In this episode of Debtwired (available on Spotify or Apple Music), Albane Poulin, Head of Private Credit at Gravis, discusses the evolving role of private credit in infrastructure and real estate finance across the UK and globally. Time stamps for the podcast are as follows:

0:30: Albane, you joined Gravis as its Head of Private Credit last January. Just over a year on, can you tell us how it's going? And what have been some of the highlights of Gravis' private credit activity in the infrastructure and real estate sectors?

2:05: What have been some of the most significant developments you've seen in the private credit sector generally in relation to infrastructure and real estate?

4:32: What would you say is Gravis' key differentiator from other players in the market?

5:48: How much of Gravis' book is private credit currently, and are there plans for that to increase?

6:53: Focusing on the real estate angle, what would you say has been the sector's relationship with private credit until now, and where do you see it going?

8:26: And in terms of refinancing these assets this year, are you seeing a different flavour of interest from lenders or even different names coming up than you did last time?

8:50: Can you talk about any specific real estate projects or types of real estate that Gravis has been involved in through private credit, and which factors made them more attractive?

9:58: Pivoting over to the infrastructure aspect of your focus, what would you say are the key similarities and differences between the infrastructure finance market and real estate when approaching from a private credit perspective?

11:04: What would you say sets your infrastructure fund apart from others in the market? And how do you decide on the key opportunities to pursue within the infrastructure space?

11:52: How do you see the relationship between infrastructure finance and private credit? Would you say that infrastructure borrowers are becoming more comfortable with non-bank loans?

12:40: Could you share an example of where Gravis became an early mover in a sector?

The full transcript is below:

Amelia Weitzman (AW): Hello, and welcome back to Debtwired! In today's episode, we're joined by Albane Poulin, who is Head of Private Credit at Gravis, to discuss the market in relation to infrastructure and real estate finance.

For those that don't know, Gravis is an infrastructure and real estate investment manager based in the UK. With an extensive background in credit and investment management, Albane will share insight into this evolving asset class and its role in shaping future markets.

So, Albane, you joined Gravis as its Head of Private Credit last January. Just over a year on, can you tell us how it's going? And what have been some of the highlights of Gravis's private credit activity in the infrastructure and real estate sectors?

Albane Poulin (AP): Thank you, Amelia, and a pleasure to be here today. As you said, one year in the job and it's going very well. I guess moving from a company with 5,000 employees to a firm of 50 employees, requires a bit of adjustment. But my team is actually larger, with 21 people working in direct investment, who are experts and well connected to developers, financial advisors and regulators. So, I'm in charge of the oversight of the existing loan book for GCP Asset Backed Income and GCP Infrastructure Investments. These two investment companies are listed on the stock exchange, so the level of reporting and disclosure is much higher than any of the funds I've managed in the past.

It's quite interesting to be involved with the team and have extensive discussions with the Board on different topics, such as strategy, capital allocation, and portfolio management. I guess another part of my role here at Gravis is to focus on new strategies and on raising a new private credit fund. So, in the past year, I've worked on how best to position Gravis in the next phase of growth. So, we have started marketing a new private credit fund and expect to have our first close later this year. And I really enjoy being involved at the loan level, [looking at] origination, monitoring, structuring, but also at the strategy level. This is what attracted me to the role at Gravis Capital.

AW: What have been some of the most significant developments you've seen in the private credit sector generally in relation to infrastructure and real estate?

AP: In my mind, the most significant development is the fact we’ve seen a broader investor base investing the asset class. It means private credit keeps growing, but also becomes more sophisticated.

If you take the example of the UK, the key priority of the UK government is to get the pension industry to increase investment in startups and infrastructure projects in order to boost the economy. This is what we call the Mansion House Function Reform, where the government is looking to consolidate defined contribution and local government pensions schemes. These schemes will be forced to pool more of the assets. The idea behind that reform is to boost UK economic growth by investing in vital infrastructure projects including transport, energy and housing. And, at the same time, these investment should improve the return for UK pension savers, as their capital is invested in what we call the more productive assets, so effectively generating a higher return. So, the focus is on private equity and venture capital, but we also expect real estate, infrastructure and private debt to play a key role too.

I guess another dominant topic in my mind is we see more sophisticated strategies in private credit, providing liquidity with, for example, open-ended, evergreen structures or semi-liquid funds.

