Family office interest in infrastructure debt surges
Family office participation as limited partners (LPs) in infrastructure debt funds is rising fast.
At the same time, asset owners from East Asia and Australia are showing a clear preference to co-invest alongside these funds to secure direct exposure to preferred deals.
“We've seen the interest globally from family offices almost skyrocket in this cycle. They tend to like the wealth preservation level of returns in the high single digits that infrastructure debt offers,” Evan Nahnsen, head of private debt infrastructure at QIC, told AsianInvestor.
Another asset manager, Ares Management, reported a 7.6% gross return for its infrastructure debt portfolio, according to alternatives data provider Preqin.
Traditionally, family offices have not been significant investors in infrastructure debt; however, Nahnsen has observed a substantial shift in this trend.
Family offices, which often already hold private credit investments, are increasingly diversifying into infrastructure debt. This trend is notable among family offices in both North America and Hong Kong, according to Nahnsen.
EAST ASIA PUSH
Around a third of all capital raised for QIC’s infrastructure debt vehicles comes from Asia Pacific, and primarily from East Asia. In particular asset owners in Korea and Japan, namely pension funds, have been where capital has been raised, Nahnsen explained.
For Korean insurers, for instance, their risk-based capital (RBC) regime is very favourable for infrastructure debt.
Conversations with Hong Kong-based insurers are also progressing as a new regulatory capital scheme is being instituted. This will influence the capital requirements when investing into infrastructure debt.
“The new Hong Kong regulations are based on EU’s Solvency 2, which has very a favourable treatment for infrastructure debt. We are talking with the Hong Kong-regulated insurers and regulators to understand the capital charges, and if infrastructure debt will be treated like general private debt it will be attractive,” Nahsen said.
In terms of infrastructure debt markets where capital is deployed, North America and West and Northern Europe are the major targets, although OECD countries are considered potential targets.
CO-INVESTMENT DEMAND
Co-investing is in demand among asset owners when they allocate to infrastructure debt. Early access to review specific investments is showing traction and moving beyond being a limited partner in a commingled blind fund.
This trend is exemplified by Australian asset owners. For instance, QIC’s owner and foundational client, the Queensland Government, is eager to invest alongside the commingled fund on selected opportunities.
“It is natural for us to partner with the Queensland Government and other LPs that really like to co-invest. We've sized our funds specifically to kind of undershoot the opportunity set, knowing that we can deliver a lot of co-investment opportunities alongside the fund vehicle,”
In Asia, Korean asset owners are also showing a relatively high preference for co-investments and do direct transaction on assets.
Many Korean asset owners’ portfolios are currently saturated with alternatives especially on the equity side, and the weak Korean won against the US dollar is also an issue, but the interest persists.
“Korean asset owners are open to most sectors within infrastructure debt, although it is key that they can achieve their targeted yield which is typically cash plus 400 basis points,” Nahnsen said.
While there has generally been a focus on infrastructure investments, infrastructure debt has been growing in its own right as niche to both infrastructure equity and private debt.
In 2016, global infrastructure debt AUM were $38 billion, but have since risen to $141 billion, slightly outpacing the growth in the infrastructure asset class overall, a report from HSBC Asset Management highlighted in January 2024.