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European insurers Axa, Allianz and Ageas have recently made high-profile commitments to invest in infrastructure assets as they hunt for additional returns in the current low interest rate environment and have been looking to exploit the opportunity afforded by banks' withdrawal from the market in recent years.
However, some insurers are warning they could be crowded out of shorter-term investments by a resurgence of bank financing. Wim Vermeir, chief investment officer at Ageas in Brussels, says: "There is more competitive pressure at the short end of the curve. When we started investing in infrastructure, we saw that there were very attractive yields in infrastructure whatever the tenor. We now see that banks are coming back into the short end [of the curve] and that those spreads are coming down."
Capital flows into infrastructure assets have increased thanks to insurers' interest. Despite banks' growing interest at the short end, long-dated investments remain attractive because of the absence of banks in this segment. Bankers observe that although competition for shorter-tenor deals is increasing, banks are naturally better suited to certain types of infrastructure loans than insurers.
However, while banks' liquidity profiles are a better match for ‘greenfield' projects – those that have yet to enter, or are in the early stages of, the construction phase – some large insurance companies are starting to explore opportunities in this area too as their familiarity with infrastructure grows.
Insurers have also recognised the importance of managing a diverse infrastructure portfolio to balance the risk and return profile of these instruments. Allianz invests in both equity holdings in infrastructure (through Allianz Capital Partners) and direct debt financing (through Allianz Global Investors). Projects are also geographically dispersed, with holdings in both Europe and America.
However, despite insurers' increasing sophistication and confidence with these assets, infrastructure is likely to remain a shared market with banks.
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