09 May 2023
Infrastructure debt: An essential ingredient
Companies: BNP Paribas Asset Management
09 May 2023
Companies: BNP Paribas Asset Management
With inflation returning and investors on the hunt for stable yields, insurance companies should explore how an infrastructure debt allocation can support their investment strategy.
In a high inflation environment, insurers are looking for assets that can provide stable income with the potential of providing some indexation. Infrastructure debt can be part of that solution.
Most infrastructure assets are essential parts of society, and demand remains relatively stable even as other kinds of assets are subject to significant volatility. We believe this makes infrastructure an essential part of any investment portfolio.
As insurers seek out high-yielding assets, the benefits of infrastructure investing should make the asset class stand out. Core European infrastructure debt yields approximately 5% a year on average, and subordinated debt can yield as much as 8%1.
Infrastructure debt assets can offer inflation protection through links to pricing indexes such as RPI or CPI, meaning they have historically performed relatively well through inflationary environments.
They are typically structured as senior debt and often with floating-rate coupons, providing investors with further security of income and stability. With demand remaining relatively stable, pricing increases rarely lead to falls in demand or asset value.
The essential nature of infrastructure assets also makes them attractive from a sustainability and responsible investment perspective. Renewable energy is a rapidly growing theme within the asset class, but social infrastructure such as education and healthcare assets have been a core element for many years.
Demand for infrastructure debt is rising as more and more investors look to private markets to diversify their portfolios and boost potential returns. Last year saw a record level of fundraising from infrastructure managers, with $139 billion raised by 67 funds2.
Despite high levels of competition for assets, we still see areas of significant opportunity. In Europe, the drive from policymakers and governments to reduce their reliance on Russian energy has led to a rapid increase in demand for new and clean energy assets, such as solar, wind, and hydrogen power.
The renewables sector is an area in which we expect to see significant growth, presenting a clear dual opportunity for insurers to access potential risk-adjusted returns as well as boosting their environmental, social and governance (ESG) investment credentials.
The significant level of investor interest in infrastructure, coupled with the estimated $330 billion in capital waiting to be deployed in the debt markets, means there are many investors chasing deals. Those that can take on innovative transactions and explore niche sectors may find more opportunities at attractive prices.
As more institutional and retail investors seek to access infrastructure, the asset class is expected to grow significantly over the next few years. Assets under management in the infrastructure sector – including debt and equity – are estimated to reach $1.9 trillion by 2027, compared to $1.1 trillion at the end of June 20223.
There are strong long-term themes at play in several areas of infrastructure. One notable area is the digital sector, which has experienced increased attention with ever-improving technology and the greater need for communication. The rise of online services such as entertainment streaming and online payments – coupled with more remote and hybrid working arrangements – has made robust and fast internet connections vital. Datacentres and high-speed internet are now essential to many economies, with the share of the infrastructure market taken up by these assets having increased by approximately 20% since before the pandemic.
Government finances have been stretched by the support programmes put in place during the Covid-19 pandemic, meaning there is less public money available for new infrastructure investment. Demand remains, however, meaning there is a strong pipeline of opportunities in areas such as healthcare. Ageing populations across the developed world mean there is a long-term need for healthcare investment.
Renewable energy will remain a strong theme for years to come as governments and companies seek to reduce their carbon footprints and meet net-zero emissions targets. Successful adoption will also require investment in energy grids and storage, as well as power generation.
For all these areas and others, the recent market turbulence may have given rise to additional funding needs, potentially presenting an attractive entry point for some assets.
Infrastructure debt is a much broader and deeper asset class than investors may realise. Insurers can diversify across themes, industry sectors, geographies, and currencies, and can access opportunities in junior and senior debt depending on risk appetite.
This is a maturing asset class that is ready to become a core part of insurance companies' portfolios.
1 Source: BNP Paribas Asset Management/Prequin., April 2023
2 Source: Preqin Global Alternatives Report – Infrastructure, December 2022.
3 Source: Preqin Global Alternatives Report – Infrastructure, December 2022.
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