Nilgosc outvotes social infrastructure sceptics

Nilgosc, which manages a £7.3bn fund for the Local Government Pension Scheme for Northern Ireland, is currently invested in a number of different infrastructure funds, and also has co-investments with the Lothian Pension Fund.

Social infrastructure is quite attractive for pension schemes looking for steady, stable income

Marcus De Kock, LCP

A number of committee members had expressed their opposition to private finance initiatives and public-private partnerships. They were concerned about “the impact on the delivery of public services, transparency and reputational risk, particularly where projects were local or national in geographic location”, according to the minutes of a meeting held last month.

The committee noted that the normal due diligence process will be undertaken before any decision is taken to invest in a specific infrastructure fund.

Despite “the strongly held views of those members who represent public sector workers”, the chair reminded them that it was a decision that should be made taking the best interests of the scheme beneficiaries into account.

When a vote was put to the committee on whether social infrastructure would be an appropriate investment type for the fund, the motion passed by nine votes to four.

David Murphy, Nilgosc chief executive and secretary, said: “We are reviewing a number of potential opportunities that include some social infrastructure.” He said such investments would provide diversification within the overall infrastructure portfolio.

“These would likely be global opportunities of which social infrastructure will form an element but not the entirety of the investment,” he explained.

Murphy confirmed the committee has now agreed social infrastructure is a suitable asset type for the fund, “recognising the need to have as broad a range as possible of opportunities to consider” in order to build up a portfolio with the appropriate risk and return characteristics.

‘Government-backed cash flow projects’

The asset class typically comprises of healthcare projects, education projects, and sometimes even police stations and courts, explained Anish Butani, infrastructure specialist at consultancy bfinance.

This infrastructure subsector is attractive to pension plans because they are essentially “government-backed cash flow projects”, he said.

If a fund invests in a schools project, this would mean putting money towards building, operating, and maintaining the project for a 20-25-year period, for instance. It would receive cash flows for ensuring facilities are in adequate condition, Butani explained.

“The UK’s been a pioneer in these PFI/PPP-type projects, where there’s a very well-laid-out road map” in terms of how projects and finance are procured, he said.

“The infrastructure funds that have invested in these projects have made very strong and very good returns on them,” he added.

Politically divisive

However, this has also meant on a political level there has been an outcry about the private sector profiteering from such projects.

Butani said: “The irony… is that those private equity funds that are investing in those social infrastructure projects are usually doing so [on behalf of] local government pension schemes.”

Marcus De Kock, senior investment consultant at LCP, said allocating to social infrastructure could interest a scheme looking to invest in the local community. He added that, in general, a broad and global approach to infrastructure is more beneficial than focusing on one niche sector.

“It’s not a huge sector,” agreed Andrew Wauchope, senior investment director at discretionary fund manager Psigma Investment Management.

“The larger the pension fund, the more ability it has to diversify its portfolio and provide reasonable sums of money, but still have a small exposure to a sector like this, which is not very liquid,” he said.