GLOBAL – Investors should be wary of expecting unrealistic or unsustainable returns from infrastructure debt, according Industry Funds Management (IFM).
Robin Miller, global head of debt investments at IFM, warned that some new entrants to infrastructure debt could be basing their return expectations on unrealistically aggressive pricing.
He told IP Real Estate: "We think there are a fair number of people who have come to this space having raised the expectations of their investors unrealistically."
Miller said some new debt fund managers had "positioned" infrastructure debt products as being "low risk but with a high return".
"They haven't considered what that means for the implied social equation," he said.
A number of infrastructure fund managers have set up debt platforms to take advantage of the lack of bank lending in the sector.
Last year, IFM hired David Cooper to head up its debt investment programme in Europe, and the company is looking to appoint someone to lead its US expansion.
Although governments are under pressure to seek private sector financing for their infrastructure needs, Miller believes there will be a limit at which governments will say, "you're asking for too high a return, we can't do it that way".
Miller said IFM had "a more realistic view of where that market price should settle".
He added: "We want to say, let's be realistic, because then privatised infrastructure debt will work and satisfy the needs of society as well as investors.
"This perhaps subtle shift in pricing emphasis then has a better chance of unlocking a government-led asset supply."
Miller said a lot of the "early money drawn to this space" came from credit investors "chasing yield" and attracted to what they saw as a "high-returns-for-low-risk asset class".
He added: "We would always emphasise that you must maintain low risk first and foremost.
"The uplift you should expect to get from being in infrastructure debt should be realistic and rely on the predictability of the asset class while offering investors a decent premium for the low liquidity of the investment."
IPE and Stirling Capital Partners are co-hosting a conference, Infrastructure for Pension Funds and Other Capital Owners, to take place on 2 October in London. For more information, click here.
