Institutional investors have begun to become more interested in the infrastructure debt asset class, which is a less volatile alternative to traditional asset classes. As interest rates rise, investors can be assured of a steady stream of cashflows. This makes this asset class attractive to long-term investors. Here are some of the benefits of infrastructure debt:

Long-dated assets offer attractive yield enhancement. While banks will remain the primary debt financiers of infrastructure projects, institutional investors are increasingly recognizing the value of long-dated assets. They are able to match asset/liability duration, reduce risk capital charges, and offer yield enhancements over sovereign debt. Furthermore, insurers will typically play a deeper role in long-dated infrastructure debt as the duration of the investment increases. However, there are still risks.

Institutional investors are increasingly looking at infrastructure debt as an alternative to equity investments. Because infrastructure debt is less risky than equity, it is a better fit for pension funds and insurers' investment needs. Insurers can shape the duration of their investments, and can control capital costs. As a result, infrastructure debt offers attractive margins, which is a great asset class for these investors. A good example is the new infrastructure project in Brazil, which is part of a public-private partnership.

The infrastructure debt asset class has been around for decades. It has a few large players, and it has a solid track record when it comes to returns and defaults. Historically, the infrastructure debt asset class was the domain of banks. The GFC and European debt crisis changed all that. As banks reduced their liquidity levels, institutional asset managers stepped in to fill the funding gap. The result is that more investors are now looking to invest in

debt as an alternative to private equity.

The growth of renewable energy and the digitalisation movement are also significant tailwinds for the asset class. The income generated by infrastructure debt can be a stable one even when the market is volatile. In addition to a stable income, infrastructure debt offers a large physical asset. Further, it has high barriers to entry and yield. It also provides investors with the opportunity to diversify their portfolio. These benefits make it a compelling alternative investment for investors.

While most investors will access the infrastructure debt space through closed-end funds, a few individuals will opt to implement their strategy with separate accounts or internal staff. Compared to real estate debt, infrastructure debt's universe is smaller. Likewise, the history of the asset class is shorter than that of real estate debt. However, there are more managers, vehicles, and strategies for this asset class. These differences make it important to consider the purpose of infrastructure debt in the portfolio.

Another key advantage of infrastructure debt is its low default rates. As compared to traditional corporate loans, the CDRs of infrastructure debt tend to decline with maturity. In fact, by year 10, the CDRs for infrastructure project loans are comparable to those of Baa3-rated corporate loans. Furthermore, marginal default rates are less than 0.01% by year 20 - suggesting that there is less risk of default as projects mature. However, this is a risky investment.

The asset class's performance also varies across regions. North America, Western Europe, and Asia have similar performance compared to those of the consortium dataset. Asia and Latin America are slightly worse than North America and Western Europe. In contrast, Latin America and Oceania have lower performance than North America and Western Europe. These regions have relatively low infrastructure loan recoveries. The global dataset includes 81 institutions, including banks and pension funds. In other words, infrastructure debt is a good alternative to conventional bank loans.

The European infrastructure investment landscape is undergoing a shift, where governments and banks are feeling capital constraints, while governments are increasingly hesitant to provide long-term infrastructure funding. There is a funding gap in the European infrastructure sector, and insurers are expressing interest in filling this void. Insurers could become asset managers and trigger a massive capital inflow to the infrastructure market. Insurers may become the next white knights of infrastructure debt.