UBS raises €1bn for second European infrastructure fund

UBS Asset Management said it had reached the final close of its second European infrastructure debt fund, Archmore Infrastructure Debt Platform II (IDP II), raising €1bn within nine months of launch, thereby exceeding its initial target of €700m.

‘Our new Archmore Infrastructure Debt Platform II fund will focus on Euro-denominated countries, such as France, Italy, Germany, Spain, Portugal and the Benelux region, although it can also invest in the Nordics,’ Alessandro Merlo, executive director, infrastructure debt funds at UBS, told REFIRE. ‘We have already done four transactions on behalf of the fund in France, Belgium, Finland and Portugal (details are confidential) since we launched the fund last March.We don’t have a fixed target per country but we can’t invest more than 30% of the fund in any one country. We also can’t invest in countries that aren’t investment grade, such as Greece.’

Technically, the new fund can also invest in the UK but ‘hedging the currency is very expensive so I think we’re unlikely to’, Merlo said. ‘It’s less prohibitive to invest in Denmark or Sweden, despite hedging, because those costs can be offset by higher margins.’

UBS is targeting loans with a weighted average life of seven to 10 years. Its first infrastructure fund, launched in 2015, invested predominantly in transport infrastructure, benefitting from the rebound of traffic flows. The new fund will continue to invest in transport, energy, telecoms and social infrastructure, although the latter will be a smaller part of the portfolio.

‘We can also lend on greenfield projects with shorter draw-down periods, such as renewables, but as we are focused on maximising cash yield for investors, we will avoid projects with extended draw-down periods such as long concessions for newly built motorways,’ he said. The first fund was fully-invested in 18 months and Merlo expects the latest fund to be fully deployed within 18 to 24 months.

In total, 48 limited partners, comprising a mix of pension funds and insurance companies from 10 different countries across Europe and Asia, committed capital. The fund will look to take advantage of the continued capital supply/demand imbalance in mid-size European infrastructure financing and focus on private senior secured infrastructure debt opportunities, primarily through direct lending where it sees the most attractive risk-adjusted yield potential.

‘The successful closing of our second European infrastructure debt fund has received strong support from both new and existing investors, who have looked to the track record of IDP I and reaffirmed their confidence in our strategy, underpinned by efficient deployment and investment diversification,’ said Tommaso Albanese, head of infrastructure at UBS REPM.‘While we will remain selective in our approach, IDP II’s exciting pipeline provides me with confidence in its ability to deliver solid results.

’The latest fund-raising benefitted from over 70% re-up rate from investors in IDP II’s predecessor, Archmore Infrastructure Debt Platform I (IDP I), which was fully-invested last year. IDP I is now deployed across a diversified portfolio of infrastructure financings, which have delivered gross returns averaging 3.8%. UBS is also targeting a gross return of between 3.8% and 4% for its second infrastructure fund, according to Merlo.

However, there are challenges, he warns: ‘The biggest challenge is the disconnect between the public and private markets: the decrease in valuation and the steep increase of credit spreads due to global market volatility, US-China trade tensions and slowdown of the European economy. Will the volatility in public capital markets filter through to the private infrastructure market? I think it will, so that’s where you need to have a lot of investment discipline. We need to preserve the premium we had in the first fund.’

REPM’s European infrastructure debt platform now totals €1.6bn in committed capital across both of the Archmore European IDP funds and has invested in 16 transactions with operations spread across 11 countries over the past four years. REPM’s wider infrastructure business, comprising both debt and equity strategies for direct investments, has more than $4.5bn (€3.9bn) in funds under management. (ssk)