Infrastructure debt is becoming less attractive, with spreads narrowing on the back of the asset class's increasing popularity.
This is according to Wim Vermeir, group head of investment at one of Europe’s largest insurance companies, Ageas, as well as CIO of Belgian AG Insurance, in which Ageas holds the majority stake.
Too much liquidity
‘As an insurance company we have one big advantage: we have very stable liabilities, so we can match them with less liquid assets. We had made a move into infrastructure some time ago and have so far invested around €1 billion in infrastructure lending. That gave us very stable assets with fairly acceptable risk and solid returns.’
However, Vermeir told Modern Investor that he was becoming more selective on infrastructure deals because of falling yields. ‘There is so much liquidity in this market that the banks – which abandoned the asset class in the aftermath of the financial crisis in 2008 – are coming back, and a lot of institutional investors are there as well.
‘We think in some countries infrastructure debt has become very competitive space and the spreads are too low. Sometimes we are able to find a small deal with some added value where we can do everything by ourselves, and not as member of a big lending consortium. But when we make calculations we say usually say more no than yes so I expect us to invest less in it. It's a little bit too crowded today.’
Alternative to infrastructure
Vermeir said he currently sees more value in other asset classes that he sees as an alternative to infrastructure debt. ‘On the long side what we like is the type of direct lending to government-related entities in the areas such as social housing, water treatments, electricity distribution. These types of institutions that benefit often from an explicit or, in some cases, from an implicit government guarantee.
‘There we can get a spread of around 40 basis points. Now, that's not a lot but the treatment is similar to that of government bonds.’
He compared that with infrastructure debt spreads, which can reach 100-200 basis points, but with high capital charges, whereas in the case of lending to government-related entities the capital costs tend to be very low.
Another sector Vermeir likes at the moment is mortgage loans. ‘There we can see that the competition is less fierce so the spreads are still there. We recently did a deal in residential mortgages in Belgium buying an existing, seasoned portfolio. We are also investing in new mortgage activity in the Netherlands. This is currently an interesting alternative to traditional credit.’
Institutional investors broadly agree that infrastructure has become a fashionable asset class. However, they have different views on how to best approach it. For instance, for the Canada Pension Plan Investment Board (CPPIB) direct equity is the best way to access infrastructure investments whereas the Danish Pension Fund for Engineers accesses the asset class indirectly through funds.
The second Modern Investor Forum in London also saw investors debate the pros and cons of the various options.