Infrastructure Debt   

Infrastructure is a cornerstone of future economic development. Assets such as smart grids, storage and fibre networks are becoming critical to support the triple revolution that the UK is facing: the energy transition, urban mobility, and the digitalisation of services.

The infrastructure debt market is made up of senior and junior debt. Regulatory constraints mean junior infrastructure debt is not suffering the same competitive pricing tension as seen in senior debt where banks and insurance companies compete heavily. With demand for junior debt, therefore, being lower than senior and there being fewer participants in this part of the market, junior debt displays approximately twice the illiquidity premium as senior infrastructure debt.

Given these characteristics, we believe junior infrastructure debt represents an attractive proposition for UK pension schemes seeking attractive returns and diversification with a lower risk credit profile.

What is junior infrastructure debt?

Junior infrastructure debt displays quite different characteristics to the senior part of the infrastructure market. Junior debt is generally shorter in term and enjoys a significant spread premium, for a marginal increase in risk, when compared to senior debt. It is therefore more suited to schemes who want to capture an illiquidity premium.

When thinking about portfolio construction, junior debt front-loads returns and can assist a scheme’s move to buy-out more quickly, whereas senior debt can provide duration and has hedging characteristics.

Why UK junior infrastructure now offers good value for UK pension schemes?


Illiquidity premium*

Junior infrastructure debt has potential to offer Libor + 4–6% return*, providing pension schemes with an attractive illiquidity premium above corporates.

*Target only and not guaranteed, based on a [400-600] bps target spread



Infrastructure assets are not correlated to the general market and therefore offer diversification benefits. Additionally, junior infrastructure debt focuses on essential infrastructure assets which are less exposed to the economic cycle.


Directly contributes to the UK economy and society  

Investments in infrastructure contribute to the development of the UK economy and society, generating a socio-economic rate of return of c.20% per year. In particular infrastructure debt contributes positively to the themes of climate change and digitalisation.


Cash flow

Infrastructure debt can be a particularly attractive component of cashflow driven investment (CDI) solutions due to its maturity profile, predictability of cash flow and performance in stressed scenarios.

The opportunity in the UK

The UK infrastructure debt market potential is one of the largest in Europe, offering opportunities for pension schemes to directly invest in the development of the UK economy and society. Further, the economic impact of Covid-19 has left the UK facing a large funding gap for developing, maintaining and upgrading key infrastructure. Private capital, such as that from UK pension scheme investment, has a key role in filling the financing gap.

Potential opportunity in the European infrastructure debt market

Source: Infranews, July 2019 – volume of transactions in 2018, and for European assets, average of 2015–2017 split by sectors and European countries. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

The Spring Budget 2021 announced the launch of a new National Infrastructure Bank to help the UK reach its net-zero carbon targets and channel billions of pounds into sustainable projects. It aims to attract up to £40 billion of private investment into green projects by investing in sectors such as renewable energy and carbon capture and storage. To learn more, read our latest insight article on the Spring Budget.

This opportunity in renewables, as seen in the below chart, highlights the contribution infrastructure investment will have on the energy transition movement in the UK.

UK sector composition

Source: Infranews, July 2019 – volume of transactions in 2018, and for European assets, average of 2015–2017 split by sectors and European countries. For illustrative purposes only and should not be viewed as a recommendation to buy or sell.

Key investment risks

Interest rate risk for fixed-rate instruments: Interest rate volatility may reduce the performance of fixed-rate instruments. A rise in interest rates generally causes prices of fixed-rate instruments to fall.

Deterioration of the credit quality of the bond: Caused by a change in the market environment (for commercial activities) or a change in law/regulation (for all infrastructure activities).

Risk of issuer default: A decline in the financial health of an issuer can cause the value of its bonds to fall or become worthless.

Prepayment risk: The capital may be repaid by the borrower before reaching maturity.

Exchange rate risk: Where assets are denominated in a currency different to that of the investor, changes in exchange rates may affect the value of the investments.

Illiquid and long term investment risk: Due to the illiquid nature of the underlying investments, an investor may not be able to realise the invested capital before the end of the contractual arrangement (which is likely to be long term). If the investment vehicle is required to liquidate parts of its portfolio for any reason, including in response to changes in economic conditions, the investment vehicle may not be able to sell any portion of its portfolio on favourable terms or at all.

Capital loss: The capital is not guaranteed and investors may suffer substantial or total losses of capital.

Greenfield risks: in contrast to “brownfield” investments, investments in ”greenfield” infrastructure assets expose investors to additional risks, in particular construction risk (e.g. construction delays, cost overruns, etc.) and deployment risk (e.g. capital being deployed in several instalments during construction period rather than upfront for brownfield investments).

Operational risks

Trade cancellation risk: Trades and settlements are made on a bilateral, negotiated basis. A last-minute trade cancellation can occur in the absence of standard trade and settlement processes via clearing houses.

Service provider risk: Investments can be at risk due to operational and administrative errors, or the bankruptcy of service providers.

Do you wish to find out more about infrastructure debt and our strategy?

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