Executive Summary

Cashflow-driven investors are familiar with the arguments for investing in assets that offer contractual income with varying levels of credit risk based on investor risk-reward appetite. Inflation-linked income streams are highly prized but fixed income streams can also offer a compelling alternative to nominal gilt holdings and private infrastructure debt is an asset class that offers exposure to these income streams.

For liability-driven investors, private infrastructure debt denominated in the same currency as their liabilities, is an asset class that has received significant attention. Approaching an investment in infrastructure can be quite daunting even for experienced investors making their first foray into infrastructure. What follows is an attempt to demystify the asset class.

Several papers have been written on how to use these cashflows to match liabilities and so our focus here is less on this aspect. Instead we aim to add to the available material out there by summarising our view on the assets underlying these cashflows and the specific factors that influence the stability and predictability of those cashflows.

The paper covers the following:

– Background and context to the asset class by recognising that infrastructure is not a homogeneous asset class, outlining three simplified categories of infrastructure assets.
– We then delve deeper into the nature and characteristics of infrastructure debt and some of the key drivers of risk and return.
– We turn to portfolio construction by evaluating infrastructure debt as a substitute for an institutional investor's existing credit holdings (for example, corporate bonds).
– We tackle the listed vs unlisted debate and show, using available data, that when considering an investment in infrastructure debt, the risk-adjusted returns available on private infrastructure debt are sufficiently compelling to consider moving beyond listed infrastructure bonds.
– Those focused on a LDI (Liability Driven Investment) strategy understandably tend to have a 'home-bias' to cashflows that are denominated in the same currency as their liabilities. That said, for those investors who may be prepared to consider a tactical allocation to other currencies, we show that there are selective opportunities to access attractive yields globally.
– We then move on to some common implementation questions. A common concern with any asset class is whether the time is right and, specifically, whether there is too much money chasing too few assets. We look at the infrastructure debt deal pipeline in the main developed markets (UK, Europe and the US) and show that the pipeline is strong.
– Finally, on manager selection, we highlight what we consider to be important considerations in choosing an infrastructure manager, including the ability to source the right deals and adequately measure credit risk for private transactions.

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