As the global economy evolves, infrastructure liabilities emerge as a unique asset class with promising opportunities for investors. It provides a low correlation between the business cycle and attractive yields, fueling key sectors such as renewable energy and AI infrastructure. The public and private sectors are converging to meet the growing global demand for modern infrastructure. While governments lay the foundations through strategic investment, private capital is increasingly stepping in to drive innovation, address funding gaps and shape the future of key projects. This post touches on some of the topics that will be the scope of the upcoming CFA Institute Research Founder Brief, focusing on infrastructure debt.
Within the investment environment, in addition to low correlation with the business cycle, infrastructure debt has historically been a relatively stable source of return and a highly differentiated source within the portfolio. Capital-intensive tangible assets such as infrastructure loan transportation systems, energy facilities, and data centers. These loans are usually provided by private funds, either alone or in combination with public funds.
Private infrastructure obligations typically invest in regulated assets (which are rarely found in companies involved in infrastructure services or operations) with inelastic demand, either in monopoly or quasi-unitist markets. Debts are usually protected against cash flows generated by the project itself. The loan is tailored to the project's specific risk and ability to generate revenue. While most of the debt issued are advanced, some transactions also include junior tranches that provide attractive yields for risk-averse investors.
The asset class has historically grown at a steady pace, but has expanded more rapidly in recent years. This is driven by a favorable macroeconomic environment, such as pandemic-driven fiscal expansion and financial regulations after the GFC that limit the capacity of banks for many years. Duration of balance sheet liabilities. Since 2017, the global private infrastructure investment market has more than doubled, reaching more than $1 trillion per year.
Geographically, infrastructure debt is heavily concentrated, with the US and Europe leading the way.
Preferred macro environment
A significant boost to infrastructure debt has led to an increase in spending after government spending across developed countries.
The US Congress approved a massive infrastructure package in 2021, receiving dual-party support aimed at modernizing the country's aging bridges, tunnels and railroads and building new high-speed internet connections. A year later, the Inflation Reduction Act (“IRA”) added funding for large infrastructure projects with potential co-investment opportunities in the private sector.
In the European Union, the NextGen EU fund after the pandemic provided grants and loans for member states to spend on infrastructure projects. Finally, the UK was launched as a “alternative” for the European Investment Bank in June 2021 as a “alternative” for the European Investment Bank and was recently renamed the National Wealth Fund, making it a particularly successful UK sustainable infrastructure project, particularly in particular. Underdeveloped in the northern part of the country.
This recent push to revive the infrastructure of developed countries has been driven primarily by a desire to reverse decades of underinvestment in space from the public sector. However, it also spurred gusts of private sector activities due to attractive co-investment opportunities, and in some cases government spending was considered dangerous.
It is still unknown whether the macro environment will remain supportive. Reducing government spending – possibly to control balloon deficits – could cause slower infrastructure debt growth. However, in theory, it could spark more interest from the private sector amid the potential high yields in the context of reduced supply.
Promotion of renewable energy projects
Despite recent backlash towards environmental, social and governance (ESG) investments, so-called “green” investments in clean energy, climate mitigation and resilience continue to increase. Of course, the backlash against ESG can be attributed to a lack of clarity in evaluation criteria and an attempt to over-adjust disclosure, leading to large companies playing games of their systems.
By making the valuation criteria clearer, public opinion about ESG investment could be reversed. Additionally, pressure to reduce carbon emissions has led to strong demand for infrastructure investments in renewable energy, electrification and public transport. Financing for wind and solar projects, energy storage and electrified infrastructure is becoming a focus for investors.
Infrastructure liabilities expose investors to potentially attractive yields, while also fulfilling the “impact” mission by climate-conscious asset owners in particular in Europe, while also providing potentially attractive yields. It's a way to be exposed.
Building infrastructure for the AI revolution
The rapid rise in artificial intelligence (AI) has revealed the need for a new type of infrastructure. Essential data centers for AI processing and cloud computing are one of the latest drivers for infrastructure spending. Infrastructure debt provides a unique way to participate in an AI-driven future by funding the physical backbone that supports this technology.
Furthermore, AI energy consumption has emerged as a serious problem already addressed by building small reactors to power data centers.
These new facilities require significant capital and sophisticated management skills, and can create attractive investment opportunities. This is because debt can be issued to complement equity investments such as the recently created AI Infrastructure Fund.
Why infrastructure liabilities are attractive asset classes
Aside from the cyclical macroeconomic tailwinds, infrastructure debt appeals to investors for several reasons.
First, there is a unique risk return profile. Infrastructure debt usually indicates a low level of correlation with direct or consumer lending opportunities in the private market, as well as publicly traded bonds. What is somewhat overlooked is the fact that infrastructure debt also indicates diversification from the business cycle.
Another notable factor is the potential exposure to illiquid premiums. Infrastructure debt often exhibits lower liquidity than corporate debt, but as mentioned earlier, this is not necessarily negative. Although ju-search has not yet been made as to whether investors are compensated for abandoning liquidity, a fair argument is that non-liquidation will result in investors' knee reactions being broader market movements It means limiting opportunities for people to respond.
Finally, the risk of defaulting in the sector was historically lower compared to similarly assessed corporate debt. This is because infrastructure projects often have built-in long-term revenue streams. Many infrastructure assets act as monopolies, are subject to regulation and serve markets with stable, inelastic demand.
Fitness and Return
From a suitability perspective, infrastructure liabilities are investment opportunities targeted at liability-driven investment (LDI) strategies and are therefore attractive to pension funds and insurers with an investment range of over 10 years.
The quality of collateral is high. Funds aimed at stable yields usually invest in mature assets under management (brownfield), which often have a stronger credit profile, whereas assets targeting higher returns are subject to development phase You can focus on assets (green fields). However, risk mitigation technology allows even risk aversion funds to build transactions related to greenfield projects.
Most infrastructure obligations, including bonds, are issued as senior obligations and offer a safe position in repayment, but yields (usually around 6%) may not be attractive to certain investors. To strengthen the credit profile and reduce capital costs, sponsors may issue more risky, junior, or mezzanine liabilities with higher returns (10%+).
Outlook
The cyclical convergence of government spending, robust structural growth in climate investment, and the requirements of early AI industries drive unprecedented demand for infrastructure investment.
For investors, the combination of low correlations and economic cycles, attractive yields, and exposure to critical tangible assets makes infrastructure liabilities a compelling asset class. There is a tendency to be a low correlation between public equities and bond allocations.
Future depletion of public resources available for infrastructure investments is likely to be possible, serving as a catalyst for private money (acquires first loss position on the most risky projects) – private sector It could act as a hindrance to infrastructure debt.
Meanwhile, lower government spending could increase demand for private money to reduce the effects of crowding, leading to higher yields and more opportunities for potentially trained institutional managers .
