At a recent Capital Markets Day for GCP Infrastructure Investments, guest speaker Albane Poulin, Head of Private Credit at Gravis, outlined her thoughts on the outlook for infrastructure debt, the long-term opportunities available for investors, and Gravis’s credentials in this space.

The macroeconomic outlook is improving, and despite some geopolitical uncertainties, there is a growing confidence in the economy. Inflation is no longer out of control and global growth remains steady. So, for me, 2025 is the year of normalisation.

While infrastructure is a non-cyclical asset class and has proven to be resilient through different economic cycles, having a more positive economic environment will stimulate M&A activity and refinancing, thereby creating more opportunities for lenders.

In terms of valuations, as we are in the early stage of the rate-cutting cycle, it’s the perfect time to lock in high fixed-rate coupons, especially those with longer duration. And, as interest rates continue to fall, investors are likely to move from Gilts and public bonds into higher yielding areas, so private credit will become more attractive on a relative basis, while also providing lower volatility compared with listed instruments.

Thinking about credit risk, lower interest rates mean less pressure on cashflows and also reduces refinancing risk. As infrastructure loans aim to be secured on physical assets and contracted income, the asset class offers strong capital preservation. Investors like the inflation-linkage but also this certainty of capital being returned to them.

Another key trend is we expect demand for private credit to grow quickly in 2025 and particularly for infrastructure, where investors like this capital preservation, recurring income and investment in the real economy. We particularly anticipate strong demand for evergreen strategies providing some liquidity.

We’re operating in a supportive environment in terms of public policies. The government has an ambitious target to achieve decarbonisation, so significant investment is required creating opportunities for infrastructure lenders in existing, but also new sectors where Gravis is well-placed to play a role. The majority of these projects come with various forms of public subsidies generating attractive opportunities with long-term and predictable cash flows.

Some of these policies are shown in the chart below – just to evidence the scale of the challenge and the huge opportunities in the infrastructure space.

For example, the UK is targeting a 78% reduction of emissions by 2035 – which is set in law. That’s just 10 years away. To help achieve this, the aim is to almost double onshore wind, and triple solar and offshore capacity. Given the time scales this is perhaps not realistic, but it sets a clear direction of travel.

While the big focus is on electricity generation and expansion of the grid, the Government also has targets for heat, transport and industrial decarbonisation. These include a minimum EPC rating of C for rental properties, and no new diesel cars by 2030.

Longer term, complete decarbonisation of all sectors will be required by 2050. We’ll need 100% green energy 37 million of the 40 million cars currently on the road in the UK will need to be electric, 50% to 80% of our homes will have to have heat pumps and we’ll have to remove 50 million tonnes of carbon each year for industries which cannot decarbonise.

With all this change it’s also worth remembering that electricity demand is expected to double by 2050, driven by the electrification of heat and transport, but also driven by the production of hydrogen and the continued digitalisation of our economy. The increased demand will require significant change to the current energy system in order to ensure security of supply. Electricity networks will have to be upgraded and expanded, and we will need more flexible generation – generation that isn’t necessarily connected to the grid. As the deployment of renewables increases, batteries will play a key role in balancing supply and demand in real-time.

Gravis has been investing in infrastructure debt since 2010. When you compare our loans against a public bond index with a similar risk profile – so BBB and high yield – the additional income return we’ve received for the lack of liquidity and the complexity of these loans has been between 1-2%. We call this the ‘illiquidity pick-up’ and, when combined with capital preservation, it’s been a compelling reason for investors to allocate to this asset class.

Strong origination capabilities are essential. The fund management company needs to be well connected to developers and financial advisors and have a pipeline of transactions. Technical expertise is also paramount for writing and structuring deals.

At Gravis, the team includes people with engineering backgrounds who understand the evolving sectors and technology, as well as people who monitor the regulatory frameworks which support government policies to achieve faster energy transition.

Our portfolio managers are also proactively engaged with the assets so they can detect potential credit deterioration early. This is proven by our low loss rate ratio of 0. 41% over the past 14 years for GCP Infrastructure Investments. This can be compared to the annualised loss rate ratio over the same period of time for bonds with similar risk profiles which according to Moody’s is 2. 1%. And when things do go wrong – because they do - having the expertise and experience to work on restructuring is key.

On average, Gravis has achieved an investment return of 10.1% on exit, which is higher than the average coupon. This has been possible because we obtained extra fees from prepayment, as well as extra fees from negotiations with our borrowers.

Our expertise means we are able to provide bespoke and complex financial solutions which best match the risk profile of the asset. We're focused on loans with credit qualities in the BB waiting category, where we can generate more alpha, but still benefit from strong collateral.