Infrastructure remains an attractive asset class for investors, but there is much to consider before jumping in, Pádraig Floyd finds.
“There is no shortage of potential investors for infrastructure, but what we need from the government is a pipeline of projects to invest into.”Mike Weston
Good investment is all about keeping your options open. Never burn your bridges, we are told from an early age, and until recently, institutional investors were advised against building them, too.
However, infrastructure has become a word that, if not on the lips of every pension fund trustee in the UK, has certainly been one at the back of their minds.
The NAPF’s annual survey shows only 18% of schemes invest in infrastructure, though this has increased from 15% in 2012. Those investing had an average allocation of 3.5% in 2014, a healthy increase on both 2012 (2.7%) and 2013 (3.2%).
Penny Green, an independent trustee, can see the attraction and invested when in charge of the Superannuation Arrangements of the University of London (SAUL): “We are all searching for yield and infrastructure – if it’s the right type – can throw off index-linked returns. This makes it a super proxy for defined benefit (DB) pensions should you be able to find access to those that have sufficient diversification, low levels of leverage and low – or at least satisfactory – levels of fees.”
This has been the problem for many schemes over the last decade. They’ve looked longingly at infrastructure as being at least a part of the solution to provide long term inflation-linked cashflows, but have fallen short.
John Nestor, an independent trustee with Law Debenture, says some of the difficulties are inherent to infrastructure: “It’s an asset class which is very capital-intensive, it requires scale, it is illiquid and requires commitment to a very long time horizon.
“It is important you have expertise you can draw on either from the fund or your adviser, to be able to understand whether you are being paid for the risk you are taking on for that illiquidity.”
This is where so many dreams have been shattered, because schemes simply didn’t have the resources to do this on their own.
DO IT YOURSELVES
This was the primary motivation for the formation of the Pensions Infrastructure Platform (PIP) last year. And in December, the London Pensions Fund Authority (LPFA) announced the formation of a £10bn north-south asset liability management partnership with Lancashire County Council, designed to create a jointly-invested pool of assets to be overseen by an FCA-registered company to be formed by both funds.
This departure will give the funds the scale and levels of governance required to access a broader range of assets, including illiquid assets like infrastructure.
Just last month, Greater Manchester Pension Fund announced a £500m joint infrastructure programme with LPFA (see box-out below).