(Bloomberg) -- Global demand for new infrastructure to service everything from clean energy to data has created a lucrative new market for some of the biggest names in private credit.

Investors including Blackstone Inc, Brookfield Asset Management Ltd and Ares Management Corp raised almost $9 billion last year for funds that will be used to finance infrastructure projects. The market has the potential to grow to $1.5 trillion, according to a white paper published by Ares on Tuesday based on an extrapolation of 2022 data over a five-year time horizon. 

The pairing is unusual given that private credit investors typically lend to junk-rated companies and have only recently begun a foray into investment-grade debt, while infrastructure projects are more commonly funded by bank loans. But a surge in demand for investment at a time when governments are strapped for cash has pushed developers to look for alternative sources of financing.

“One of our focus areas is decarbonization and in that space, there are a lot of new, smaller developers and players that may be less likely to access big banks,” said Ian Simes, a managing partner of Brookfield Asset Management Ltd.’s infrastructure group. Brookfield has raised the largest private infrastructure debt fund to date with Brookfield Infrastructure Debt Fund III closing on $6 billion in November 2023.

Simes says that infrastructure debt funds will likely supplement, rather than replace, bank lending, as it has done in the junk credit market.

The sector is also attracting large pools of money from private equity funds, which in turn should generate growth and demand for debt. The world’s largest asset manager, BlackRock Inc., acquired Adebayo Ogunlesi’s Global Infrastructure Partners for $12.5 billion in January in a bid by CEO Larry Fink to profit from what he described in an interview as “the early part of this infrastructure revolution.”

A third of investors in private markets, known as limited partners, polled in a Preqin survey said they plan to put more money into infrastructure funds this year.

Why Is Private Credit Booming? How Long Can It Last?: QuickTake

Private debt linked to infrastructure can be both floating or fixed rate and lenders are keen to lock in a fixed rate given the jump in interest rates. Infra private credit can generate yields of around 8%-10%, compared with around 5% before the jump in rates, according to Philippe Garrel, head of energy transition funds at Sienna Investment Managers.

The flip side of the jump in yields is that higher borrowing costs, coupled with increased inflation, may slow growth as infrastructure projects get more expensive. 

But the scale of investment needed to transform global energy infrastructure alone means the sector is likely to keep growing over the longer term. Electricity grids will require at least $21.4 trillion of investments by 2050 to support a global net zero trajectory, according to estimates from BloombergNEF.

In addition, contracts are long-term and feature fixed tariffs that are designed to function with inflation changes, making the sector very resilient, according to Roopa Murthy, a partner at Ares. 

That in turn has resulted in a “historical record of low losses, high rates of recovery and low ratings volatility,” Murthy and her colleagues wrote in the Ares white paper.

--With assistance from John Sage.

(updates with line on Brookfield Infrastructure Debt Fund III in paragraph 4)

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