Private Infrastructure Debt: A Growing Asset Class for Public Pension Investors

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• On: 08/23/2024 13:00:12
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By: Brian Collett, I Squared

Public pension investors will learn that private infrastructure debt is becoming an asset class, providing diversification, steady income, and downside protection. They will understand the significant opportunities this asset class presents due to the global infrastructure funding gap and the benefits of stable, inflation-linked cash flows, lower default rates, and increased security compared to corporate debt.

This is an excerpt from NCPERS Summer 2024 issue of PERSist.

Private infrastructure debt is emerging as an attractive investment opportunity for public pension investors seeking diversification, steady income, and downside protection. This asset class bridges the gap between the significant need for infrastructure funding and the limited capacity of traditional financial sources to meet this demand. This article explores the growth of private infrastructure debt, its benefits, and its role in portfolio construction for public pension investors.

Growing Demand and Supply-Demand Imbalance
The global infrastructure funding gap is substantial. By 2040, the estimated infrastructure expenditure needed worldwide is $94 trillion, yet current spending projections fall short by about $18 trillion. This shortfall highlights the growing opportunity for private infrastructure debt to fill the void left by traditional financing sources, such as commercial banks and capital markets. Regulatory changes have tightened capital requirements for banks, reducing their capacity to finance infrastructure projects. As a result, private market participants have stepped in to address the imbalance, offering more flexible and tailored financing solutions.



The graph above illustrates the significant opportunity set for Infrastructure debt with over $284 billion financed via debt in 2022. This underscores the growing recognition of infrastructure debt as a viable standalone investment vehicle, attracting a substantial amount of capital from investors seeking stable and reliable returns.

Key Characteristics and Benefits of Infrastructure Debt
Infrastructure assets are vital for social and economic development. They typically generate stable, long-term cash flows that are often inflation-linked, providing a natural hedge against inflation for investors. Additionally, infrastructure debt usually involves secured lending, which offers higher protection compared to corporate debt.

Reduced Risk and Downside Protection
Infrastructure projects generally operate under long-term contracts or regulated environments, ensuring revenue visibility and reducing volatility. This stability is attractive for investors looking for reliable returns. Historical data supports the lower risk profile of infrastructure debt compared to corporate debt, with infrastructure credit showing lower default and loss rates over the past decades.



The graph above shows the significantly lower default rates for infrastructure debt compared to corporate debt over nearly four decades, reinforcing its lower risk profile.

Attractive Yields and Risk-Adjusted Returns
Despite lower risk, infrastructure debt can offer competitive yields. This is particularly true for private infrastructure debt, which benefits from less competition compared to corporate direct lending. Investors can achieve strong risk-adjusted returns, making infrastructure debt a valuable addition to diversified portfolios.



The comparison between 2012 and 2022 demonstrates the shift in debt issuance, with private debt surpassing high yield bonds and leveraged loans for the first time. In 2022, private debt issuance reached $500 billion, significantly outpacing high yield bonds and institutional leveraged loans, which stood at $350 billion and $450 billion, respectively.

The Role of Private Infrastructure Debt in Portfolio Construction
Private infrastructure debt can enhance public pension portfolios by providing several key benefits:

• Incremental Downside Protection and Portfolio Resilience: The essential nature of infrastructure assets means they are less sensitive to economic cycles, offering stability and resilience.
• Attractive Cash Yields: Infrastructure debt investments typically generate higher yields compared to traditional fixed-income securities.
• Enhanced Diversification: Adding infrastructure debt to a portfolio can improve diversification, reducing overall portfolio risk.
• Improved Risk-Adjusted Returns: The favorable risk-return profile of infrastructure debt can enhance the overall performance of a portfolio.