Getting the foundations in place

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3 Mar 2015

Infrastructure remains an attractive asset class for investors, but there is much to consider before jumping in, Pádraig Floyd finds.

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Infrastructure remains an attractive asset class for investors, but there is much to consider before jumping in, Pádraig Floyd finds.

Mike Weston, chief executive of PIP makes  no apologies for dealing in brownfield  assets:  “We are very clear that what we wish  to offer is positioned as low level of risk  returning  cash flows as a bond substitute.”

Brownfield has been used by PIP as these  assets fit better within its risk/return  profile,  says Weston, which targets  the  lower  end of the risk spectrum of public-private  partnership/private finance  initiative/  solar and photovoltaic (PV).

Investment in the Thames Tideway project,  in particular the London Super Sewer (ironically  a greenfield project) can be done by  PIP due to the government guarantees  provided  which mitigate much of the construction  risk. But that isn’t true of many of  the infrastructure projects in the pipeline.  Although the national infrastructure plan  consists of £450bn of projects, few are suitable  for private investment and where that  is sought, they don’t offer the right risk and  return structure, says Weston.

PIP already has £348m committed and  £221m invested and Weston is working  with Aviva on a second fund covering solar  and PV investments. Weston is convinced  there will be many more schemes investing  in infrastructure, but growth is hampered  by its structure.  Consultants understand the opportunity,  but see PIP as a matchmaker rather than  asset manager and until it is FCA regulated,  they must take a lot on trust.

POLITICAL RISK  

Though Weston defines solar and PV as  lower risk, not all would agree. Aside from  a reliance on technology and problems  with storage of energy, like social infrastructure,  political interference is a real  problem – especially if you are making a lot  of money from the contract.

But Weston remains unfazed, dismissing  the Spanish government’s change to feed  in tariffs as a response to the crisis and  should not discourage investment.

“Political interference is a risk in major  infrastructure  projects because they are, by  their nature, large and expensive and something  that politicians want to get involved  in,” says Weston.

This must be accounted for by any scheme  considering a 20 or 25-year investment in  illiquid assets, because this covers a number  of political cycles and investors should  anticipate change.  “You can be almost certain that politicians  will change the rules,” says Weston, “but  not retrospectively as this would undermine  the whole legal structure and governments  need investors to have confidence in  their contracts. There is no shortage of  potential  investment  to go into infrastructure,  but what we need from the  government  is a pipeline of projects to  invest  into.”

The demand for infrastructure never  abates, but the days of government paying  for it all have gone. This, combined with  developing structures created by the funds,  for the funds like those from PIP and  LPFA,  would suggest infrastructure investment  is only likely to grow at rapid pace.

BOX-OUT: GMPF JOINS LPFA IN INFRASTRUCTURE INVESTMENTS  

In January, the Greater Manchester Pension Fund (GMPF) joined forces with the  London Pensions Fund Authority (LPFA) in a £500m programme of infrastructure  investment. Councillor Kieran Quinn, chair of the GMPF, explains why  they chose LPFA over PIP or an asset manager.  

“LPFA shares our views on the benefits of investing in infrastructure. We feel  this initiative can complement the Pensions Infrastructure Platform, that to date  has had a slow start,” he says.

“Our collaboration with LPFA will facilitate superior governance arrangements  and local accountability, together with the ability to tailor investments to local  pension fund requirements and liability profiles in terms of the degree of risk  that is desired and the potential return and cashflow requirements.”

The structure of the mandate is designed to be flexible, says Quinn, to take  advantage  of the opportunities presented.

“However,” he adds, “examples of possible investments include core and noncore  assets, operational and greenfield projects, debt and equity investments.  From a sector perspective – transport, housing/commercial and regulated assets  such as transmission or utility companies, but the funds will focus  on Greater  Manchester and London, with a high degree of flexibility for suitable  opportunities.”

The move for GMPF is mostly about diversification, but stable, inflation-linked  long-term cash flows are of course attractive and in partnership with the London  scheme, can achieve scale investments and greater efficiency.  It’s early days, yet, Quinn is “happy with the way the collaboration is working”  and further collaboration with the London schemes may be on the cards at a  future date.

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