Private infrastructure debt is set to become one of the most attractive asset classes of the moment. With long-term interest rates now at a high plateau after a period of famine, the yields offered by this asset class are at attractive levels for investors looking for long-term prospects, and offer an attractive way of contributing to sustainable development and combating climate change.
According to the OECD, infrastructure investment needs are colossal, estimated at around €6,000 billion to meet people’s needs between now and 2030. Private debt funds will play a key role in deploying the necessary capital.
Infrastructure provides essential services to the population, such as telecommunications, renewable energy, social services (schools, universities, hospitals, etc.) and water distribution and treatment. Technology is also present, with data centres for example. These needs and demands will continue to exist regardless of the economic climate (because structurally there will always be a need to build hospitals, schools, etc.).
A resilient, solid investment
Infrastructure choices remain essential if we are to achieve our sustainable development objectives and combat climate change. For investors, these assets generate stable, predictable and recurring cash flows. They can be resilient to economic shocks and are uncorrelated with equity markets, with less volatile performance. Logically, operating contracts for these infrastructures are often for very long periods and can provide income over several decades.
The sector offers a form of long-term protection against these marked variations, since infrastructure operating contracts are often index-linked.
The illiquidity of infrastructure funds can be criticised. But never mind, this aspect generates a bonus, an ‘illiquidity premium’ specific to the asset class, which offers an additional yield of around 1% compared with a conventional investment grade bond (minimum BBB), explains Bérénice Arbona, Head of Infrastructure Debt at LBP AM. Another interesting perspective is that the latest statistics show that default rates for players in the infrastructure sector are lower than in other segments. “The debts are secured and offer collateral. The recovery rate (the proportion of investment recovered in the event of financial problems) averages around 80%. The quality of the bonds in our portfolios is around the BBB rating level, without going below BB- for the time being. In short, infrastructure funds can provide exposure to good credit quality securities with long-term visibility and resilience,” adds the manager, who has 20 years’ experience in this field.
These funds are mainly aimed at institutional investors who are able to hold their position until the securities mature (the last debt is repaid). A fund’s investment period can extend to three years. Unlike private equity, maturities are longer, up to 30 years. During this period, the investor will mainly receive interest but also, over time, depreciation linked to the investments made.
Target profitability of 5 to 5.5% gross
To date, LBP AM, a major player and leader in sustainable investment, has developed 8 infrastructure funds, representing over €3.2 billion invested, including an impact fund on the theme of energy transition, in line with social and environmental challenges classified as article 9 according to SFDR*. Open to subscriptions until April 2025, this fund targets a return of 5 to 5.5% gross, with an average rating for the bonds in the portfolio of around BBB-. Between 500 and 700 million euros will be deployed in financing operations, with three target themes: decarbonisation of the energy mix, sustainable mobility, and efficiency in energy consumption and storage.
For asset managers, one of the challenges is to maintain a strong and diversified pipeline of transactions. And at this level, the new “industrial revolution” represented by the energy transition offers a host of opportunities, particularly in terms of decarbonisation, electrification and energy efficiency infrastructures. For example, LBP AM has invested in waste infrastructure, biomass energy production, onshore and offshore wind turbines, solar photovoltaic installations, electric charging stations and the circular economy. This investment in these categories of infrastructure contributes to the objective of reducing CO2 emissions set by the Paris Agreement.
In total, LBP AM manages €72 billion**.
* Regulation (EU) 2019/2088, known as Sustainable Finance Disclosure – SFDR, imposes transparency obligations on sustainable investment funds. Article 9 covers funds with a sustainable investment objective.
** By the end of September 2024