Infrastructure: innovation and ESG drive financing 

Rising interest rates have benefited infrastructure debt funds, offering managers numerous opportunities on the secondary market. The need for energy and digital transition requires institutional investors and all sources of savings to be mobilised. To convince them, fund managers are focusing on sustainable development, the fight against global warming and innovation. Bérénice Arbona, head of the infrastructure debt team at LBP AM, looks at how these new challenges are perceived and taken into account in her investment choices. 

What impact rising interest rates and inflation hace on infrastructure financing?  

The paradigm shift in interest rates has not changed investor appetite for infrastructure. On the other hand, while it is true that until recently equity infrastructure funds were able to attract very substantial allocations from investors, we are now seeing a greater attractiveness of infrastructure debt. The return on infrastructure debt is based on the interest rate plus a credit margin. Today, with the rise in interest rates, the yield offered on infrastructure debt is equivalent to that offered a year or two ago by certain core infra equity funds. The relative value of the debt sub-asset class within the infrastructure asset class is better today. As a result, it is attracting new categories of investors. With a yield of 6% on senior debt and a yield of between 8 and 10% for junior debt, family offices are taking an interest in the asset class. As a reminder, this is a defensive asset class invested in real assets that can also help with the energy transition, have a social purpose, etc. The economic climate has never been so favourable, even if in absolute terms the market is becoming more complicated due to the denominator effect. Institutional investors have less money to spend and have reinvested in liquid assets where yields have become attractive again. To attract institutional investors, we need to continue to deliver the promise of a complexity premium and an illiquidity premium, which is the value proposition for our asset class. On the investment side, we have seen fewer opportunistic refinancing deals, a slowdown in mergers and acquisitions and, generally speaking, deals are taking longer to exit as we adapt to the new economic environment. On the other hand, our project portfolios remain very healthy, and the pipeline of new transactions is strong.

“The financing requirements for energy transition infrastructure in France are expected to rise to €60 billion a year in the coming years” 

How can institutional investors be convinced?

At the InfraWeek meetings held on 10 October, the French Minister for Industry indicated that France's energy transition infrastructure financing needs should amount to €60 billion a year in the coming years. This compares with €4 billion invested in low-carbon infrastructure by 2022. The energy transition represents a huge challenge, a new industrial revolution. Investors are aware of these challenges and the opportunities they present, but to make an investment decision, they need returns and a track record. If, in addition to these two conditions, an investor can justify investing in solutions that comply at least with article 8 of the SFDR regulation, and even with article 9, and have an impact, this will constitute an additional argument in favour of this investment. In this context, the management company must be credible in terms of ESG and have the capacity to produce solid extra-financial reporting. In our view, this requires resources, data processing for the entire portfolio, and a detailed extra-financial analysis that also includes negative externalities, in addition to traditional legal and financial analyses.

Can democratisation be a growth driver for institutional clients? 

Last year, we launched our first infrastructure account unit, which was very successful with the general public. There will undoubtedly be more. This asset class is attractive to retail investors. For fund managers, however, it means putting in place a mechanism to ensure liquidity for the end client.  

We are at a rare moment when the financial response is ahead of the political response. Taxonomy helps to guide investment and funding, but investors of all kinds are well aware that if they want business models to change, they have to put in the resources. It's a real paradigm shift that needs to be brought about in a very short space of time.   
 

"It's through innovation that we can build value for investors” 

Which investment themes should be favoured (electrification, energy sovereignty, etc.)? 

Diversification remains essential for investors. To achieve this, we need to combine different geographical, sectoral and risk profile criteria in order to find the operations that offer the best risk/return ratio on the market, while at the same time being in line with the strategies that investors have subscribed to. We have launched an Article 9 impact fund that finances projects offering solutions for decarbonisation, electrification and energy efficiency. More recently, we launched a €1 billion article 8 impact fund that will invest in both pure player projects and traditional infrastructure with a commitment to a decarbonisation trajectory. This is also how we generate impact. 

Are you able to finance innovation? Are you involved in new areas such as hydrogen and geothermal energy?

It's through innovation that we can build value for investors. But to finance innovation, managers need to be well equipped. They need to analyse in depth the technical, regulatory and financial complexities associated with this innovation.   

“It is essential that fund managers are made aware of extra-financial criteria” 

How is the market shaping up, with infra funds falling more under Article 8 or Article 9 of the SFDR regulation?   

Most infrastructure funds come under Article 8, but we were keen to launch an Article 9 impact fund. It corresponds to the highest level of requirements in line with the convictions of the Group and our management company. Despite everything, this fund is diversified: only one transaction at the moment corresponds to a renewable energy project, while the others are in line with the various aspects of the energy transition. These include energy efficiency, electrification and the circular economy. In addition, the notion of impact requires the definition of KPIs (performance indicators) that can be monitored over time and are therefore based on reliable data, which is no small challenge. We have therefore worked hard on the tools needed to manage the impact KPIs. With this in mind, we can't limit ourselves to what our borrowers tell us, we have to be able to control the KPIs based on the data collected.

Have you noticed that institutional investors are becoming more demanding? 

They are carrying out increasingly detailed extra-financial due diligence, in line with the requirements of the SFDR regulations. We have to demonstrate the tools used by the funds, provide examples of impact reports, etc. In this context, we believe that SRI should really permeate the entire management company and not be limited to a dedicated department. We have developed our own tools and each manager must be able to master them, as they are the first filter in the selection and discussion with borrowers. It is essential that managers are made aware of the extra-financial criteria.  

Find out more about the "Great Infrastructure Debate" on the Option Finance website (French only)