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 our society is facing: the energy transition, urban mobility, and the digitalisation of services.
For UK pension scheme investors, we believe junior infrastructure debt offers a unique risk/return profile to other asset classes.
Junior debt offers a high complexity, or illiquidity, premium for, in many cases, a better credit profile compared to other asset classes of similar ratings or returns.
Traditional high yield corporate bond portfolios are highly exposed to the risk of downgrade risk if a bond suffers a deterioration in credit quality and is downgraded and sold at a loss.
Infrastructure debt are private assets and therefore not exposed to this risk unless there is an impairment, which is rare.
Infrastructure assets are not correlated to the general market and therefore offer diversification benefits not available through other more traditional asset classes.
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.
In late 2015, Schroders established an infrastructure platform with the goal of offering institutional investors with access to high quality infrastructure investments which should provide more predictable and secure cashflows than other asset classes.
For UK pension schemes, we offer a high quality, diversified portfolio of UK-based infrastructure projects and companies, concentrating on the brownfield segment of the infrastructure market.
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.
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.