Infrastructure debt: Unlocking investment opportunities in a transforming economy

AS GLOBAL economies evolve, infrastructure debt emerges as a unique asset class with promising opportunities for investors. Offering low correlation with business cycles and appealing yields, it’s fuelling critical sectors such as renewable energy and artificial intelligence (AI) infrastructure. Public and private sectors are converging to meet the growing global demand for modern infrastructure. While governments lay the groundwork with strategic investments, private capital is increasingly stepping in to drive innovation and address funding gaps, shaping the future of essential projects.

Within the investment landscape, besides having low correlation with the business cycle, infrastructure debt has historically been a source of relatively stable returns and a high degree of differentiation within a portfolio. Infrastructure loans finance capital-intensive, tangible assets such as transportation systems, energy facilities, and data centres. These loans are generally provided by private funds, either alone or in combination with public funding.

Private infrastructure debt typically invests in regulated assets (more rarely in a company involved in infrastructure services or operations) with inelastic demand, in either monopolistic or quasi-monopolistic markets. The debt is typically secured against the cash flows generated by the project itself. The loans are tailored on the project’s specific risks and revenue-generating capabilities. While most debt issued is senior, some transactions also include junior tranches to offer more attractive yields to less risk-averse investors.

The asset class has historically grown at a steady pace, but has been expanding more rapidly in recent years, largely fuelled by a favourable macroeconomic environment – including pandemic-driven fiscal expansion and post-global-financial-crisis financial regulation that limited commercial banks’ ability to hold long-term debt on their balance sheets. Since 2017, the global private infrastructure investment market has more than doubled, reaching over US$1 trillion annually.

Geographically, infrastructure debt is heavily concentrated, with the United States and Europe leading the way.