We believe the higher yielding debt segment of the market currently can offer a highly attractive risk/return profile many insurers after adjusting for Solvency II capital charges.
Amongst an economic backdrop of low interest rates, unprecedented levels of monetary and fiscal policy and a potential economic downturn, investors are still left with the conundrum of where to allocate their portfolios to provide both attractive and stable return opportunities. Here, we consider the growing infrastructure market and the opportunity it presents to institutional investors as we continue to emerge from the global pandemic as well as outlining some of the key considerations for investors and we share latest in the AGI approach to generate higher-end credit returns by investing in core, core+ and core++ / value-add infrastructure corporates, mostly on a subordinated basis. Is it time to consider a higher yield infrastructure debt strategy?
Growing Infrastructure Market
Unlisted infrastructure assets under management ("AuM") has experienced considerable growth over the last 15 years. In particular, AuM has roughly doubled since 2015. The asset class has continued to attract investors seeking stable, cashflow based yields.
Global AuM for unlisted infrastructure stands at $655bn as of June 2020. Preqin predicts this will grow at a CAGR of 4.5% to reach $795bn by 2025.
Unlisted infrastructure assets under management, 2000-2020
As we assess the market opportunities and where best to allocate a portfolio, we take stock of the current market environment and consider some developments expected to arise in the coming years. 2020 proved to be a challenging year due to the COVID-19 pandemic. Global lockdowns have resulted in a deep contraction of the economy, some local businesses have had to close and those which have managed to stay afloat have had to focus on maintaining enough liquidity to operate. Whilst the overall infrastructure asset class has proven to be resilient, specific subsectors have had to deal with their own set of disruptions due to changes in demand for consumer-based assets including the transportations sector, energy sector and also digital infrastructure as consumer habits change.
As a result investors can assist by providing capital financing to facilitate the role out fibre networks, participate in capital structure optimizations where refinancing opportunities exist and finally balance sheet repair opportunities in cases where short to medium term financing is required.
So why is now the right time?
- Strong demand for credit in the performing higher yielding infrastructure debt space
- Lack of capital supply in the mid to high single digit EUR return segment and absolute yield opportunity
- Natural extension of the existing Infrastructure Debt platform
- Long-term market dynamics - Net-zero 2050 goals, EU taxonomy and the energy transition
European sovereign yield curves
For insurers junior debt offers a unique profile where investors can capture a high complexity, or illiquidity, premium for often a better credit profile compared to other asset classes of similar ratings or returns.
With shorter durations of 5-10 years it is well suited for insurers with shorter-term liabilities and for surplus portfolios such as shareholder assets.
Finally, we believe the higher yielding debt segment of the market currently offers a highly attractive risk/return profile many insurers after adjusting for Solvency II capital charges.