Macquarie Asset Management - Fri, 06/28/2024 - 16:38

Perspectives - Infrastructure debt: First among equals

Executive summary

  • Infrastructure is one of the most rapidly growing asset classes globally, with assets under management increasing by 19.7% per year since 2015. Within infrastructure, it is infrastructure debt that has seen the most rapid expansion, boasting lower default rates and higher recovery rates compared with similar non-financial corporate debt.
  • This surge, which has been fuelled by (1) the global need to invest in essential services and large-scale investments, and (2) investors seeking diversification and enhanced risk-adjusted returns, has resulted in substantial growth opportunities for alternative lenders.
  • Infrastructure assets provide essential services with low demand elasticity, high capital intensity, and significant barriers to entry. These types of assets tend to offer stable, predictable, and inflation-linked cash flows, ensuring reliable returns and reduced risk compared with non-financial corporates. However, like all commercial enterprises, they can face operational challenges and financial risks, such as cost overruns and delays.
  • The withdrawal of traditional banks from infrastructure financing has created significant opportunities for non-bank lenders. These agile lenders can quickly provide bespoke, complex financing solutions, meeting a crucial market need. The long-term nature of these investments heightens the importance of rigorous due diligence and ongoing risk management to mitigate potential financial and operational risks.

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