A lot is still uncertain, when it comes to future U.S. policy-making. However, infrastructure is emerging as a key priority of the Trump administration. Investors are likely to pay close attention. Capital markets play an increasingly critical role in funding infrastructure, reflecting budgetary pressures on governments in the U.S. and elsewhere.
Globally, demand for infrastructure debt continues to grow. Interest rates remain low by historic standards. This is causing investors driven by long-duration strategies to look for alternatives to government bonds. Investors are looking at options that can potentially offer better risk-return profiles without diverging significantly from a low-risk proposition.
Infrastructure-bond investment strategies offer the opportunity for diversification. Investing in a liquid portfolio of large, high-quality, investment-grade infrastructure assets can potentially lead to interesting risk-adjusted returns. Moreover, cash flows generated by infrastructure assets tend to be predictable in nature and visible in the long term, which may also help to lower default rates. And, if there is a default, the hard-asset-backed nature of infrastructure assets, and relative stability of asset valuations tend to translate into higher recovery rates for creditors. Keeping track of the performance of senior infrastructure bonds can be difficult. This is why we have developed the recently published iBoxx Infrastructure Debt Index family, transparent benchmarks designed to help measure asset-class performance.
The investment criteria of key current holders of infrastructure debt typically suggest an even larger target allocation.
Source: Deutsche AM estimates based on Preqin database as of 9/30/16; includes only North America and Western Europe.