Infrastructure Debt

A diversifying income solution for long-term investors

Challenges faced today by traditional asset classes mean that long-term investors seeking sources of stable, enhanced yield and secure cashflows are increasingly looking to private market alternatives such as infrastructure debt.

Infrastructure loans can offer an attractive investment alternative to fixed income for investors seeking to diversify their portfolios and access the illiquidity premium available from private loans.

The debt is secured by high quality real assets which tend to exhibit low volatility and stable cash flows leading to historically lower default rates and higher recovery rates than similarly rated corporate bonds.

Drivers of global Infrastructure investment

Almost everyone relies on infrastructure in one way or another. Whether it is taking the train to work, having clean drinking water, turning on the lights, surfing the internet or visiting a hospital. Infrastructure touches our lives on a daily basis.

But deteriorating infrastructure assets, rising populations, and the drive for sustainable development are driving countries’ need for substantially increased capital investment into communications networks, renewable energy, transport and other systems that support economic growth and improve the lives of their peoples.

Infrastructure is typically divided into two major categories:

  1. Economic infrastructure: transport, utilities and power, telecoms, storage and parking) that provide essential services that typically operate under the terms of a licence or a concession agreement
  2. Social infrastructure: hospitals, student accommodation, public transportation etc that are typically supported by contractual arrangements with no volume risk.

Infrastructure assets are typically capital intensive (which creates high barriers to entry) and exhibit a high predictability of future cashflows which are the principal source of payment of interest and repayment of capital.

5 reasons to consider investing in infrastructure debt

Incorporating infrastructure debt into a diversified investment portfolio has the potential to:

  1. Generate visible, high quality and stable long-dated cashflows secured by high quality real assets
  2. Enhance yield by capturing illiquidity premia when compared to listed corporate bonds
  3. Improve portfolio diversification owing to the asset class’s low correlation with traditional credit
  4. Increase the resilience of portfolios given low default risk and a historically strong recovery rate for the small proportion of loans that may default[2].
  5. Help investors align with the UN Sustainable Development Goals (SDGs) and demonstrate positive contributions to their achievement

Making them potentially attractive to insurance companies, infrastructure debt investments may also qualify for preferential capital treatment under Solvency II, stemming from the low volatility and diversifying characteristics of the asset class.

Risk considerations

As with all investments, there are risks to investing in infrastructure debt which need to be managed to the greatest extent possible.

General risk factors of investing in infrastructure debt include currency risk, credit risk, and liquidity risk where the is a limited or non-existent secondary market for the assets. Investment in real asset finance should normally be on a long-term buy and hold basis.

Other risk considerations for long-term investors include but are not limited to:

  • Potential for unfavourable change to regulation
  • Transaction and operational complexity
  • Leverage
  • Market risk
  • Pre-payment risk

The value of investments may fall as well as rise and you may not get back the full amounted invested.

Sources:
[1] Bridging infrastructure gaps: Has the world made progress?  October 2017 | Executive Briefing – McKinsey Global Institute
[2] Moody’s Investor Service, Annual Default Study 2019

Disclaimer:
This page is for informational purposes only and does not constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services and should not be considered as a solicitation or as investment, legal or tax advice. Past performance is not a guide to future performance. The value of investments, and the income from them, can fall as well as rise and investors may not get back the amount originally invested. The strategies discussed herein may not be available in all jurisdictions and/or to certain types of investors.