The infrastructure yield call falls a treat at Edmond De Rothschild
The venerable European investment and wealth management house has around 150 years of infrastructure experience. The head of his oversight team for this asset class discusses the yield appeal of the zone at a time when yields on conventional debt are often so meager.
Private equity and venture capital are getting a lot of attention in the wealth management industry today. The infrastructure zone is also proving to be a lucrative hunting ground for some players looking for yield in a world of ultra-thin or negative bond yields.
A recent report from Preqin, the research firm that tracks alternative assets, showed that infrastructure saw a 4.6% year-on-year return in 2020, only private equity and venture capital investments. offering higher returns. More than half of the investors Preqin tracked plan to increase their commitments to the asset class over the next 12 months.
And the attractions become obvious once listed: stable cash flow, a degree of government protection (from competitors), and support for real assets like a toll road or power plant. The term “infrastructure” can be elastic, but in general it applies to entities such as ports, toll roads, logistics warehouses, utilities (gas, electricity, water, telecoms) and modes. transport. Investors often draw on them through borrowings and loans issued by the arrangers of these entities. Some sectors – logistics – have increased during the COVID-19 crisis; others like airports have been affected by the collapse in air traffic. Overall, however, the sector continues to gain ground.
Edmond de Rothschild, the European family office and wealth manager, is a firm with decades of experience in the field. The company can trace its infrastructure resume back to when it funded the railroads in the mid-19th century. This accumulated expertise is worth tapping into, Jean-Francis Dusch, CEO, Global Head of Infrastructure and Structured Finance, CIO Infrastructure Debt at Edmond de Rothschild Asset Management, told this publication.
“We are a mid-sized family business and we choose areas where we can be relevant and strong,” he said.
The sector is attractive in a very low interest rate environment, he said. By way of illustration, French 10-year government bonds are a little below zero; for an equivalent benchmark, a 10-year German government bond is -0.25 percent. In such an environment, obtaining government-like security but with higher efficiency is a very powerful proposition. Infrastructure can provide that, Dusch said.
“We are true alternative debt arrangers and provide a strong spread for secured debt securities backed by a set of covenants,” he said.
Infrastructure-backed bonds, which are smaller in the debt repayment hierarchy, such as those rated BB by a rating agency and have a term of around five or six years, can attract spreads. [above equivalent government debt] were closer to 550 to 600 basis points, he said.
“Remember, this is a credit and not a disguised form of equity,” Dusch said.
There are no free lunches in economics, but it’s easy to see why infrastructure debt attracts investors tired of negative government bond yields. Paying for the privilege of lending money to the state is unattractive.
There is less risk of default than comparable forms of corporate debt, Dusch said. “That’s what institutions like.”
Data from the unlisted infrastructure fund industry illustrates what investors think about the industry. They raised $ 100 billion in 2020 on 101 funds, reported Preqin, and assets under management increased 3.5% from 2019 to reach $ 655 billion in June 2020. “Dry powder” – capital no spent – in value-added debt and infrastructure strategies increased by 30% and 14% respectively. Most investors (89%) said performance had met or exceeded expectations over the past year, more than any other asset class. Some 54% of investors plan to commit more to infrastructure in the next 12 months than last year, Preqin said.
The supply of infrastructure debt has been hit by the pandemic in some quarters, and the past year has been difficult due to the pandemic in specific regions. The total volume issued in Europe (source: www.actuaries.org) was 10 billion euros ($ 11.8 billion) in the second quarter of last year (a decrease of 9% compared to Q2 2019) and 12 billion euros (a decrease of more than 50% compared to Q3 2020). Most of the new issuance came from the renewables and telecommunications sectors, suggesting that investors believe these sectors are more resilient to the pandemic.
Edmond de Rothschild created his existing infrastructure business almost 20 years ago and started lending for infrastructure projects around seven years ago. It raised 3.2 billion euros on its platform in connection with infrastructure. Edmond de Rothschild has an umbrella fund and can create compartments, mainly attracting flows from institutions such as pension funds and insurance companies, as well as money from private clients.
Edmond de Rothschild will work where there is a debt component, mitigating the specific risks of each asset they invest in, Dusch said.
Monitoring infrastructure requires the debt team to understand the sector, including training in engineering and public sector relations where applicable. “We also advise governments because we are, after all, talking about a regulated industry,” Dusch continued. “It is good to understand how public organizations perceive these issues and the constraints.”
ESG considerations are now key and this has been noticeable over the past year, he said. Edmond de Rothschild uses independent auditors to verify whether the areas of activity in which he invests actually reduce C02 emissions, and by how much, he said. “We make sure we’re close to the ground.”
There is some measure of regulatory risk exposure. A lot of work needs to be done to talk to the different entities that are part of the whole infrastructure game, such as industrial sponsors, equipment suppliers, operators; it requires investors to understand the entire value chain underlying an infrastructure asset.