Riding the Green Wave: Private Credit and Sustainable Infrastructure in Asia

It is no secret that private fund managers are facing a brutal fundraising market in Asia. Yet, amidst the turmoil, some encouraging bright spots are emerging, one of which is private credit in the green infrastructure space.

Filling a Funding Gap

The need for private credit to support the development of sustainable infrastructure in Asia is driven by a confluence of factors, biggest of which is the presence of supportive institutional policy. Governments in Asia, multilateral development banks (MDBs) and development finance institutions have made significant efforts to bolster investments into sustainable infrastructure. Recognising that public financing alone will be insufficient to meet green infrastructure demands in the region, initiatives have been put in place to crowd-in private capital under the banner of blended finance. In Singapore for instance, the Monetary Authority of Singapore has established the Financing Asia’s Transition Partnership (FAST-P), a blended finance initiative in collaboration with public, private and philanthropic sector partners which aims to mobilise US$5 billion to de-risk and finance marginally bankable green infrastructure projects in Asia.¹

Against this backdrop, private credit is especially well-suited to address the funding gap. Infrastructure projects are predominantly financed by debt, a significant portion of which had traditionally been provided by MDBs and the commercial banking sector.² However, with such banks facing stricter credit environments, it may be that obtaining loans for marginally bankable green infrastructure projects will become increasingly challenging. This shift presents an opportunity for enterprising private credit managers to offer innovative and tailored sources of debt capital to finance green infrastructure projects in Asia.

Key Considerations

Managers who are looking to enter this space should consider the following:

• Fundraising and Capital Structure
  A sizable proportion of green infrastructure projects in developing Asia are marginally bankable.³ As such projects are typically unable to attract private capital on their own merits, raising funds for such projects is inherently challenging. One solution to crowd-in capital is to utilize philanthropy-backed blended finance, which involves interlaying philanthropic funds with private and public capital. As philanthropic funds tend to be concessional and can bear below-market returns, this solution allows managers to leverage philanthropic contributions to mitigate risk and attract private and public capital by offering a cushion that can enhance the project’s financial viability. This blending can be done at the project level, but for greater impact, it is possible to interlay these different forms of funding within the “waterfall” of an investment fund.
  
  However, this is easier said than done. From a structural perspective, not only will managers need to figure out the right mix of concessional and commercial capital, they must also consider how to structure the fund’s capital stack to accommodate both philanthropic and commercial investors, each with distinct risk and return profiles.

• Duration
  Infrastructure-focused funds tend to have a longer fund life (often upwards of 15 years) compared to traditional private credit funds (around 5 to 8 years). Accordingly, managers need to consider how this timescale affects the fund’s economics structure. For instance, the fund economics may need to be tailored to allow commercial investors, who typically have a shorter return horizon, to extract value earlier from their investments. Internally, managers will also need to consider how their carry incentive scheme should be structured to motivate their team members for the long haul.

• ESG Reporting Requirements 
  Investors may impose ESG reporting requirements and, to the extent the fund is classified as an Article 8 or Article 9 Fund under the EU Sustainable Finance Disclosure Regulation (SFDR), there will be additional ESG reporting requirements. As lenders have limited ability to influence borrowers, managers need to consider early if operationally they will be able to meet such ESG reporting obligations.