Fund analysis: AMP Capital Infrastructure Debt Fund IV

As the interest for mezzanine strategies spreads among equity managers, AMP Capital has reinforced its reputation in this space by raising a total $6.2 billion on its latest vintage.

On 17 October (2019), AMP Capital signed off final close on its latest mezzanine debt strategy AMP Capital Infrastructure Debt Fund IV (IDF IV). It did so by going above the hard cap at $4 billion on the fund and raising $1 billion in co-investment rights and $1.5 billion in separately managed accounts (SMAs).

A total of 86 investors from 14 countries invested in the fund, with strong demand from institutional investors in Korea, Japan, Canada and the UK.  

A more specific regional breakdown of the fund's capital shows that LPs came from:

  • Asia – 52%
  • Europe – 23%
  • North America – 25%

The breakdown by investor type shows that:

  • corporate pension funds – 32%
  • insurance companies – 29%
  • public pension fund – 16%
  • sovereign wealth funds – 6%
  • credit unions – 6%
  • banks – 8%
  • asset managers – 2%
  • foundations – 0.2%
  • family offices – 0.1%

IDF IV launched at the end of 2018 with a $3.5 billion target. At the time, two cornerstone investors – believed to be Samsung Securities and CDPQ Revenue Fixe Americain VI – contributed a total of $1 billion. By June this year (2019) the fund had raised $2.7 billion.

IDF IV deploys capital into debt deals across utilities, energy, digital and transport projects in OECD countries. Like AMP's other debt funds, it primarily invests in brownfield and refinancing transactions, in mezzanine debt.

So far, the manager has deployed $2 billion of the fund's capital into 10 assets mainly across Western Europe and North America, with one Asian investment.

Sector-wise, digital infrastructure and energy – both conventional generation and renewables – have been the sectors in which the manager has closed the most deals.

Average deal ticket size for the fund is up to $200 million. However, the manager has the ability to write larger loan notes up to $400 million with IDF IV.

Target IRR is gross 10% per year. Andrew Jones, global head of infrastructure debt, told IJInvestor that AMP Capital has been able to hit the target across its debt vehicles so far.

IDF IV's main fund is domiciled in Luxembourg, but the vehicle has additional sleeves domiciled elsewhere to accommodate investors from outside Europe.

Kirkland & Ellis acted as the fund's legal adviser.

Appetite for mezz debt and the rise of mid-co debt

The success of mezzanine – or subordinated – debt strategies goes beyond that of AMP Capital, who has a strong track record. A number of traditionally equity-oriented fund managers have set up debt strategies, especially in the US.

Most recently, I Squared has been targeting a launch of its maiden credit strategy in 2020 following the appointment of Thomas Murray from Apollo Global Management.

Market rumours also suggest that Starwood is looking into setting up a credit strategy, which would be in line with the firm’s mandate to focus on energy deals.

Vantage Infrastructure is also said to either be nearing market with or recently launched a US-focused debt infra strategy.

Existing strategies coming from similarly equity-oriented managers include Brookfield’s two debt vehicles – Brookfield Infrastructure Debt Fund and Brookfield Infrastructure Debt Fund (Europe) – and GIP’s two debt vehicles – GIP Spectrum Fund and Global Infrastructure Partners Capital Solutions Fund.

Like AMP Capital’s IDF range, all of the above strategies target returns in the region of 10% gross IRR.

“We are definitely seeing great momentum in our business for mezzanine debt, and it is true that its popularity is growing among the owners of infrastructure assets too,” Jones says.

According to the manager, investors have seen compressed returns in core infrastructure equity for quite some time now and mezzanine debt has become more attractive on a relative basis. For infrastructure asset owners, mezzanine debt is increasingly popular as a financing solution in both the US and Europe, Jones adds.

The opportunities for higher-yielding debt investments in infrastructure continue to grow. “We have started seeing some managers targeting mid-co debt strategies, which is a new layer between senior and subordinated debt. This is still investment grade debt, but with slightly higher returns compared to your traditional 3% senior debt IRR.”

Mid-co debt, Jones carries on, is not issued by the operating company but by a company that owns the operating company and is expected to return around 4-5%.

In a cash-crowded market like that of infrastructure funds, it is natural to see managers exploring new strategies. Time will tell whether they will prove as successful as their equity counterparts have.