Net zero, digitalization to boost private infrastructure investment

Infrastructure debt is a growing asset class with much to offer investors, with a wide range of assets and characteristics available.

AllianzGI manages over €90 billion of assets in private markets and is one of the largest infrastructure investors globally, with over €50 billion of assets under management in infrastructure as of 31 December 2023.

Claus Fintzen, chief investment officer and head of infrastructure debt at Allianz Global Investors (AllianzGI) outlines his expectations for the rest of 2024, major trends in infrastructure debt and the main challenges for institutional investors below. 

FORECAST FOR H2 2024

As we enter the second half of the year, the trajectory of the US interest rates remains a primary concern for investors. Fintzen expects that it will take longer for inflation to decrease significantly enough for central banks to lower their interest rates.

However, he sees hope that this might happen by the year's end, leading to increased market liquidity.

Fintzen believes that once a positive yield curve is formed at a slightly lower level, there will be significantly more liquidity in the market. This change would align the disconnect between sellers and buyers of companies, potentially revitalizing the M&A market and increasing demand for debt financing.

TRENDS IN INFRASTRUCTURE DEBT MARKET

Characterized by a wide range of assets and features, infrastructure debt is a growing asset class with much to offer investors.

Fintzen observes two major emerging trends in infrastructure debt. The first is the energy transition towards a net-zero economy, requiring substantial investments and involving private markets in tailor-made transactions with direct lender-borrower interactions.

He says that capital markets are not suitable for classical project finance transactions due to construction risks and future drawdowns.

The second trend is digitalization, which significantly increases the need for additional power in data centers to support innovations such as driverless cars and artificial intelligence.

Fintzen expects a growing demand for telecom towers and fiber infrastructure to facilitate data transfer, adding that these trends necessitate significant global investments. "As investors, it’s time for us to get prepared to support these developments," he emphasized.

CHALLENGES FOR INSTITUTIONAL INVESTORS

Fintzen identifies two primary challenges faced by institutional investors today. The first is related to the energy transition and achieving a net-zero economy.

He emphasizes the need to develop the right financing tools and structures for the infrastructure sector. For new technologies, creating blended finance structures in conjunction with multilateral organizations, sovereign support, and government backing is likely necessary to mitigate risks that are currently unquantifiable in today's market.

There is substantial liquidity in the energy transition sector, and many investors are eager to participate.

However, the right incentives must be in place. For example, investors should be able to finance borrowers transitioning from coal to renewable energy, thereby helping the shift toward a net-zero economy. Establishing KPIs and appropriate structures is essential.

The second challenge is the impact of rising interest rates. As many companies are financed with debt and the cost of debt has increased, buyers now expect lower prices for companies due to the higher financing costs.

Meanwhile, sellers still expect valuations based on previous lower interest rates, leading to a disconnect between buyers and sellers. This misalignment needs to be resolved over time.

Additionally, the higher interest rate environment has reduced liquidity in traditional infrastructure financing.

Some insurance companies and pension funds, which have been participating in private markets, now find themselves over-allocated in private markets due to significant declines in public markets driven by rising interest rates.

By Claus Fintzen, chief investment officer and head of infrastructure debt at Allianz Global Investors

Jennifer Nicholson-Breen edited this article.

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