Where are the best opportunities?
The overall European infrastructure debt market is now valued at around USD 130 billion. Something like 75 percent of the opportunities are in that mid-market space. Investors have a window to take share in that space from the banks that are withdrawing. This is where the opportunities are.
Previously, the artificial support of quantitative easing made them awash with capital, and it was harder for managers to compete. Now, many banks have been burned in the leverage finance market and so are much more cautious. It has reduced their risk appetite and changed their general approach to deploying risk capital. We have more pricing power and much more structuring power. We are in a position to achieve a much better risk-return profile than before. If you look at the general market indices, there is something like a 50 to a 100 basis points pick up between the corporate investment grade index and the comparable infrastructure debt index.
Some managers, like us, are able to increase that pick up by another like 50 to 200 basis points. Investors are going through a learning curve. They are making greater allocations to infrastructure and have a greater appetite for alternatives. That trickles down into the sub-class of infrastructure debt, as there is more awareness of the solvency efficiencies and the lower risk profile that we can offer. We are giving investors a better risk-return equation. The infrastructure debt sector has a long history of lower losses. Moody’s research demonstrates that the recovery rate is something like 72 percent in infrastructure debt, compared to just 55 percent for corporate debt.
The default rate of corporates is one and a half times that for infrastructure debt, namely 3 percent versus just 2 percent. And when you look at rating down-grades, the comparison is also very favorable, coming in at 15 percent for infrastructure debt versus 35 percent for corporates. For more answers from Viktor: