Nilgosc makes inroads into infrastructure funds

Four per cent of European pension schemes currently have exposure to listed infrastructure, according to consultancy Mercer. Three per cent of schemes are invested in unlisted infrastructure.

A spokesperson for the committee confirmed that it committed €50m (£43.9m) to Dutch manager DIF’s Infrastructure V fund in December 2017. The scheme completed its entry into the fund in January.

We basically made an allocation to infrastructure, and those managers will find the assets for us

David Murphy, Nilgosc

The committee also approved €20m “in principle... for suitable co-investment opportunities with DIF V”, with the Lothian Pension Fund.

Last month, the DIF V fund acquired a majority stake in the A150 toll road in France. The fund took a 66.7 per cent stake in Albea SAS, a company that holds the concession to operate the road.

The scheme has also committed $50m (£38m) towards the KKR Infrastructure Fund III.

It now turns its attentions to the hiring of two absolute return bond managers and two MAC managers.

Nilgosc was late to infrastructure investment

Managing a £7.8bn fund covering Northern Irish members of the Local Government Pension Scheme, Nilgosc is invested in a range of different infrastructure funds.

The scheme currently holds a £100m investment in Antin Infrastructure Partners’ Antin Infrastructure Fund II, ¤48m in the Antin Infrastructure Fund III and $60m (£45.2m) in the KKR Global Infrastructure Investors Fund II.

It is also co-invested in infrastructure with Lothian Pension Fund in the KKR Evergreen fund.

Last year, it faced a showdown between committee members over plans for social infrastructure investment.

A number of members cited concerns over private finance initiatives and public-private partnerships, citing reputational risk and the potential for the fund to be linked with a negative impact on public services. Sceptics were eventually outvoted.

David Murphy, chief executive and secretary at Nilgosc, said that the vote was held to “make sure that the board was comfortable” with investing in PPP assets.

Its board is equally composed of employers and trade unions. The latter group has “strong feelings” about PPP investment, according to Murphy.

“We have a commitment to put 5 per cent of overall fund value into infrastructure...we’ve now increased that target to 7.5 per cent,” he said. The scheme’s position currently stands at 3.9 per cent.

Nilgosc first started investing in infrastructure in 2014. Murphy admitted that Nilgosc had been a “late player” in the asset class.

The committee spreads its risk across Antin Infrastructure Partners, KKR and DIF. Antin Infrastructure Partners offers the scheme its highest risk exposure, while Nilgosc uses DIF for its lowest risk infrastructure investment.

KKR offers an intermediate level of risk, Murphy said. “Each manager has their own view on what is infrastructure, and what they’re looking for and where they can get their returns,” he said.

“We take a step back from that,” he added. “We basically made an allocation to infrastructure, and those managers will find the assets for us”.

Nilgosc will meet its objective of 7.5 per cent exposure to infrastructure with increased allocations to existing managers rather than hiring new ones, Murphy said.

Brownfield investment carries less risk

The DIF V fund targets equity investments in PPP, regulated assets and renewable energy projects.

The €1.9bn fund, which launched in June 2017, invests in greenfield and brownfield projects mostly in Europe, North America and Australasia. It had its final close on May 15.

Allard Ruijs, a partner at specialist infrastructure fund manager DIF, said the fund has raised between £500m and £600m in capital from UK institutional investors.

The UK leads Germany and the Netherlands when it comes to investor interest in the fund. The Church of England Pensions Board has also invested with DIF, he said.

The fund’s greenfield PPP investments are typically made in “road projects, schools, hospitals [and] accommodation”, he said.

Toll roads such as France’s A150 highway, which runs between Rouen and Le Havre, in Normandy, are an important brownfield target for the fund, he added.

The project was completed three years ago. “The first ramp-up of the road has passed. That means that most of the risk of a toll road is gone,” Ruijs said.

The investment is projected to provide a steady cash yield until 2066, he said, adding that the fund intends to hold its stake in the project for 10 to 15 years before selling it on to another party.

Scheme collaboration

The committee has maintained a co-investment relationship with the Lothian Pension Fund since 2016.

LGPS funds in England and Wales have now settled into their respective pools, which are drawing upon their capital in order to capitalise on the benefits of scale and lower fees. It is intended that pooling will facilitate more infrastructure investment.

Nilgosc and the Lothian Pension Fund fall outside of LGPS funds pooling, as Northern Ireland and Scotland do not fall under the initiative.

Peter Hobbs, managing director of private markets at consultancy bfinance, said that he had not witnessed “a great deal” of collaboration between schemes of this kind.

Nilgosc’s infrastructure objective is being matched across the board by other schemes, according to Hobbs. “They’re doubling what they have, from 3.5 per cent to 6-7 per cent,” he said. This is despite Q1 2018 being the worst for infrastructure deals in four years.

Greater scale offers pension schemes more control and opportunity in infrastructure investment, allowing schemes to move on from domestic or global funds, or funds of funds, according to Hobbs.

“As they grow in scale, maybe £300m to £500m-plus in infrastructure, then they start to do a number of things, including having more of a regional exposure,” he said.

“Also, they tend to want to have more direct control, so might have separate accounts, they might want to do more co-investments and ultimately they might want to own direct assets,” he added.

Nilgosc’s Murphy said that collaboration with the Lothian Pension Fund allows them to benefit from knowledge and a “track record” in order to access deals “that we just probably wouldn’t find out about”, he said.

“Really, we’re leveraging off their expertise, because they have a dedicated team… which we just don’t have here at Nilgosc,” he noted, adding that co-investment also has the effect of lowering fees.

A spokesperson for the Lothian Pension Fund said: “Lothian and Nilgosc both benefit from access to a wider range and larger size of infrastructure assets – in other words, the opportunity set of investments is increased.”

Absolute return bond funds have disappointed

Committee minutes from March provided an update on Nilgosc’s ongoing search for two absolute return bond managers, which the committee declined to comment on.

Amanda Burdge, principal investment consultant at Quantum Advisory, said that schemes can afford more protection to their portfolios with absolute return bond funds in a rising interest rate environment, “given their short duration”. This duration is typically under 10 years, she said.

The search may have well have come in good time. On Thursday, the Bank of England’s chief economist Andy Haldane shifted his previously dovish position and voted to raise interest rates.

The Monetary Policy Committee voted 6-3 to hold rates, with anticipation growing over a potential rate rise at its August meeting.

Burdge said the asset class has underperformed in recent years, but the tide may soon turn for investors.

“If you look back at the performance over the last five years or so, I think they have disappointed,” she said.

“With the market turning, they could potentially offer not just diversification benefits, but you may find that their portfolios begin to deliver returns for pension schemes,” she added.

Valuations are driving MAC demand

The fund has also launched a search for two MAC managers, which remains live.

The asset class has received increased interest in recent months from the LGPS sector. The London Borough of Haringey Pension Fund recently moved some of its equity exposure into MAC, while the Strathclyde Pension Fund has added £420m to its MAC mandates.

David Walker, head of LGPS investments at consultancy Hymans Robertson, said that improving funding levels may be behind the surge in demand for the asset class.

“With the valuation cycle coming round, they’re looking to diversify some of the equity risk that they have,” he said.

“It’s still providing a relatively attractive level of yield, and in terms of return stream, has that greater component of the return coming from a nice and more stable income stream,” he added.