Is infrastructure on pension funds' buying list?

Vassos Vassou: At the smaller end – and when I say ‘smaller end’ I probably mean 80–90 per cent of schemes – pension schemes probably are not interested in infrastructure because they will have other asset classes that they will target first. They will be worried about their liability profile, the covenant of their employer and other issues which perhaps are more at the forefront of trustees’ minds.

LGPS pools will invest in the best infrastructure projects they can, but that does not necessarily mean that those would be comparable with best alternative uses of that money

Danny Vassiliades, Punter Southall Investment Consulting

But the bigger schemes are where most of the assets actually are. That is where there is more interest for this sort of asset class, which perhaps trustees would see as a bit of diversification relative to what they have at the moment; and also, potentially, a good match for cash outflows when they are looking at their liabilities.

Gerald Wellesley: The market is moving a bit. And there is talk of packaging assets in a more attractive way for the smaller schemes.

It depends what you are looking for. Yes, there is an awful lot of talk about infrastructure and there are deals getting done. But the idea, for example, that Trump is going to create a lot of infrastructure assets is a bit of a myth I think, because all of those things in the US are done at a state and local level. There will not be federal spending on infrastructure. As far as the UK is concerned, there is an issue with the local authorities, with cheap funding competing for that space.

I would like to feel there would be an additional diversification; that smaller funds can have some infrastructure and other property types that look a bit different and so have a little bit of both. Maybe it is a 5 per cent allocation to each; maybe it is a bit more.

Danny Vassiliades: For the 80–90 per cent of pension funds Vassos referred to, their constraint is their governance budget. How much time, how much cost do they want researching every single kind of asset that is available? A lot of them will access infrastructure and property through diversified growth funds. It is just a neat way of accessing diversification without having the day-to-day responsibility of actually monitoring the infrastructure part or the property part.

With these Local Government Pension Scheme pools, effectively you have created a supply of investment, and it always seems to me if that money has to be invested in infrastructure, then it is not necessarily as return-aware as it should be. In other words, you are crowding out a little bit of the market by saying we need to buy infrastructure.

They will invest in the best infrastructure projects they can, but that does not necessarily mean those would be comparable with best alternative uses of that money, from an investor perspective.

Anish Butani: Pension funds have mainly been investing in operational brownfield projects. That highlights the level of risk these investors are willing to take. Though, when we look at private fund managers, more of them are moving up that curve and taking some greenfield risk because the brownfield space is becoming very crowded.

The market is moving a bit, and there is talk of packaging assets in a more attractive way for the smaller schemes

Gerald Wellesley, HR Trustees

Infrastructure has clearly emerged as an asset class, and the global financial crisis has proven its resilience. At present, there are a fairly limited number of options for accessing the sector as an investor, but as time goes on, it will slowly start to resemble something like private equity, which is very sophisticated in terms of the number of ways you can access it.

Compared with other asset classes, infrastructure is still coming up the maturity curve, but the level of choice investors have is beginning to broaden.

Pensions Expert: New projects sometimes have a guarantee from government. Does this help to get institutional investors to invest in the building phase?

Butani: A poster child example is the Thames Tideway Tunnel. There is a consortium of investors, including local government pension funds, that participated in this project to finance the building phase. It is quite atypical for those types of investors to take that construction risk and wait three or more years before receiving their first distributions.

To encourage private sector investment for that particular project, the government created a mechanism whereby from day one of construction, they will start earning some return. That made the project unique, in that a structure was created to incentivise the private sector to fund a big UK capital building programme.

Barry Fowler: I have heard of a transaction down in Singapore where the government is providing some level of guarantee in relation to the revenue, so it is becoming availability-driven rather than volume-driven.

I imagine they will try to attract overseas foreign capital into supporting their transactions, and once everyone gets used to investing in that region the guarantees will presumably start to fall away and it will just become business as usual.

Wellesley: The difference for a government is that it can raise 10-year bonds; the UK government can raise them at 110 basis points at the moment. These pension funds are looking for somewhere between 4–6 per cent, and then of course there is the cost of structuring them and running them and manager fees. So it will be interesting to see how this plays out if rates do not go back up, and how governments can justify putting these structures in place. It helps the government’s balance sheet, but at the end of the day, if it is going to cost that much more to build, how does that dynamic play out?

Both in this country and particularly the US there is a lot of need for new infrastructure; it is a matter of how it is going to get paid for. Pension funds are very keen that there should be lovely pooled structures, but it is a question of getting those deals done.

Fowler: I suppose if the governments do not provide the support, then you are restricting the universe of investible assets for pension schemes, but funds still need to invest in something. So if you are not investing in that, then you are presumably pushing up the price of another asset class somewhere else.

Wellesley: I think it might be a potential constraint on further pension infrastructure investment, if the government, in theory, can do this much cheaper.