The benefits of infrastructure debt

Infrastructure debt offers an excellent investment opportunity given the relative stability of returns and low default risk that derive from the ‘essential purpose’ nature of the borrowing business. The low default risk is accompanied by relatively higher recovery rates in the unlikely event that a default does occur. The combined result is lower expected losses from defaults and hence very low or even non-existent loss rates overall, compared to otherwise similar corporate credit risk. This opportunity is often masked by complextiy.

Infrastructure debt is not only comparatively more defensive than other types of credit risk asset, but can offer a partial substitute for traditional defensive assets such as sovereign bonds ... 

Infrastructure debt is a high quality credit risk asset that pays a reliable income stream based on interest payments that may be inflation related. As a result, infrastructure debt is not only comparatively more defensive than other types of credit risk asset, but can offer a partial substitute for traditional defensive assets such as sovereign bonds, especially where these are offering either artificially low returns (and perhaps negative real returns in present times) or where once safe-haven sovereign bonds now pose significant concerns about both credit and market value risks.

This investment strategy is often taken up by our investors in the form of individual mandates, although it also forms a sub-set of our broad-based credit fund, the Alternative Fixed Income Fund.

In general IFM’s pooled credit funds will not invest debt in infrastructure businesses in which the IFM infrastructure equity portfolio is invested as this can give rise to doubling up of exposures for some of IFM’s investors. This rarely gives rise to lost opportunities as what is a good debt deal for infrastructure equity investors is not often good value to debt investors. The opposite is also true.