Why invest in subordinated debt when you can invest in senior debt for the same returns? That question has been pertinent for Brookfield Asset Management and its infrastructure debt co-head Ian Simes as the firm deploys its $6 billion Brookfield Infrastructure Debt Fund III, which closed in November last year, affiliate title Private Debt Investor reported.
“Our strategy mainly targets holdco and subordinated debt sitting behind the senior debt but more than half the capital we’ve deployed so far for our most recent fund vintage has been senior debt, and at the returns we indicated to our investors,” says Simes.
He says there are situations where the firm could theoretically insert senior and junior pieces, but the borrower prefers a quick and pragmatic solution. “Counterparties are often looking for a total quantum of debt to solve a problem for them. It can be a great risk/return for us, and a lot of that exposure has features [that] make it feel investment grade.”
He says there are also situations where inserting pure junior capital strips would mean returns at least equal to, if not in excess of, expected equity returns in the same structure.
Simes joined Brookfield in July 2015, having previously been a director at Citi, and – as well as being a managing partner – co-heads infrastructure debt alongside Hadley Peer Marshall. While Simes is based in London, Peer Marshall, who joined at the same time as Simes to launch the infrastructure debt business, works out of New York.
“ A successful track record obviously helps but fundraising has been helped immeasurably by people saying, ‘Yes, I’ve got a bucket for that’ ”
Ian Simes
The strategy’s progress since then has seen it add substantially greater amounts of capital each time it has reached out to investors: $900 million for the debut fund that closed in 2017, $2.7 billion for Fund II in 2020 and then the mighty $6 billion third fund – the largest fund of its type ever raised.
Finding a niche
Going back to the firm’s roots and rationale for the launch of the strategy, Simes recalls: “The focus initially was on trying to avoid competing with the banks, doing something that they weren’t doing and the capital markets weren’t very good at doing – which was high-yield, subordinated, Holdco-type financing in the infrastructure space.”
The firm believed this was an under-serviced niche that had a good risk/return profile and where there was a growing need for that type of capital. “The occasional high-yield specialist would dabble in infrastructure but there were few infrastructure-dedicated strategies in play at the time,” says Simes.
By the time Simes and Peer Marshall launched the debt business, Brookfield was already a long-established equity player in the space. This made the strategy feel like a “natural extension”, according to Simes. “We already had the asset ownership knowledge, and we could exploit that in the investments we were making,” he says. “It all seemed very logical, and it’s taken us to where we are today with a global team, a good size platform and a fantastic deployment rate.”
Simes says the team deployed $3 billion last year alone.
Changing reception
Simes says the evolution of Brookfield from fund one to three has seen education play a big role in terms of explaining the use cases of high-yield investment. Simes cites an example: “Maybe you’ve got an asset in an old fund and it has a great expansion opportunity but the fund is fully deployed. You want to make the investment because it’s got fantastic potential so maybe we could be that capital, the equity-like capital or equity replacement capital that helps you do that attractive bolt-on or expansion.”
On the investor side, Simes says the biggest evolution has been the creation of specific allocations. When the firm was raising fund one, he says, it would point to a great risk/return and diversification benefits, but LPs would have no place for it in their portfolios. By the time it got to fund three, that had all changed.
“A successful track record obviously helps but fundraising has been helped immeasurably by people saying, ‘Yes, I’ve got a bucket for that, I know where I can allocate internally.’ That’s been a big change in the evolution in the market.”
Having broken records with its third fund, Brookfield is turning its thoughts to a fourth version, expected to launch in H2 this year. The firm remains tight-lipped about the potential size of the vehicle but after alternative assets as a whole endured a big dip in fundraising last year, Simes detects more favourable conditions ahead: “It’s feeling more optimistic now. The worst is behind us.”
Five areas of focus for Brookfield
Accommodating insurance capital is among the firm’s priorities
1 Investment grade: Having built up around $100 billion of assets under management in insurance capital, Brookfield is aiming to invest that capital in a “more efficient way” – whether through Brookfield funds or direct deployment. Insurance money is steering Brookfield towards more investment-grade exposure.
2 North America: Driven by demand for data centres and renewable energy, the current fund “has a much greater weighting to North American deployment”, according to Simes. In renewables, he sees not just expansion and piecemeal M&A opportunities but fundamental growth in the asset base.
3 Europe and APAC: Because of the banks being more active in Europe and APAC than in North America, Simes says there are slimmer pickings to be had in both regions. However, he points out that the data and renewable energy buildouts are global phenomena, ensuring that – with a bit of hard work – deals are to be found everywhere.
4 Data deals: Simes compares the buildout of data centres with the construction of the railways in terms of speed of execution and transformation of the infrastructure landscape. In May 2024, Brookfield struck a deal to supply 10.5GW of fresh renewable energy capacity to Microsoft between 2026 and 2030. Simes sees a huge market in supplying clean energy to the private sector.
5 The Middle East: The region proved to be the right hunting ground, according to Simes, when Brookfield last hit the fundraising trail, with the firm successfully raising capital there for the first time. This was the first capital out of the infra credit fund to be raised from the ME region. The US, Europe and APAC are still fundraising strongholds – but Middle Eastern capital is a growing force.