Macquarie has launched Macquarie Infrastructure Debt, the first fund to have an explicit focus on investing in U.K. inflation-linked infrastructure debt. Though Macquarie has extensive experience in infrastructure debt and has been investing separately managed accounts for institutional investors for a number of years, MID is the firm’s first pooled vehicle to provide institutional investors access to infrastructure debt.
“Pension schemes and infrastructure businesses are natural counterparties who barely know each other due to bank intermediation,” says James Wilson, CEO at Macquarie Infrastructure Debt Investment Solutions. “We were talking to both parties, and the lenders thought the borrowers weren’t interested and vice versa.”
Wilson went on to explain that the disintermediation of banks through direct lending is opening up a large pipeline of attractive liability-matching assets, adding that there is significant unmet demand from borrowers.
“We estimate a pipeline of approximately £4 billion [$6.6 billion] per annum of demand for inflation-linked debt in the U.K. market,” Wilson continues.
Despite the demand, high barriers to entry have meant that only the largest pension schemes have been able to break into the market. Macquarie expects the vehicle to grant pension schemes of all sizes access to the asset class.
“There was an obvious gap in the market that we believed we could fill by providing a pooled fund,” Wilson continues.
The closed-end fund is expecting to have its first close by approximately fourth quarter 2014, and Macquarie has already secured £200 million ($330 million) from a U.K. corporate pension scheme to invest in inflation-linked infrastructure debt through a separately managed account. Macquarie said in a statement that this allocation would supplement the fund to provide a platform for meeting significant demand from infrastructure borrowers for inflation-linked debt.
Though a fundraising goal was not disclosed, Wilson stated that Macquarie is hoping to raise several hundred million pounds and has already received significant interest.
The fund will have a buy-and-hold strategy, and invest in both brownfield and greenfield assets in subsectors including utilities (water, electricity and gas), transport, renewable energy and social infrastructure. Though Macquarie looks at opportunities to invest across Europe, the United States and Australia, the fund will focus on opportunities to lend to U.K. infrastructure businesses.
The fund will exclusively focus on investment-grade debt in order to provide predictable asset cash flows suitable for pension scheme liability matching, and anticipates an average yield of 200–250 basis points over inflation-linked government bonds. Based on market expectations for long-term U.K. inflation, this provides an expected all-in yield around 5.5 percent to 6 percent.
“By focusing exclusively on infrastructure debt that is long duration, investment grade and inflation-linked, the fund will be uniquely suited to pension investors seeking assets for matching their liabilities, while at the same time delivering a significant yield in excess of government bonds,” Wilson concludes.
With U.K. infrastructure needing an estimated £500 billion ($824 billion) in investment by 2020, according to the Institute of Directors, a new wave of infrastructure debt funds could not come at a better time.