Bridging the $94trn gap

15 Dec 2017

The global need for infrastructure investment is huge and pension schemes are searching for long-term income. Mark Dunne asks if they could be the answer to each others prayers.

“As long as the asset is throwing off cash, I don’t think pension plans are too concerned about illiquidity.”

Lee Mellor, Ancala Partners
Pension funds have a fondness for the boring and predicable. This desire, however, has caused concern among trustees in recent years. Yields on 10-year UK government debt collapsing below 1.3% have left many schemes short of the cash needed to pay member benefits. To avoid selling assets to raise the funds needed, some schemes have sought to boost their income by taking on more risk. This has put infrastructure on their radar. Roads and bridges are creaking in the developed world thanks to decades of under-investment, while new structures are needed to serve growing populations and rising prosperity in the emerging markets. The estimated cost of such a modernisation programme is staggering. A $94trn investment is needed by 2040 to provide adequate global infrastructure, according to forecasts by the Global Infrastructure Hub. Private capital will be needed as it is clear that governments will not be able to pick up such a big tab on their own. The UK is one example of where private capital will be needed to upgrade aging assets. By 2020 government spend in this area is forecast to fall to 1.4% of GDP, down from 3.2% in 2010, according to RICS. There is an appetite from the private sector to fill this gap. A global survey of institutional investors published in November found that interest in infrastructure is high. The survey – Investor Perceptions of Infrastructure 2017 by the Global Infrastructure Hub and EDHEC Infrastructure Institute-Singapore – found that 90.3% of institutions want to increase their investment in this area, up from 65% last year. Advisers are also bullish. In October a report from infrastructure and private equity manager Foresight showed that 59% of those supporting institutions expect to see a higher demand from their clients for exposure to the sector. The report pointed to infrastructure becoming an increasingly popular asset class due to it mitigating some of the biggest headwinds facing portfolios, including volatility, market corrections and inflation. There is also another key reason why interest in bridges, roads, ports, broadband connections and water and energy storage and distribution networks is high among pension funds: It is the lure of stable, predictable and inflation-protected long-term income streams. “Infrastructure offers a unique total return profile with diversifying characteristics relative to equities and bonds,” says Marc Haynes, senior vice president at Cohen & Steers. “From a portfolio allocation perspective, it can help reduce portfolio risk and it can provide a degree of downside protection.” At the lower risk end of the spectrum, large regulated utilities are reported to yield between 4% and 7%. For those wanting to take on more risk by investing at the development phase of an asset, returns as high as 8% to 12% are available. Those managing the VT Gravis UK Infrastructure Income Fund say it’s on course to yield 5%, a favourable return compared to the 1.3% risk-free rate. Kempen Capital Management manages €200m of infrastructure assets. Interest in this area from larger schemes has increased in the past few years and senior portfolio manager Marvin de Jong is seeing more mid-sized funds (€1bn to €5bn under management) follow their lead. One fund active in the infrastructure space is Local Pensions Partnership (LPP), which manages the assets of Lancashire County Pension Fund and the London Pensions Fund Authority. Investment director Jonathan Ord points to stable investment returns and inflation-linked cash-flows as attractions. The £1bn fund owns wind farms and trains in the UK, renewable energy assets in Portugal and a gas distribution business in Madrid.

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