This can help a broader investor base, such as defined contribution [schemes] but also retail investors, to access that asset class. This is great to see more types of funds, but we believe private credit remains a buy-and-hold strategy, so very much [more] suitable for investors with a long-term investment horizon. So, with a broader investor base and more sophisticated types of funds and sectors, private credit is expected to keep growing fast and is definitely on track to reach $3 trillion of assets by the end of the decade, compared to $1.7 trillion of assets under management today.

Some sources think private credit is already $3 trillion of assets, but regardless of which number you use, we expect demand for private credit to keep growing fast and infrastructure debt to be a core part of this allocation, where investors like the resilience, capital preservation, recurring income and investment in the real economy.

AW: What would you say is Gravis' key differentiator from other players in the market?

AP: We invest in infrastructure across the whole capital structure, from senior debt, to mezzanine debt and equity. And we provide bespoke financial solutions, which match best the risk profile of the assets. So, in other words, we are happy to go to mezzanine loans and accept a higher leverage if we are comfortable with the predictability of the cash flow.

We have established a 14-year track record of being an early mover into new sectors when they are less competitive, so we can generate higher returns. We lend to assets which contribute to the transition to net zero and make a positive social impact on economies. So, for example, back in the day, we invested early in onshore wind and rooftop solar, but also biomass, anaerobic digestion, geothermal projects and, most recently, in EV chargers, electrical vehicles and battery energy storage, which are all essential to decarbonisation.

For our debt strategy, we particularly focus on loans with credit qualities in the BB rating category, where we can generate more alpha, but still benefit from strong collateral. It's also a less competitive market and less commoditised. We believe this is where we add significant value.

AW: How much of Gravis' book is private credit currently, and are there plans for that to increase?

AP: So, if you think about our funds today, they are closed-ended investment trusts, so effectively the capital doesn't grow. And as the loans mature and get repaid, we reinvest the capital into new loans. So we recycle the capital into more attractive sectors. Overall, we have invested £3 billion in infrastructure loans and asset-backed financing, but we have recycled that capital over time. The size of the loan book today is just under £1.5 billion. So with GCP Infrastructure reducing equity exposure - we're focusing the strategy to a debt strategy - combined with the new fundraising, our plan is definitely to increase our allocation to private credit, with a strong focus on real assets in line with our track record.

So we're also working on opportunities [inaudiable] in mandates. So we expect to capitalise on existing strategies, with GCP soon celebrating 15 years of track record of generating regular, sustained, long-term distributions while preserving capital by lending to these projects.

AW Focusing on the real estate angle, what would you say has been the sector's relationship with private credit until now, and where do you see it going?

AP: Real estate is a sector where we have been particularly active at Gravis, with GCP Student Living, the first real estate fund focusing exclusively on student accommodation. But also with GCP Asset Backed [Income] Fund, which holds investments secured against physical assets or contracted cash flows. Real estate loans account for the largest sector of the GCP Asset Backed [Income] Fund.

Since central banks started to increase interest rates in 2022, we have seen a massive slowdown of transactions in real estate debt. Higher rates, combined with a declining property market, lower yields, banks retrenching completely from the market, capex requirements due to ESG regulations, scarcity of new projects - all these factors combined means refinancing for the sector has been very challenging, especially for loans with high loan-to-value.

The majority of the commercial real estate loans come with a five-year maturity, meaning these loans, which were all under return when rates were super low back in 2020-2021, have to be refinanced this year and next year. So this is what we call the maturity role. The longer the rate stays elevated, [the] harder it will be for these loans to be refinanced.

It has been especially challenging for the office sector. We're not very much exposed to commercial property, but much more exposed to residential care homes and social housing, which have stronger fundamentals in our view.

AW: And in terms of refinancing these assets this year, are you seeing a different flavour of interest from lenders or even different names coming up than you did last time?

AP: I think, as I said, the volume of transactions has been quite low. So, I guess the focus has been very much on data centres, and digital infrastructure has been the main focus over the last 12 months. But in commercial property, we haven't seen many deals.

AW: Can you talk about any specific real estate projects or types of real estate that Gravis has been involved in through private credit, and which factors made them more attractive?

