11.30.2012
By Terry Flanagan

Investors Eye Return To Infrastructure Financing

As investors go in search of yield in this low interest rate environment, demand for infrastructure finance—which can offer potentially high and stable returns—is rising.

Infrastructure finance has, like many other sectors, suffered since the onset of the financial crisis with some funds being exposed to the volatility of overpriced and over-leveraged assets.

And with heavily indebted governments unwilling to sanction new projects and global debt markets seizing up post-2008, many pension funds and insurance companies—the previous mainstays of the sector—have been unwilling to provide the long term finance needed to kickstart these projects.

However, that may be beginning to change as governments in Europe begin to look at ways to kickstart their flagging economies and put in place projects that investors can make adequate risk-adjusted returns from.

“Currently, institutional investors are redefining their investment and risk diversification strategies,” said Olli Rehn, the European Union commissioner for economics and monetary affairs, in a recent speech in Brussels.

“A return to infrastructure financing is clearly on the menu worldwide as international investors look for better return opportunities.”

Asset manager BlackRock has recently launched a European infrastructure debt investment unit based out of London in response to institutional client demand to channel capital into new infrastructure projects and secondary loan investments.

“Investors are looking for increased yield, and to exploit new investment opportunities resulting from global de-leveraging,” said Matthew Botein, head of BlackRock Alternative Investors. “Alternatives debt financing is a compelling proposition for investors.”

BlackRock’s new unit will help investors review opportunities to invest in investment grade infrastructure debt assets in sectors such as transportation, social infrastructure and regulated utilities.

Infrastructure investing offers different characteristics from other more traditional asset classes, which can represent barriers to entry to some potential investors. High up-front costs, lack of liquidity and the long asset life of the projects require significant scale and dedicated resources to understand the risks involved, resources that many investors are lacking.

And new capital requirements, such as the impending Basel III and Solvency II rules, may also hit infrastructure funding as more capital may have to be allocated to long-term debt projects. While investors in infrastructure projects could also face added sovereign credit risks due to the precarious state of many nations’ economies at present.

But infrastructure finance certainly holds the right building blocks for some longer term investors.

BlackRock says infrastructure debt is a natural complement to insurers’ fixed income portfolios, as it offers a cash yield, attractive liquidity premium and low correlation to other asset classes.

“We expect to see a continuation in the robust growth in the infrastructure market,” said Botein. “The OECD [the Paris-based economic think tank] estimates market size at $3 trillion by 2018 and $50 trillion by 2030, and alternative investments have doubled as a proportion of the institutional investment market in the last seven years.”

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