Baring Asset Management, newly headquartered in Charlotte, North Carolina following the merging of various managers owned by MassMutual, plans to set up a dedicated infrastructure debt operation in Australia, in response to a growing global focus on the asset class, AsianInvestor can reveal.

The move reflects growing demand for different types of infrastructure assets, particularly from pension funds and insurance firms, said Emeka Onukwugha, head of Barings' infrastructure debt group based in Springfield, Massachusetts. It also comes at a time of increased activity in the infrastructure space in Australia, he noted.

Onukwugha told AsianInvestor the firm was already active in Australian private markets, but that it was looking to beef up its efforts in that space by hiring a team of two initially. “The intention is to have people helping to originate transactions from Asia,” he added, with personnel expected to be in place later this year or early 2017.

Barings has people on the ground in Europe, Australia and North America working with sponsors to originate transactions. It then processes all those transactions through a centralised underwriting department.

The firm’s main infrastructure investment team is based in London, and it also has infrastructure professionals in the US, Sydney and Springfield, MA.

Of a total of $260 billion in AUM, Barings manages $6 billion of infrastructure debt. Of that, 90% is investment-grade and 50% represents non-US assets, Europe accounts for 30%, Australia and New Zealand 15% and there is 5% spread across Latin America and the rest of Asia. 

Sources of demand

Onukwugha said the expansion of the infrastructure debt team was in response to growing demand globally, including Asia. It is yet to win any mandates from asset owners in the region, he added, but the firm is talking to clients in Korea, Japan and increasingly Australia. 

“We see demand especially from pension funds and insurance companies who have exposure on the equity side but are looking to gain more exposure on the debt side,” noted Onukwugha.

Most clients are liability-based investors looking to use these assets to manage their long-dated liabilities, and those tend to be pension funds and insurance companies. 

“A typical pension fund or insurer looking for 30-year paper is often limited to investing in utilities," he said. "But with infrastructure you are able to find long-dated paper offering incremental spread that gives you the same type of duration, with the downside protection as well as the diversification and the other aspects.”

The downside protection comes in the form of the covenants included in the transactions, he explained. A typical infrastructure debt instrument is done through a project finance structure that requires a special-purpose vehicle (SPV). The vehicle is structured so that if things are not going well, the investor can secure cash within the SPV that can be used to service debt.

Onukwugha cited as an example an investment in toll roads. “If tolls are not being collected as projected, you want to make sure that the debt comes down in line with the lower performance.”

Australia's privatisation drive

In Australia, there is a large privatisation initiative emanating from state governments seeking to monetise some of their assets, including the power grid. 

Australian infrastructure investors, including IFM, AustralianSuper and Hastings, are buying up ports and power suppliers. Moreover, foreign institutions such as` Korea’s National Pension Service (NPS) and China Investment Corporation (CIC) are buying into Australia’s ports. NPS and CIC formed a joint fund last year with Queensland Investment Corporation targeting infrastructure assets from the privatisation programme. 

A key consideration is that infrastructure debt investment is not like doing a traditional corporate loan, where there’s a lot of expertise out in the market, Onukwugha said. “Origination becomes critical, and one differentiating factor for us is that instead of just buying what’s out there, it’s important to be able to structure deals to have the necessary safeguards for investors." 

Investment in infrastructure debt have been dominated by the US power sector and in certain American states the transportation sector is strong, said Onukwugha. Germany offers good opportunities in the renewable energy space, he added, while in Australia Barings has airports and sea ports in its portfolio. 

Alignment of interests is a critical factor, he added, and all of its 20-30 transactions a year, it has the parent company’s capital involved.