Monday, June 17, 2024

Global Infrastructure Finance targets $1bn with private EM bond fund – exclusive

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Susan Wisialko left investment manager GMO in 2018 to launch the Boston-based Global Infrastructure Finance, manager of an open-end private fund investing in emerging market infrastructure bonds. In 2021, she was joined by chief operations officer Chris Papetti, also formerly of GMO.

And finally – following a pandemic-imposed hiatus – the Global Infrastructure Fund has been launched, receiving its first round of funding at the end of 2023. Wisialko declined to comment on the amount raised.

The fund is an open-end private vehicle aiming to raise $1 billion in capital “as quickly as possible”, according to Wisialko, or “optimistically” in 18-24 months. This would entail investments in 50-60 bonds in total.

The strategy will target a high single-digit return on average over a full seven-year credit cycle. Wisialko estimates that her strategy – using figures from Bloomberg to make a mock portfolio of 25-35 bonds – could have yielded an annualised average performance of about 8.4 percent gross and 6.4 percent net returns in 2023, over an eight-year credit cycle. She also estimates that the strategy would’ve had a low correlation (at 23 percent) with five- to seven-year US Treasury bonds during that time period.

A rare exposure to non-OECD infra

Now, through that initial fundraise, Global Infrastructure Finance owns 31 bonds, with an average credit quality between a BB+ and BBB-. These bonds are US dollar-denominated and based solely in non-OECD emerging markets. The majority of the portfolio is in Latin America.

The bias towards Latin America wasn’t planned, according to Papetti. “We’re indifferent really to the region. [Susan] chases the cheapest bonds and it just happens to be that there are far more cheap bonds available in LatAm,” he said.

“Latin America has more bonds available. When there are more bonds available, there is more opportunity, number one,” Wisialko expanded. “Number two, sometimes in Asia and in the Middle East, locals will buy the bonds a little tighter. Local investors may ascribe a different view of the credit risk and therefore accept less compensation for the risk they take. Typically, locals in some regions will buy the bonds at a level that I may think is too expensive.”

The portfolio also skews heavily towards bonds supporting investments in electrification, energy and transportation.

One example of such a bond is a project finance bond for a coal-fired electricity generation plant in Indonesia. There, tariffs are set in place via availability-based payments from the Indonesian state-owned electricity company, meaning revenue streams are predictable.

In other words, it’s classic infrastructure, but without the potential risks that commonly come with equity.

“We don’t have to go in and deal with the local laws, the municipality, the employees and the boots on the ground,” explained Papetti. “If there are any difficulties with payment, we can go to court in the US or UK because it’s either US law or UK law security and the remediation process, or how you collect on a defaulted bond, is well understood. And that’s the process we follow.”

Hitting the market

Despite chasing these classic infrastructure protections, Wisialko has had more success marketing the fund as a fixed income strategy.

“Any differentiated manager is going to be hamstrung by their rolodex. My rolodex includes ministers of finance and heads of central banks and prime ministers of countries. But I can’t get the chief investment officer of whatever public fund – I can’t get to them. So there’s a little bit of challenge there,” she explained.

“I’ve been talking to fixed income people and fixed income investors. And it’s easy for me to say this is like emerging markets, corporate dollar debt, but better. So, someone who buys emerging market corporate dollar debt, it’s easy for me to explain this to them.

“Honestly, when I first had the idea, I thought, ‘Oh, the infrastructure investors are going to love this because it’s the same return they get, but it’s much more liquid. So why wouldn’t they want something like this?’ But for some reason, it’s been hard to make the right connections.”

The fund will offer investors six-month liquidity.

Another differentiator Wisialko thinks infrastructure investors will appreciate comes in the form of dealflow. “If you’re investing in the latest $25 billion infrastructure fund, we’re going to deliver something different than that. That $25 billion fund, I don’t know if they have $25 billion projects to use it up on or spend it. We can spend our capital right away.”

Despite these frictions, the fund is still seeking institutional investors in the form of insurance companies, public pension funds, endowments and foundations. The fund seeks investments from $100 million-$200 million, with a minimum investment of $5 million.

It’s likely to be a strategy most LPs haven’t been pitched before. There is only one other private bond fund that Wisialko has seen in market – that of DoubleLine Capital, an infrastructure income fund that produces returns by buying listed bonds with the daily market price that support the development of infrastructure. However, DoubleLine’s strategy is more focused on North America.

“Our investment strategy is differentiated” she concluded. “We chose this structure because we think it’s the best way for investors in this strategy to maximise their return.”

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