2020: Year of the debt fund?

As widely expected, the fundraising market saw a healthy final quarter in 2019. After a modest Q3, when 15 funds logged $8.4 billion in capital, Q4 closed at $40.4 billion across 12 funds.

More than half of that capital, however, came from Global Infrastructure Partners (GIP), which closed its Global Infrastructure Fund IV (GIP IV) at $22 billion.

As we look at the 2019 full-year figures for the fundraising and capital deployment market, it might seem as more of the same can be expected in 2020. Large volumes of capital will continue to be raised – Brookfield is expected to announce final close above $20 billion on its fund IV this quarter (Q1) – and the definition of infrastructure will continue to expand with more deals expected in telecoms, energy transition and care homes.

However, the top three funds to reach final close in Q4 2019 signal that a new trait might emerge. In a fairly rare occurrence, one of the three largest vehicles to reach final close in the period was a debt fund:

Mind the gap

In 2019, equity funds raised some $84.5 billion versus around $11 billion raised by debt strategies across senior, junior, and mezzanine debt and mixed equity and debt strategies.

The gap is still significant, but as yields are increasingly compressed in core infrastructure equity, debt − especially 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.

While players like GIP, Brookfield and IFM Investors have already launched their mezzanine strategies, some new comers to this space are preparing to launch this year.

I Squared has been targeting a launch of its maiden credit strategy in 2020 following the appointment of Thomas Murray as managing director, head of credit investments 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.

In Europe, DIF Capital Partners has emerged as being in the process of launching its maiden debt strategy.

Already an investor in debt through separately managed accounts, Vantage Infrastructure is targeting first close in Q1 for its maiden US debt fund, seeking total $300 million to $400 million capital.

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

The opportunities for higher-yielding debt investments in infrastructure continue to grow.

At the time of IDF IV's final close, Andrew Jones, global head of infrastructure debt at AMP Capital, told IJInvestor: “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 is not issued by the operating company but by a company that owns the operating company and is expected to return around 4-5%.

As well as expanding their investment mandates into new regions and sectors, launching a debt strategy might become another way to chase yields while deploying capital without taking on too much risk for fund managers.