1. Banks have historically been the dominant source of financing for infrastructure projects. What is now driving the turn towards private options?

Bank capital rules are tightening making it challenging for banks to provide term debt for infrastructure products, especially core-plus-type assets that are below investment grade.  Additionally, ESG pressure from shareholders is driving many of them from financing natural gas assets, such as efficient gas fired generation, which are necessary in the medium term as a transition supplier.  Sub-IG core-plus infrastructure, and transition energy fossil fuel are the primary areas moving from banks to institutional investors.

2. How have rising interest rates impacted deal flow over the last 12 months?

The biggest impact has been that M&A activity has slowed to nearly a halt. The lack of M&A has been more than offset by the refinancing market as bank maturities get refinanced into the institutional market and new build opportunities emanate from the Inflation Reduction Act.

3. Infrastructure debt funds continue to grow. What is the attraction of the asset class to institutional investors?

It’s a diversifier to a direct lending or private corporate debt portfolio.  Infrastructure debt performs through the cycle with a significantly lower expected loss, with the same yield profile.  Volumes are lower but it provides a ballast to a corporate debt portfolio that is exposed to economic risk.

4. Where are the biggest opportunities in the market today?

The areas that are top of mind in the markets today are:

1. Refinancings of bank-financed high efficiency gas fired generation
2. Financing of data warehouse facilities. This sector was previously financed by regional banks who have stepped away from the sector due to their real estate challenges
3. Financing of new but proven carbon reduction technologies in energy transition, agriculture, transportation, heavy industry, and housing

5. Where are spreads today in the current market?

400-600bps. We’re seeing most deals around 5% spreads right now, which get to about a 10% return in the current rate environment.  The 400-600bps spread is what we’ve targeted over the past 10 years since we started. When base rates were close to zero and there was more liquidity, we were closer to 400bps, but have been on the higher end of the range for the past 24 months.

6. What are the biggest challenges the infrastructure debt market is going to face over the next 12 months?

Infrastructure debt is still not a widely accepted asset class in the US market for institutional investors, primarily pensions.  As banks pull back and demand from borrowers increases, the market needs the pension funds to step in.  I think they will, given many other countries’ pension funds see the portfolio value of the asset class.

7. How much of an issue is ESG and how have such considerations changed over time?

It’s both a risk and an opportunity set.  We analyze the risk due to climate change (damage, regulatory, obsolescence are just some of the factors we consider) but there is also a huge opportunity set as one of the largest asset replacement cycles I’ve seen over 30 years is just getting started.

8. With it being an election year, do you anticipate any political uncertainty halting dealflow?

No.  The needs of the sector and society are driven by economics, not politics.

9. Where is the best place you've lived/visited?

I was a Peace Corps volunteer in Zaire — now the Democratic Republic of Congo — from 1988-1991 living on the shores of Lake Tanganyika.  Experience of a lifetime.