We believe the current risk/return profile of Junior Infrastructure Debt presents an attractive case for investors.
The McKinsey Global Institute states that an additional £3.3 trillion needs to be invested globally each year in infrastructure just to support current rates of growth through to 2030. This funding gap is primarily caused by the continued strong demand for infrastructure (and therefore infrastructure debt) while regulation has constrained the ability of banks (which have traditionally provided infrastructure debt) to lend.
Junior infrastructure debt involves lending for the acquisition, construction, expansion or refinancing of infrastructure assets. Debt repayments are financed through a combination of underlying 'demand based' revenue streams and government contracts. The level of risk varies by asset. Junior debt sits in the middle of the capital structure, protected by the equity cushion but ranked below senior debt.
We believe that the current supply and demand imbalance within the junior infrastructure debt space offers attractive risk-adjusted returns for institutional investors. The essential nature of infrastructure assets, coupled with the presence of protective covenants, enables investors to mitigate downside risk. Clients should take into consideration the illiquidity and high concentration in the fund.
Download Junior infrastructure debt – Investment case to find out more.