Managers set to cash in on infrastructure debt upswing
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May 30, 2016 01:00 AM

Managers set to cash in on infrastructure debt upswing

Arleen Jacobius
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    Hadley Peer Marshall said Brookfield Asset is focusing on mezzanine lending.

    Money managers are bulking up on staff and resources, betting that infrastructure debt will be the next big thing for investors searching for yield.

    StepStone Group LP, Standard Life Investments Ltd., Brookfield Asset Management and Mitsui & Co. Ltd. added or bolstered infrastructure debt businesses in the past 18 months. Even managers with more established infrastructure credit businesses — such as Aviva Investors, Macquarie Group Ltd. and AMP Capital — have been adding staff.

    Managers are following the money. Some $11.5 billion was raised for infrastructure debt funds last year, more than double the $4.5 billion raised for infrastructure debt funds in 2014, according to London-based alternative investment research firm Preqin.

    Banks had been the primary lenders for infrastructure projects until recent regulations tightened restrictions on their lending business in general. As the banks have stepped back, infrastructure and other alternative investment money managers have come forward to offer financing for infrastructure projects. Infrastructure is one of several areas, including real estate and private equity, in which new providers of financing are filling in as banks continue to lend, but only sparingly.

    This year through May 16, two funds raised $1.6 billion combined; there still are 27 funds aiming to raise $21.1 billion, Preqin data show.

    Brookfield Asset Management is expanding into infrastructure debt with a focus on mezzanine lending, said Hadley Peer Marshall, New York-based senior vice president in Brookfield's infrastructure business.

    Ms. Marshall joined Brookfield from Goldman Sachs Group Inc. in July to help the Toronto-based real asset firm expand its credit capabilities, she said. Brookfield already has a business investing on the equity side of infrastructure. The infrastructure business totals $51 billion.

    “We are looking to deploy capital into mezzanine structures,” Ms. Marshall said. “Banks pulling back on leverage is leaving opportunities for private credit to play a more extensive role.”

    Not only is fresh capital needed to finance new projects, but also to refinance current debt, Ms. Marshall said.

    "Widely recognized'

    “Infrastructure debt strategy has become widely recognized by various asset management firms over the past 24 to 36 months,” said Marietta Moshiashvili, managing director, energy and infrastructure, in the New York office of TIAA Global Asset Management.

    Banks are scaling back on their businesses offering infrastructure debt — commonly referred to as project finance, Ms. Moshiashvili said.

    Banking executives are finding their way to money management firms looking to build their infrastructure debt businesses in light of investor interest in the sector.

    Low interest rates and a concern that rates won't stay low for much longer are driving new infrastructure debt business. Borrowers are willing to accept provisions in debt offered by managers that are absent from most bank debt financing.

    “The trend is driven by the borrowers' desire to lock into historically low interest rates even if the structure includes make-whole premiums and longer maturities associated with the fixed-rate bond financings,” Ms. Moshiashvili said.

    A make-whole premium pays the lender for interest income lost if the borrower pays off the loan early, she explained.

    Increased money manager interest in infrastructure debt is making real assets even more crowded.

    “Currently, there is a lot of competition across the real asset space as investors chase higher-yielding opportunities and allocate a greater percentage of their annual programs to these sectors to access multiple benefits, including uncorrelated returns and income generation ability of the assets,” Ms. Moshiashvili said.

    Still, not all managers are aiming at the same type of infrastructure debt strategies or the same areas of the world.

    Babson Capital Management LLC's private debt group sees opportunities in new construction, or greenfield, projects, said Emeka Onukwugha, managing director and head of Babson's private debt group.

    While greenfield projects make up about half the market, institutional investors have traditionally tended to prefer existing infrastructure, or brownfield, projects, said Mr. Onukwugha, who is based in Springfield, Mass. Babson started ramping up its infrastructure loan business in 2012.

    But that preference is slowly changing as new debt structures allow institutions to be paid for the construction risk, he said. For example, in the past, project finance bonds provided for the money to be drawn down immediately. Now the capital is drawn over time to avoid investors having negative carried interest.

    It's a slow rate of improvement, but more investors are willing to invest in greenfield debt, Mr. Onukwugha said.

    “Over time, there is a higher risk-adjusted return if you can roll up your sleeves and analyze the construction package and get comfortable with it,” he said.

    Greenfield projects are a small piece of Babson's infrastructure portfolio, but investing in greenfield provides side benefits. Investing in greenfield allows Babson executives to gain greater knowledge of the project because they're in on it from the beginning, Mr. Onukwugha said.

    Greenfield investing also extends the length of time of Babson's infrastructure investment.

    “Our preference is to be in the asset as long as we can,” Mr. Onukwugha said. “Being in greenfield allows us to be in the asset a lot longer.” Babson managed about $6.8 billion in infrastructure debt as of March 31; about 13.5% of the portfolio is in greenfield investments.

    A lot of opportunity

    Brookfield executives see a lot of opportunity in Latin America as a number of countries there increase transportation projects, Ms. Marshall said. “There is a lot of opportunity and limited financing” in Latin America, she said.

    In Colombia, for example, there is a public-private partnership to build roads and other transportation projects. Brazil and Mexico also are expanding roads.

    “It's a good time to be in infrastructure, hence there is a lot of fundraising,” Ms. Marshall said.

    Investor interest in infrastructure debt is growing rapidly, especially in the past 12 months, but from a very small base, said Monte Brem, partner and CEO of StepStone Group, in La Jolla, Calif.

    Investors are becoming more sophisticated with their infrastructure investments, delineating infrastructure along the risk spectrum, Mr. Brem said.

    Earlier this month, StepStone hired a 15-member infrastructure team and announced the acquisition of European private debt and hedge fund manager Swiss Capital Alternative Investments AG.

    The combination will give StepStone the ability to offer infrastructure and real estate debt investments, he said.

    “Firms are trying to catch up fast,” Mr. Brem said. “Infrastructure debt will be a growing area.”

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