US-based Carlyle Group announced that it had reached a $2.8 billion final close on its second energy debt fund on 2 November 2016. 

Carlyle Energy Mezzanine Opportunities Fund II (CEMOF II) primarily targets mezzanine investments in projects and companies in the power generation and energy sectors and is one of the many US-based fund managers that are raising funds to invest in the debt space.

Other large fund managers including Brookfield, GIP and BlackRock are also in fundraising mode for future debt investments.

Brookfield, a manager that recently closed a $14 billion global infrastructure equity fund, is attracting institutional investors to its Brookfield Infrastructure Debt Fund I. The fund is understood to have launched in the first half of 2015 with a mandate to invest in senior and mezzanine infrastructure debt deals and transactions. Energy and transport are likely to be the main sectors of investment for the fund. 

GIP, which is set to reach final close at around $16 billion on its equity fund soon, also runs a credit product for which it has been reported as targeting $2.5 billion. Global Infrastructure Partners Capital Solutions Fund (GIP CAPS)'s latest investment consisted of $125 million of a $135 million secured term loan investment in a 453MW portfolio of power generation assets owned by Heorot Power.

BlackRock is also understood to be in the market fundraising for a $350 million debt fund to invest in Colombia's 4G toll roads, energy and transport sectors, in both the greenfield and brownfield space across the debt spectrum. 

US vs Europe

In a previous analysis article, IJGlobal noted how the European debt fund market sees the majority of managers taking the separately managed accounts (SMAs) route versus raising a fund. This difference in approach, compared to in the equity space, seemed to be attributable to the more recent nature of the asset class.

Since then, IJGlobal has learnt of a number of European managers coming to market with a debt fund. Allianz Global Investors is set to launch its second UK infrastructure debt fund; Natixis Asset Management is also fundraising for its first infrastructure fund and Legal & General Investment Management (LGIM) is considering launching its first infrastructure debt commingled fund.

The scope of the respective debt mandates in Europe is in contrast to in the US. While European managers tend to target predominantly senior secured, investment grade debt deals - especially at the outset - US debt funds seem to be more inclined to target investments throughout the debt spectrum, including both junior and mezzanine debt.  

While this might be taken as a sign of maturity of the US market versus the European one, Tavneet Bakshi, global head of project management & due diligence at funds placement agent FIRSTavenue says that both the US and European markets are relatively new to the debt space. But with some distinctions. 

"When we were doing our initial research of the GP universe for private, unlisted, senior infrastructure debt a few years ago, very few managers had an established, long-term track record. In the US, the larger insurers/life companies have expanded their infra debt capabilities across the listed and unlisted markets. Europe is slowly catching up," she says.

Jorge Rodriguez, global head of infrastructure debt at Deutsche Asset & Wealth Management (Deutsche AWM), confirms that for many US-based institutional investors debt is a more recent entry point into infrastructure.  "The debt market for infrastructure has historically been the domain of commercial project finance banks [...]. As such, it is still in its early days, though there has been much interest recently. Depending on the market and/or geography there may be structural elements which are being considered as institutions seek to allocate to infrastructure debt," he says.

When it comes to making distinctions between the European and the US debt fund market, Rodriguez points at two factors: higher yields and a clearer sector focus. "At the moment one clear distinction is yield. It is widely accepted that the US market currently provides a more attractive credit spread/risk premium to Europe. This is driven by both macro factors - including the ECB quantitative easing resulting in negative yields - and micro-economic drivers - including bank liquidity - which has continued to drive down spreads.

"Another key distinction is sector focus. The US market is defined by its large proportion of investment opportunities in energy and utilities (historically conventional power and more recently driven by renewable and midstream due investments to shale gas discovery and development) while opportunities in transportation have been historically few."

Conversely, the European market has historically exhibited a balance, with transport accounting for about half of the deals (or more) in infrastructure. In the US, the municipal (tax-exempt) bond market continues to serve as a reliable source of cheap and efficient financing for assets in the hands of municipalities (namely transport and social infrastructure assets), Rodriguez concludes.