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Portfolio perspectives | Article - 4 Min

The resilience and diversity of infrastructure debt

Daniel Morris
2 Authors - Portfolio perspectives
04-06-2023 · 4 Min

For investors eyeing stable long-term income from a broad and diverse asset class, European infrastructure debt can be a resilient solution. It has been as robust in times of crisis – witness its performance during the pandemic – as it has been across economic cycles. What is its secret? Infrastructure provides services that are in demand whatever the economic climate.  

Rates, project costs and returns

We expect growth to lose some momentum in 2023. Europe will likely feel the drag from a contraction in the US. At the same time, the European Central Bank will feel the need to keep policy rates high over time to slow demand and thus contain inflation.

Higher interest rates not only mean higher (infrastructure) project financing costs, but also change the relative attractiveness of investments.

The gap between the dividend yield of eurozone equities (using on the MSCI EUM index) and 10-year German government (Bund) yields has fallen to its lowest since 2010, signalling a revaluation that also applies to fixed income alternatives such as infrastructure debt.

Infrastructure bonds – Solid features

Aside from the economic impact of the war in Ukraine, the attitude of governments and society towards energy security has changed. There is now more support for green energy. Policymakers have prioritised solar and wind power as well as green hydrogen. This focus should boost demand for essential – green – infrastructure. It highlights the solid fundamentals of infrastructure debt.

Infrastructure bonds benefit from longer-term dynamics. Demand for infrastructure services (which include power, water, telecommunications, and transportation), is relatively inflexible, meaning that price increases do not lead to big drops in demand and neither do economic downturns. Arguably, this lack of cyclicality rubs off on infrastructure bonds.

Moreover, infrastructure service pricing is often indexed. Investing in infrastructure can thus be seen as a practical inflation hedge (see Exhibit 1). We also note that infrastructure bonds typically have floating-rate coupons, tracking market developments. This adds to the stable value of the debt. Other features include the monopolistic positions of many service providers and the high barriers to entry for competitors. For example, one motorway between cities typically suffices, giving the toll booth operator a monopoly on that stretch of road.

Attractive investment opportunities

A key area is decarbonisation of infrastructure to help governments meet net-zero emissions targets. This includes car charging platforms, the electrification of rail travel and green mobility.

The demand for power is inevitably increasing, in particular for green electricity. We are seeing more financing transactions in areas such as biogas, distributed energy, energy efficiency and recycling.

Increasing renewables generation as well as distributed solar and green hydrogen involve capital spending on smart grids and upgrading transmission networks.

We are seeing a regular pipeline of opportunities in the healthcare infrastructure sector, boosted by post-pandemic demand and a scarcity of public money. The economy of the future will experience major demographic shifts. Greater rural-urban migration and population aging will drive demand for services such as healthcare or day care, or the deployment of fibre glass networks in rural areas.

Now more than ever, investors are looking beyond returns to the impact of their investments, financing projects that benefit the environment or local communities. Renewables are an obvious target. Challenges include measuring a project’s impact and ever evolving regulations.

Bond issuance has been expanding steadily as new infrastructure is built to keep up with technological progress and existing infrastructure is modernised. This broad and diverse market saw some EUR 310 billion in deal value in 2021 (latest data available); 70% was financed with debt.[1]

Infrastructure debt valuations

Competition and abundant liquidity have put pressure on pricing. There has been some repricing in sectors such as digital technology and energy. A scarcity of materials for greenfield projects or capital for renewables projects may impact business plans. However, an estimated USD 330 billion of dry powder from institutional investors supports the market.[2] We believe this should keep valuations stable.

We have now seen five years of strong fundraising, with 2022 a record year for capital raised for infrastructure. To what degree this continues will depend on the asset allocation plans of investors. During periods of high volatility and market uncertainty, investments often go towards high-quality assets with a defensive profile on one hand and to repriced high-yielding opportunities on the other.

Both are available in European infrastructure debt markets.

You may find investment-grade bonds[3] with a senior ranking at a yield of close to 5%. Other features include low volatility as well as bonds targeting ESG friendly projects. This segment offers diversification from traditional corporate credit.

Investors looking for higher yields can earn absolute returns close to those of core equity from subordinated infrastructure debt.

Market outlook  

Within private markets, infrastructure is the second-fastest growing area in terms of retail and institutional assets under management. Data provider Preqin foresees compound annual growth of more than 13% until 2027. The pipeline is particularly full for renewables projects. We’ll likely see more digital (telecom) transactions in view of the need for telecom towers and data centres.

Given the sustained infrastructure investment needs, and demand from asset allocators looking for a stable asset class with attractive yields, we believe the future for infrastructure debt is bright.

[1] Infranews & Inframation, October 2022  

[2] Preqin, December 2022  

[3] Equivalently rated based on internal ratings


Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Environmental, social and governance (ESG) investment risk: The lack of common or harmonised definitions and labels integrating ESG and sustainability criteria at EU level may result in different approaches by managers when setting ESG objectives. This also means that it may be difficult to compare strategies integrating ESG and sustainability criteria to the extent that the selection and weightings applied to select investments may be based on metrics that may share the same name but have different underlying meanings. In evaluating a security based on the ESG and sustainability criteria, the Investment Manager may also use data sources provided by external ESG research providers. Given the evolving nature of ESG, these data sources may for the time being be incomplete, inaccurate or unavailable. Applying responsible business conduct standards in the investment process may lead to the exclusion of securities of certain issuers. Consequently, (the Sub-Fund's) performance may at times be better or worse than the performance of relatable funds that do not apply such standards.
Private assets are investment opportunities that are unavailable through public markets such as stock exchanges. They enable investors to directly profit from long-term investment themes and can provide access to specialist sectors or industries, such as infrastructure, real estate, private equity and other alternatives that are difficult to access through traditional means. Private assets do, however, require careful consideration, as they tend to have high minimum investment levels and may be complex and illiquid.

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