On 20 September 2016, UBS Asset Management (UBS AM) reached a €570 million ($635.5 million) final close on Archmore Infrastructure Debt Platform (IDP), its first infrastructure debt fund launched in 2014.

This was only the second debt fund focused on energy and infrastructure that IJGlobal has reported reaching close since the start of 2016, following that of La Banque Postale's second infrastructure and real estate fund in April 2016.

In August it was revealed that AB’s infrastructure debt platform was being shutdown with its entire team leaving the business, which prompted IJGlobal to look into the discrepancy between the amounts being raised in debt versus equities over the past 18 months.

A number of European managers have raised significant amount of money in the debt space over the years following the global financial crisis in 2008, but they have predominantly done so through separately managed accounts (SMAs) rather than funds.

At a closer look, the European infrastructure debt market seems divided between managers like Allianz Global Investors, M&G, IFM Investors, AXA Investment Managers, BlackRock and, more recently, Schroders, who have favoured the SMAs route, and managers like UBS AM, Edmond de Rothschild, AMP Capital and France-based Rivage, who, in different ways, use a pooled structure to raise capital to invest in debt deals and transactions in Europe. Macquarie launched its debt business in 2012, manages around £3 billion across segregated accounts, £829 million through its UK inflation-linked debt fund and recently launched a second generation fund.

A relatively new asset class

The difference in the structures adopted by European managers in the debt space compared with the equity space might be due to the more recent nature of the asset class. While European private funds and institutional investors started looking at the equity infrastructure market around 15 years, in the wake of the success of foreign managers such as Macquarie and IFM Investors in Australia, the debt space in the continent has been traditionally dominated by banks and the public sector, which have only started to retreat after the beginning of the global financial crisis in 2008 and more stringent regulation was implemented.

“The opportunity available in the debt space is very significant in Europe. For every transaction, about 20-30% is equity and the rest is debt. However, institutional investors have only recently started allocating money to the sector, moving away from low yielding government and corporate bonds. Borrowers have also begun to appreciate the benefits of this new pool of capital which can replace or be complementary to their traditional bank financings,” Tommaso Albanese, chairman and CIO of UBS AM’s infrastructure debt platform says.

Schroders head of infrastructure finance Charles Dupont, who has recently spearheaded the launch of the firm’s infrastructure platform, agrees that the infra debt market is less mature in Europe compared with the equity market and explains why an SMA-approach might be preferable for investors.

“Just like in equity, the infrastructure debt market offers a wide range of risk/return opportunities and the offering of infrastructure debt fund is not translating such segmentation yet. Investors may be confused with the current offering and for large investors the SMA approach might be more relevant. When required, it might improve alignment of interest with asset managers,” he says.

Opportunity on offer

While he agrees that European institutional investors are still assessing the asset class, Edmond de Rothschild’s CIO Jean-Francis Dusch says Europe offers a strong debt transaction pipeline and says there is enough space for banks and institutions to coexist and meet investor needs and demand. “Europe is an interesting market from a debt perspective and has a lot of refinancing need. I do not rely on banks retreating the lending space, but I believe the pipeline is sufficient for institutional and private investors to come in.”

European managers seem to agree that the debt financing need is significant in Europe and that banks have cleared up some space for institutional investors to enter the debt space, especially due to the Basil III regulation that requires them to keep higher levels of capital aside. 

Disintermediation of credit is starting in Europe and infrastructure debt is emerging, Dupont says. “Almost all new debt refinancing in Europe explore the alternative source of funding offered by institutional investors investing direct or through asset managers and investors market share has grown from about 0% to 20% within the last four to five years […] infrastructure assets generate predictable and resilient cash flows, infrastructure debt offers solutions to shareholders to reduce risk to bank refinancing cycles, and therefore risk on distributions to shareholder. There is probably more rational than in others sectors to expect significant growth in infrastructure debt in the coming years,” he concludes.