Primarily, a ‘debt fund’ implies an investment vehicle in which your core holdings are considered to be fixed and long-term income investments. As a specialised form of the same, infrastructure debt is also meant to pump huge amounts into the infrastructure sector. Even though this funding mechanism demands big and long-term requirements with an extended gestation period, it is considered to be much advantageous when compared to other types of easy funding avenues, especially for long-term investors.
Infrastructure debt funds
Infrastructure debt funds are aimed to accelerate the flow of long-term debts into infrastructure sector, which also contributes towards the overall infrastructure growth of a nation. In the UK, the domestic as well as offshore investors, pension funds, and insurance all can invest into these funds through bonds and unit purchase as issued by the IDFs (infrastructure debt funds).
IDF will further take over the loans to various infrastructure projects mainly the Public Private Partnership (PPP) construction projects. Such bonds issued by IDFs can now be subscribed by anyone. The major categories of investors who can benefit in a long-term from infrastructure debt funds include, but are not limited to:
v Risk-averse offshore institutional investors
v Domestic institutions investors.
v Offshore High net-worth individuals (HNIs),
v Domestic HNIs
v Sovereign wealth funds
v Pension funds
v Insurance funds
v Endowments etc.
You can learn more at the other articles about how infrastructure debt funds work well in line with the above avenues. Here, we will discuss about the working principle of infrastructure debts and potential risk factors associated with it
How does infrastructure debt work?
While the investors put in their money into an IDF company, the company further reinvest this amount into many sorts of infrastructure projects as a loan. The project owners or infrastructure construction companies will pay an interest back to the IDF firm, which is then passed on to the investor by deducting the company’s commission. In UK, IDF income of investors is counted as tax-free, say as recognition of participating in the infrastructure development of the region.
In cases where the infrastructure debt funds issue bonds, the Public Private Partnership (PPP) credit enhancement also will be available. In this, the IDF companies will refinance such PPP projects once after their construction is over and successfully operate for a minimum of one year. It is assumed that these types of projects involve only lesser risks and in turn higher credit rating. Such a mechanism will also enable the flow of pension funds and insurance at higher costs as long-term debts into the PPP infrastructure projects like making roads, bridges, airports, ports, railways etc.
As in case of any long-term investment avenues, the risks are comparatively lesser in infrastructure debt funds. In terms of unit-based infrastructure debt funds, there will be a greater credit risk as the investors are free to avail higher returns corresponding to the risks taken.
Government is also raising funds in this mode as the present funding is inadequate for completion of long-term infrastructure projects. Banks also approach their exposure limits soon in this case due to the mismatch in asset-liability ratio. Here, IDFs are expected to initiate the evolution of a subsidiary market and in turn set open a solid investment avenue to you.