As everyone knows, the global recession is ongoing. But have you noticed that the infrastructure sector is hardly affected as it continues to prosper? Consequently, nations across the globe with struggling economies are encouraging investment in infrastructure to promote recovery and alleviate poverty. Many governments of the still-thriving emerging nations are eager to build the facilities to continue their development. They are opening their doors inviting greater opportunities for infrastructure investors in their country.
Infrastructure assets yield fixed income component as well as Infrastructure debt. As a complex investment category, infrastructure debt is well-managed by knowledgeable and sophisticated institutional investors who can interpret all the rigmarole and complicated work involved in investments. Financial rewards will be long-dated, stable, cash flow-driven returns.
The first reason is that institutional investors are interested in stable, long-term cash flows to match their long-dated liabilities. Second, investors are interested to invest in private debt markets for its potential earnings stem from complexity premium. Both requirements satisfy infrastructure debt. Third, banks are traditionally very weak in supplying infrastructure debt whereas the supply or need for additional financing continues to grow estimating global infrastructure spending requirements to 2030 to be around $50 trillion. New investment opportunities are offered to those dislocated in the market.
Developers are not used to pension fund requirements and institutional capital sources since banks no longer offer long-term lending. There is currently inadequate flow going through the market. While this is not a great issue for most infrastructure debt issuers, other borrowers are finding it difficult to finance their activities that exist in new investment opportunities.
To build solid debt expertise and experience, some large institutional investors are hiring large market teams and searching for direct investors. Third party investment managers are used to benefit from their expertise in investment and to widen networking in the marketplace. Banks continue short-term lending; however, both investment managers and institutional investors have the opportunity to benefit from the gap in long-term financing.
Good risk profile investments – Although infrastructure debt often has a level of risk similar it offers higher margins, partly due to its illiquidity premium.
Favorable capital charges – They are possible for regulated solvency 2 investors.
Good risk diversification - Investors are able to achieve to achieve good diversification within the asset due to the varied nature of the projects. They have the chance of investing in different project structures and sectors.
Long-term prospects - Projects are given strategic economic and social importance of adequate energy supply, hospitals or motorways. They are funded as the economy and society are dependent on the project over an extended period
Security - Historical data showed that investments are offered low default rates in infrastructure. Returns are lowered and not involved in the disadvantage of infrastructure asset so it has fewer risks while investment term is shorter typically from 3-7 years.
Benefits of infrastructure debt are reasons why investors are joining the bandwagon.