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The illiquidity premium obtainable in small, shorter duration infrastructure investments is shrinking as insurers and other institutional investors increase their demand for physical assets, say investors. But higher returns can be obtained on larger infrastructure projects, if an insurer has sufficient scale to take the debt of an entire project onto their balance sheets in a bilateral deal.
Bilateral deals make it easier to resolve issues as only two parties are involved. They can also lower the cost of funding for the borrower, as no implicit premium is charged for the mismatch between the actual structure and the investor's preferred structure.
The cost of intermediaries such as banks is also cut out, increasing the returns an insurer can make.
Deborah Zurkow, head of infrastructure debt at Allianz Global Investors in London, comments: "In the seven- to 10-year space, there is a large group of investors who have shorter duration books, like property and casualty insurers who might not have long-tail liabilities, so there is more money in that space".
At tenors of more than 15 years, there are deals of size and structure that still offer attractive returns, adds Zurkow. "At our end, we see there is still a premium for the expertise and the ability to get involved in transactions before construction in particular."
The fact insurers have capital already available to invest and do not need to raise it externally makes them attractive investors to those seeking project finance. "They don't need to raise it through a fund, so there's a permanency there that makes borrowers comfortable", says Zurkow.
But a lack of suitable projects in which to invest is a concern for insurers. LGIM's Roe says regulatory changes may increase the number of suitable projects. "In the latest version of the Solvency II regulation, the rules are a little bit more relaxed on small amounts of variation in the shape of the cashflows, opening up the range of appropriate deals", says John Roe, head of multi-asset funds at Legal and General Investment Management (LGIM) in London.
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