1. Financing infrastructure: no longer just the task of governments
Three main factors have favoured the development of infrastructure financing (also known as infrastructure debt) as an asset class since the outbreak of the global financial crisis in 2008:
1. Falling investment from banks
2. Dwindling state budgets
3. Stagnating interest rates
The banks were subsequently joined by institutional investors looking for investments that would offer a yield mark-up compared with government or corporate bonds, for example, as well as having terms that matched those of the liabilities of these two groups of investors. Financing of essential infrastructure that is largely independent of demand, with public-sector operators with top-quality credit ratings (governments, cantons/federal states and other regional authorities or state-affiliated companies), has at least partially replaced other asset classes such as government or corporate bonds. Intermediaries with their own departments that structure project financing have become established partners of many large asset managers. This trend has been further boosted in recent years by favourable regulatory treatment of this financing under the EU-wide regulatory standard Solvency II. However, this development has taken place mainly in OECD countries. For a long time, this financing was exclusively in the investment grade range, and it is only in the past few years that it has gradually begun to shift out of this range.
2. Investments in the investment grade range
While this development has occurred, supranational and specialist development banks have had increasing difficulty in recent years performing their official duties in areas such as financing infra- structure projects in emerging markets. Demand far exceeds the funds made available to the development banks. This demand gave rise to the idea in 2015 of mobilising capital from private institutional investors for financing in general, and infrastructure projects in particular, in emerging and even frontier markets. However, institutional investors are de- pendent on providing financing in the in- vestment grade range, if possible, particularly when it comes to long-term financing, if not for economic reasons then often for regulatory reasons.
The obvious solution therefore seemed to be for development banks, with their many years of experience and access to emerging markets, as well as the capacity to bear risk, to assume only part of this financing in future, and for private inves- tors to take over a secured portion.
This has an advantage for both sides, as development banks will increase their financing capacity, while institutional investors will receive a high-yield, struc- tured investment that also offers diversi- fying characteristics compared with the classic interest rate portfolio. However, the main focus is on the benefits for pro- ject sponsors and funding recipients in emerging markets. Without these ex- panded financing opportunities, some funding and infrastructure projects in emerging markets in the past five years would not have come about at all.
Last but not least, the conclusion of the Paris Climate Agreement in late 2015 not
only added climate protection to the agenda, but also brought up the question with respect to emerging markets of how, for example, the United Nations’ 17 Sus- tainable Development Goals can also be applied to these countries in this way.
3. New financing vehicles
In the light of all these considerations, the first financing vehicles, in some cases worth billions, have been set up in the past few years through collaboration between various supranational and national development banks on the one hand, and large institutional investors on the other. For example, Allianz SE launched a joint vehicle with the International Finance Corporate (IFC) in 2017, invested in the Emerging Africa Infra- structure Fund in 2018 and the Africa Grow Fund in 2019. A new asset class has emerged over time: “development finance”. Depending on which side we look at this type of financing from, we can describe it as indirect infrastructure financing (infrastructure debt) in emerging markets or assign it to ESG-oriented investments as “impact investments”. There is justification for both.
This asset class is expected to develop further, and to become accessible to other groups of investors in the coming years, partly for the reasons mentioned at the beginning of this article. The Covid-19 pandemic has also accelerated this development, which has been further intensified by the rapidly growing trend over the past two to three years towards ESG-com- pliant investments.