AP: I will pick out the care home sector as it's a sector where we still have significant exposure. So we have, for example, £60 million of loans secured against a portfolio of four care homes in the south of the UK, three of which are operational and one is completing development, so filling up with tenants at the moment. We like the loan as the assets benefit from an attractive, affluent location, with an undersupply of high-end care provision. The portfolio has been resilient and achieved consistently strong occupancy across operational care homes. The operator is experienced and has a very good track record.

So at the time, the team at Gravis structured a deal with the maximum limit on loan-to-value. Cross-collateralisation means all the properties are used as collateral for the four loans. And more importantly in my view, the loan is amortising over time, so you reduce the refinancing risk at maturity.

AW: Pivoting over to the infrastructure aspect of your focus, what would you say are the key similarities and differences between the infrastructure finance market and real estate when approaching from a private credit perspective?

AP: If we start with the key similarities, infrastructure and real estate are all part of what we call real assets. So it's an asset class where again, Gravis has a strong specialism. Real assets are defined as tangible assets that have interest in value due to their physical properties.

And infrastructure and real estate loans are typically secured on this physical asset or contracted income. In both cases, it offers inflation protection as the rental income is often grown with inflation and very stable income.

The main differences are in terms of cyclicality and investment horizon. So real estate tends to be more cyclical and more sensitive to the interest rate environment. While infrastructure is seen as resilient and tends to perform through different economic cycles. It's a great asset class to raise longer term debt. So my view is that having the two sectors in a portfolio makes for great diversification of benefits.

AW: What would you say sets your infrastructure fund apart from others in the market? And how do you decide on the key opportunities to pursue within the infrastructure space?

AP: So although investment trusts operating in infrastructure are usually investing in equity, GCP Infrastructure is a debt strategy - I think it's key to make this distinction. This means GCP has a lower risk profile, given we are higher in the capital structure, and benefits from downside protection. There is another listed fund investing in debt, but typically with a shorter duration.

Again, the main benefit of GCP investing with longer duration is we can lock in higher coupons for longer, so we can generate this predictable and long-term income as we did over the last 14 years.

AW: How do you see the relationship between infrastructure finance and private credit? Would you say that infrastructure borrowers are becoming more comfortable with non-bank loans?

AP: Yes, very much. I guess we don't provide the same requirement as with the banks. So, for example, private credit lenders typically provide longer maturities, which means we are patient capital and are much more flexible.

I think the banks are providing primarily short-dated maturities, and floating rate notes, and they have to comply with a certain framework. They're definitely less flexible. In the private credit market, we have the ability to provide extra funding in less than two weeks, which clearly is impossible with the banks.

So I think our borrowers really appreciate that flexibility, that speed of execution and longer duration.

AW: Could you share an example of where Gravis became an early mover in a sector?

AP: I will mention our rooftop solar transactions, but I guess I could also use the example of anaerobic digestion, student living, battery storage, where we also entered the sector early when returns were more attractive.

If we go back to 2011, so quite a while ago, GCP became the first significant backer of domestic rooftop solar projects in the UK through senior loans. Our borrower provided full end-to-end services to customers from installation to maintenance of domestic and commercial solar panels.

They invented, effectively, ‘free’ solar panels where the customer received free electricity in exchange for renting the roof for 25 years. Our borrower owns the panel through the 25-year term and is entitled to receive the feed-in tariff, which is a contracted and inflation-linked revenue for 25 years. Our borrower invested in 50,000 UK-based domestic rooftop solar panels over the years.

At this time, we secured an interest rate of around 9% on a senior-secured basis. But as the sector became very popular over the years, and the margin for senior lending compressed, Gravis introduced new senior lenders and we moved to subordinated debt in 2017 with a coupon between 9% and 13%, so we had two different loans at this time. Our senior loans, which were receiving a coupon of 9%, were refinanced with an all-in margin of 3%, with these new senior lenders coming with us.

So this is a great example of Gravis moving early into a new sector.

AW: Okay, thank you very much. It was a pleasure having you on the show and thank you for sharing your insights with us. Thank you to our listeners as well. If you've missed any episodes, please visit iTunes or Apple Podcasts to catch up on Debtwired! Bye for now.

Important information 

This article is issued by Gravis Capital Management Limited (“GCM”), which is authorised and regulated by the Financial Conduct Authority under Firm Reference Number 770680. GCM’s registered office address is 24 Savile Row, London, United Kingdom, W1S 2ES.

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