Although infrastructure debt, which is a relatively new asset class, is fast gaining popularity with institutional investors, some are still grappling with where it should sit in their portfolio, according to AMP Capital’s global head of infrastructure debt, Andrew Jones.
This asset class, which emerged after the global financial crisis (GFC) due to tougher regulations imposed on the banks which had to reduce their large-scale spending and gave room for institutional investors to step in, qualified for a relatively low capital requirement which made it attractive insurers, among others.
However, investors needed to need to think carefully about the outcomes they were looking for from their infrastructure debt allocation, and where the asset class could complement their existing holdings and offer diversification, Jones warned.
“Infrastructure debt continues to deliver outcomes that institutional investors seek. As we look set to continue in a low-rate environment following the current economic crisis, the consistent yield of infrastructure debt, along with its defensive nature, will continue to be prized,” he said.
“As a relatively new asset class, infrastructure debt has the potential to fit within many traditional buckets of a portfolio.”
As far as the real asset portfolios were concerned, infrastructure debt complemented these assets as a component of a real asset portfolio, as it was less driven by macro-economic conditions than real estate investments and commodities, which tend to be more cyclical and sensitive to market environment.
But adding infrastructure debt to an infrastructure equity allocation could balance the risk profile.
“Infrastructure debt tends to have lower volatility than infrastructure equity investments and adds even more defensive characteristics to the portfolio. In a stressed market environment, subordinated debt ranks ahead of equity and will be less impacted by market shocks,” Jones said.
On the other hand, investors who were seeking high risk-adjusted returns from their alternatives allocation may look at private subordinated infrastructure debt for its higher yield and illiquidity and complexity premia.