Shropshire County Pension Fund’s infrastructure investment gained 40 per cent during 2014/15, but entry into the asset class remains a challenge for some UK pension funds.
Shropshire’s allocation to infrastructure was a driver behind the fund’s strong overall growth, which went up in value by 13.7 per cent, or £173m, in the year to March, to push total assets past the £1.5bn mark.
There is a mismatch between what pension schemes want out of an infrastructure investment and the types of fund that are available
Adam Michaels, LCP
The fund has a 3 per cent strategic allocation to the asset class run by an external manager via a limited partnership.
But despite the growth of the undisclosed project underlying the investment, Justin Bridges, head of treasury and pensions at Shropshire council, said the fund is yet to hit its strategic target and has only managed to deploy around £16m so far.
“It takes time, obviously, for [the manager] to identify the investments,” said Bridges. “We’ve only got about 1 per cent of our fund in infrastructure at the moment; the commitment is £35m in total.”
Expectation mismatch
Adam Michaels, partner at consultancy LCP, said competition between funds for mature assets with more predictable cash flows had driven up the price of deals coming to auction, but these opportunities remain attractive when compared with more traditional assets.
However, Michaels identified a more structural dynamic driving investor sentiment beyond mere supply and demand. “There is a mismatch between what pension schemes want out of an infrastructure investment and the types of fund that are available,” he said.
“[Pension schemes are] thinking about long-term assets with stable cash flows, but the main way they’re going to access that is via a private equity-style vehicle with high fees, blind pool risk and quite a degree of concentration.”
Funds hold back on filling allocations
However Guy Hopgood, investment consultant at JLT Employee Benefits, said while discussion across the Local Government Pension Scheme around infrastructure has been rife, appetite for executing investments has dwindled, partly in anticipation of changes to LGPS investment requirements.
“We’ve seen a lot of people, whilst maybe having a strategic allocation to infrastructure, they’ve held off filling those… on the basis that they’re not sure what’s going to be around the corner,” he said.
Hopgood said there has been growing interest in open-ended funds, which are priced quarterly and allow investors to jump in and out fairly quickly, depending on their level of illiquidity.
At the other end of the spectrum there are also opportunities in non-listed, direct deals, Hopgood said, but a lack of expertise was holding many funds back.
“In the UK we’re a long way behind where the likes of Canadian and Australian schemes are in terms of infrastructure investing,” he said.
“It can be more cost effective, but it’s important to ensure you’ve got sufficient resource and knowledge within the fund to be able to make those decisions.”
Gerry Jennings, global head of infrastructure at asset manager AB, said interest in infrastructure debt is on the rise as pension funds seek to secure more stability alongside yield and diversification.
“Pension funds are taking a step back along the risk curve and investing in debt, locking in contractual yields, whether on senior or subordinated debt, and just taking some of the volatility out of the infrastructure equity returns,” he said.
