“No infrastructure asset is fully protected.

Regulations can change. Economics can

change. There’s no guarantee that an

electricity producer with a fixed contract

for a certain number of years will be able

to negotiate a similar deal in the future.

That’s part of the cost of setting these

funds up – there is often an awful lot of due

diligence involved and a critical assessment

of the intended investments,” says Cordle.

The UK is arguably Europe’s most

important infrastructure having first privatised

its airports, water companies and rail line

operators 30 years ago.

But last year, a curveball in the form of

Brexit occurred, instantly changing the optics

of its infrastructure market.

“As these projects are denominated in