Infrastructure projects traditionally require significant levels of debt financing. Prior to the global financial crisis, it was commonplace for debt to account for anywhere up to and beyond 90% of total asset value, supported by limited levels of investor equity. Despite this, however, the contraction of the credit markets post-2008 has severely restricted the flow of available and affordable debt from traditional sources. Consequently, infrastructure fund managers have found it difficult to source the long-term funding needed to support both new developments and asset re-financings. In order to compensate for this shortfall in supply, a growing number of infrastructure fund managers have begun marketing debt funds as an alternative to traditional debt.
At present there are 46 unlisted infrastructure debt funds worldwide, a considerable increase on the 27 such funds 18 months ago. To date, 28 infrastructure debt funds have reached a final close, raising an aggregate $15.7bn and a further 18 infrastructure debt vehicles are currently on the road, targeting an aggregate $10.6bn from investors. These funds account for 12% of all infrastructure funds on the road and 11% of total capital being sought by fund managers. Of these 18 debt vehicles, 12 have already held at least one interim close, raising $1.6bn towards their collective fundraising targets.
EIG Global Energy Partners is the most prominent infrastructure debt fund manager by total capital raised, having raised $7.9bn across its four infrastructure debt vehicles. These funds are global in nature and make both debt and equity investments in energy and natural resources-related opportunities. Other significant debt fund managers include US-based Darby Overseas Investments and Canada-based Cordiant Capital, which handle nine infrastructure debt funds between them that are focused on Asian and emerging market infrastructure projects.
In terms of primary geographic focus, Europe is the most targeted single region, with 10 debt funds primarily focused on European assets. However, in terms of aggregate capital raised/sought, North America is the most important single area of activity for the infrastructure debt fund market, with $9.3bn raised, or targeted by, debt funds primarily focused on the region. Eighteen debt funds are primarily focused on regions outside of the European, Asian and North American markets, seven of which target investment opportunities in South America.
Institutional investor interest in infrastructure debt funds is certainly growing. At present there are 131 institutional investors worldwide that have either previously committed to an unlisted infrastructure debt fund, or would consider doing so in the future. As with any new or emerging strategy, institutional investors are likely to be cautious when committing capital to infrastructure debt funds, although more investors are becoming attuned to the benefits of utilizing various strategies to access the infrastructure market. In the post crisis environment, investors are likely to be attracted to those funds offering more predictable yields with a lower risk/return profile, as opposed to higher-risk strategies. This applies even more so for strategies that can offer portfolio diversification – a feature that infrastructure debt fund managers will look to capitalize on.