Why debt discipline matters as infrastructure’s definition expands

James Lineker (0:03)

Infrastructure has become a hot asset class. PEI group data shows Infra funds with a final close last year raised more than $260 billion, smashing the previous record, set in 2022, by some $72 billion. But as the asset class has grown, its definition has also become stretched. That makes definitional discipline more important than ever.

In this special episode, sponsored by IFM Investors and Solas Capital, we are joined by IFM Investors head of debt investments, David Cooper, and by Solas Capital CEO and co-founder, Sebastian Carneiro. We'll focus on infrastructure debt to explore the importance of staying disciplined, how some of the best opportunities can be found in pockets where banks are absent, and why demand is more durable than news headlines may suggest. I'm James Lineker, and this is the Infrastructure Investor Podcast.

PEI. Infrastructure Investors' cover story on infrastructure debt back in May touched on the importance of the asset-backed nature of a sector to explain its allure and resilience, especially compared to private credit. But the definition of infrastructure seems to get looser all the time, with an array of infra-like assets constantly being added. We'll hear first from David Cooper, who leads IFM's infrastructure debt business in Europe and Australia.

David Cooper (1:26)

The obvious message here is to stay disciplined. So there is always a tendency on the part of issuers and sponsors to try and stretch the definition of infrastructure.

But obviously we don't need to feel that we're bound by that. So if we approach by a sponsor who says we think this is an infrastructure asset and we're putting it within our infrastructure fund, we don't have to sit there and agree with them. We don't have to say, yep, fine, okay, on that basis we're going to extend credit to you using some of our infrastructure debt money.

I guess that's the first point I would make. Then beyond that, when we think about infrastructure debt at IFM, we've always thought about it really as a set of characteristics rather than necessarily sector by sector. The definition of what has fallen within infrastructure has for that reason changed in the 14 years I've been with IFM. So when I first started, I don't think we'd have looked at things like Fiber, for example, as being an essential service necessarily. But more recently, clearly, it is a very essential part of pretty much every modern economy. So we would say that falls within infrastructure debt. And really what we're looking at are assets that are non-cyclical, and generally the entities into which we lend have high barriers to entry. They're important to the economy and society in which they sit. And then if things do go wrong, which occasionally do, actually, you've got access to real assets that you can get a decent recovery back.

James Lineker (2:44)

Solas Capital is an investment manager in the energy transition, with a focus on the demand side of the energy system, providing the project finance solutions to decarbonize buildings and industry. Sebastian Carneiro, who leads the firm, notes that there's a significant blurring of definitions here, too.

Sebastian Carneiro (3:00)

If you look at the energy transition and where we're coming from, you had projects with price certainty provided by feed-in tariffs, and then you moved into a world where you had long-term power purchase agreements.

But this world has passed, right? So I mean, you do get power purchase agreements, but not that long anymore.

And what that means is that you're exposed sooner or later to electricity price risk. And in order to be successful in that market, you do need to take a view on market developments. So this is why you see hybridization and investments and batteries, right? And you also need to become an active energy trader. So for me, this is much more characteristic of moving into private equity rather than the classical infrastructure definition. Because I think we need to go back a little bit to the roots. Because why do investors like infrastructure? Because they provide a certain degree of cash flow certainty, cash flow resilience, and it's a very good diversifier. And you have inflation protection through the real assets. And so in my view, what makes infrastructure debt resilient is, look, you need to invest into contracted cash flows. You finance essential services, asset-backed, and you're being the senior lender. So the first one in line to be repaid. And this is what we do at Solas. So it's not so much about the label or the type of asset what you're financing, it's all about the resilience of cash flows.

James Lineker (4:34)

Energy as a service models, such as heat as a service or solar as a service, are becoming more prevalent in infrastructure debt.