For much of the past decade, private credit has benefited from stable inflation, low interest rates, ample liquidity, and a retreat of banks from lending. This was matched by rising demand from investors seeking alternative sources of yield, driving strong inflows and rapid growth in assets, particularly within corporate direct lending.
That environment has changed. Today’s market backdrop is defined by heightened geopolitical uncertainty, volatile inflation risks and a lack of clarity over the path of interest rates. Conflict in the Middle East has also reinforced concerns around energy security and supply chains.
Amid this shifting landscape, investors are placing renewed emphasis on portfolio income – as both a source of resilience and key contributor to overall return – and diversifying the sources of that income.
This is not about abandoning private credit. However, the current environment is encouraging investors to think more carefully about the make-up of their private credit allocations.
Against this backdrop, we believe infrastructure debt is particularly well positioned. It offers a differentiated, diversifying source of yield – backed by essential assets, contracted cashflows and strong downside protection.
A changing macro backdrop: tailwinds for infrastructure
The energy price shock unleashed by the war in Iran underscored the need for governments, especially in Europe and Asia, to prioritise economic resilience and independence.
Strengthening energy security and defence, accelerating electrification, modernising transport systems, and boosting domestic industrial capacity will require substantial long-term investment. This creates powerful long-term tailwinds for infrastructure investment and financing.
Infrastructure assets are also typically structurally better positioned to navigate inflation volatility than traditional corporate businesses. Revenues are often linked to inflation through contractual frameworks, regulated tariff structures or concession agreements, and many debt exposures are also floating rate, so income rises as base rates rise.
Of course, not all sectors behave identically – airports and some toll road assets, for example, can be more sensitive to GDP growth or discretionary consumer spending – reinforcing the importance of manager and asset selection.
Broadening the private credit toolkit
Corporate direct lending has grown rapidly, but as capital has flowed in competition has compressed spreads, weakened lender protections, and increased complexity.
Recent headlines have drawn attention to these dynamics. While much of the discussion arguably overstates broader market risks – in our view, many of the current challenges are related more to liquidity than solvency – it has prompted investors to reassess their exposure.
Infrastructure debt offers a differentiated risk profile. Unlike much of corporate direct lending, it is typically secured against essential, hard assets with long economic lives and high barriers to entry, with cashflows that are often contractual or regulated.
This distinction matters in sectors currently attracting scrutiny: software and asset-light business models, for instance, carry very different risks from essential infrastructure.
Infrastructure debt fundamentals
While historically associated with long-dated, investment-grade lending, infrastructure debt has evolved into a broad spectrum of opportunities across risk, return and duration.
At one end are senior, investment-grade loans suited to investors seeking to prioritise long-term, reliable income. At the other are shorter-duration, sub-investment-grade or junior debt offering enhanced yields.
What remains consistent is the underlying resilience of the assets being financed, with stable demand characteristics and robust operating margins. Historically, this has translated into strong credit performance.
Rating agencies have observed lower default rates and higher recovery rates for infrastructure-related lending relative to broader corporate credit. Schroders Capital has seen strong credit stability across more than 200 transactions over a decade.
Equally important is income. Infrastructure debt continues to provide attractive spreads over public corporate debt – and even over corporate direct lending of similar risk, supported by transaction complexity, illiquidity premium and the specialist expertise required.
A deep and expanding market opportunity
Far from niche, the addressable infrastructure financing universe is vast and continues to grow rapidly. Global infrastructure investment needs already extend into the trillions of dollars. Europe remains one of the deepest and most diversified infrastructure debt markets globally.
Despite this growth, infrastructure debt structures remain conservative with fewer participants than broader direct lending – an advantage for managers with long-standing origination capabilities, sector expertise and sponsor relationships.
New horizons
Infrastructure debt represents a compelling allocation for portfolios, delivering diversified income with an expanding risk-return continuum that now extends to double-digit returns for higher-return seeking investors.
Importantly, infrastructure debt is also benefiting from powerful structural tailwinds that translate into a deep and growing opportunity set for experienced managers. As always, of course, successful investing depends on selectivity and underwriting discipline.
