Why is infrastructure debt such hot property right now?
It has been quite some time that infrastructure debt funds have found much favor with institutional investors, especially among insurers and pension funds. The attraction has its reasons. Government bonds are not at all attractive for institutional investors due to low yields. In comparison, infrastructure debt funds offer long term and reliable cash flow that makes it more attractive to investors. The rising demand for IDFs or infrastructure debt funds has also raised concerns about possibilities of yields being lowered as prices of funds go up. To understand the spurt in demand for infrastructure debt funds, one has to look back at the ways infrastructure funding used to happen traditionally.
Realigning funding methods
The global financial crisis that happened in 2008 changed the ways of infrastructure funding. Restrictions were imposed on banks’ lending that became much more regulated and governments did not have the money to spend. The gap that was created in funding has been aptly filled up by the introduction of infrastructure debt funds that allowed institutional investors to provide loans originated privately to infrastructure projects directly, thus opening up immense opportunities for institutional investors.
It’s not new but renewed
Institutional investors did take interest in infrastructure debts even earlier but the intensity of interest that we see now is something that has been renewed. Earlier, the only way institutional investors could get involved with infrastructure projects was by taking the equity route, which was not a direct form of investment. Infrastructure debt funds now give the opportunity of direct investment, which is one of the main reasons for its attraction.
Shorter span of investment
Investments in infrastructure would usually mean long time frames, usually about 30 years. Assets used to be valued on the basis of cash flows worked on a 30 year span. In today’s context, this concept still holds good for Greenfield infrastructure projects; those that have to be built from the conceptual stage. But there are opportunities of investing in “brownfield” assets too, assets that are already up and running, as these might need repairs, upgrade or expansion. In such cases, cash yields are expected to be delivered in much shorter time. It also gives complete protection against cost and time over runs that are associated with Greenfield projects.
Inflationary cover is ensured
The biggest concern for investors is inflation as they are more interested to look for yields that are insulated from inflationary effects. Corporate bonds, though high yielding are volatile in nature and less reliable. Government bonds give low yields. Higher inflation and rising interest rates are countered in infrastructure loans that are offered with floating rate of interest, which is another reason for its great attraction.
Predictable cash flows
Institutional investors are much inclined to investments that assure predictable cash flow. Infrastructure debts are ideal for meeting this goal. Investing in core economic infrastructure assets ensure security of investment accompanied by long time steady returns, just what investors would like.
The annual gap between available funds and investment needs till 2030 is estimated at US$500 billion and this is enough to bring smile to investors.