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Institutional investors more willing to provide infrastructure debt – FSI

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GLOBAL - Institutional investors are increasingly willing to switch their commitments to infrastructure projects by providing more and more debt at a time when many fund managers struggle to secure investments for their equity vehicles.

Niall Mills, head of European infrastructure asset management at First State Investments, told IPE that, since the financial turmoil in 2008, institutional investors had faced a number of challenges when seeking investments to match their liabilities.

As a result, an increasing number of those investors are now seeking to make debt commitments, filling the gap left by some European project finance banks that have had to clean up their balance sheets in the wake of the financial crisis.

"Large insurance companies in the UK, as well as pension funds and sovereign wealth funds, can obtain better coupons on debt and are now looking at providing between £10m (€12.1m) and £40m for each infrastructure project," Mills said.

"Given that typical infrastructure projects are quite large, it means each of them involves a group of investors."

However, he said institutional investors were mainly looking at brownfield projects as opposed to greenfield deals, which normally carry construction risk and where return characteristics are quite different.

Brownfield projects enable investors to evaluate cash flow well in advance, as well as the return on investments attached to such deals, whereas greenfield projects imply that no revenues will be provided throughout the construction phase. 

Meanwhile, a study conducted by Preqin shows modest interest in infrastructure fundraising among institutional investors in the first quarter.

Even though infrastructure fund managers continue to attract fresh capital from investors due to the 10 funds holding an interim close in Q1, only five funds reached a final close over the same period, with $2.6bn (€2bn) in commitments, according to the survey.

Elliot Bradbrook, manager of infrastructure data, said: "2012 has begun slowly in terms of the number of infrastructure funds reaching a final close.

"However, the vast majority of funds on the road are relatively new to the market and in the early stages of fundraising, meaning we are likely to see more interim closes taking place this year as opposed to final closes."

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