LONDON: Infrastructure debt: entry through primary or secondary markets? New paper from J.P. Morgan Asset Management weighs up each approach
Mar 06, 2013
London, 6 March 2013: Recent months have seen an increase in interest in infrastructure debt, with the launch of initiatives including the Pensions Infrastructure Platform (PIP) in the UK, and several institutions hiring or building infrastructure debt teams.
But there are two distinct approaches to investing in infrastructure debt – through the primary market, where investors lend funds for infrastructure building projects (this is the focus of the PIP), or through the secondary market, where existing loans are bought from the originators (often banks seeking to meet the capital requirements of new regulation such as Basel II/III).
A new four-page Investment Insights paper, Entry through primary or secondary markets?, from the Infrastructure Debt Group at J.P. Morgan Asset Management weighs up the costs and benefits of each approach, looking at five key areas: default probability, asset diversification, speed of capital deployment, interest rate management and execution risk.
The authors, J.P. Morgan Asset Management's Bob Dewing, Sarah Wu and Aaron Groom, argue that in four out of five of these areas, entry via the secondary market is advantageous, as the higher risk inherent in the planning, construction and start-up stages of projects is avoided, and capital can be deployed quickly across a broader range of assets.
Bob Dewing, Portfolio Manager in the Infrastructure Debt Group at J.P. Morgan Asset Management, said: "If you are an investor such as a pension fund, with long-term liabilities, it is easy to see the attractions of a sector such as infrastructure debt, where you have a visible return profile over 25 or 30 years to help match your liabilities.
"There are currently significant opportunities for secondary market investors as banks seek to restructure their balance sheets in line with regulatory requirements. Investing via the secondary market also means capital can be put to work more quickly in assets that are already operating. Greater diversification can also be achieved in the secondary market, as primary investors may find infrastructure is frequently built in cohorts as part of a programme to improve schools or roads, for instance," Dewing added.
The authors also point out that secondary markets are an effective and immediate entry point for building a diversified portfolio of senior loans, while the primary market develops, and increasingly becomes an investment strategy in its own right.
Copies of the Investment Insights paper are available on request.
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About J.P. Morgan Asset Management – Global Real Assets
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