The UK government dreams of pension funds piling money into the country’s infrastructure but investors are slow to commit, lagging behind their counterparts in Canada, Australia and continental Europe.
Plans to attract approximately £20bn from institutional investors to invest in the building of roads, power plants and hospitals in the UK over the next decade have some way to go.
Pension funds have tended to head into the UK’s developed sites such as airports and roads, but appetite for equity investment into new infrastructure projects such as hospitals, schools or prisons appear less attractive.
Finding the right type of investment is proving to be a sticking point. At London’s Royal Borough of Kensington and Chelsea Pension Fund, which currently has no UK infrastructure in its portfolio, Alex Robertson, head of pension investments, says: “We have not found anything as a suitable vehicle yet.” But it plans to “look again” following the scheme’s three-year actuarial review at the end of March.
What pension funds want is for governments “to take some of the risk on new build”, says Marcus Ayre, head of infrastructure transactions for Europe at First State Investments, the international asset management business owned by the Commonwealth Bank of Australia.
“There is more willingness among governments in continental Europe to supply security than the UK,” he argues. This could involve cash or other types of support, such as guarantees investors can call on if a new project – such as a toll road – fails to meet forecasts, or by creating the right regulatory regimes.
Global institutional investors put almost $214bn into unlisted infrastructure funds between 2004 and the end of January this year, with nearly $111bn heading into North America, just over $62bn into Europe and $21bn into Asia, according to Preqin, a data provider.
Another drawback for UK pension funds investing in infrastructure is their lack of capacity to invest directly. Most schemes in the UK lack the size and resources to make skilled in-house direct investments, while many pension funds in Canada and Australia have been investing directly in infrastructure over the past 20 years, as well as those in the Netherlands.
UK trustees tend to be “much more reliant on consultants’ advice and have used this rather than building their own capabilities”, points out Mr Ayre. UK pension funds typically allocate about 1 per cent of their portfolios to direct investment in the asset class, compared with about 10 per cent in Canada and Australia, according to investment managers.
However, this could be about to change. Last May, BT Pension Scheme took a 13 per cent stake in Thames Water, the UK water supplier, while USS, the Universities Superannuation Scheme, together with a consortium, invested directly in Australian road owner and operator ConnectEast last year. Fund managers expect to see more follow suit.
Last year, too, some of the UK’s largest pension funds, including BAE Systems Pension Funds, BT Pension Scheme and the Railways Pension Scheme, joined forces to invest directly in infrastructure, becoming founding members of the Pensions Infrastructure Platform to help gain better access to the asset class.
The platform, which aims to raise £2bn to invest in new and existing projects and launches in the next few months, will invest in projects free of construction risk. It is almost halfway to meeting its target – in terms of soft commitment – the National Association of Pension Funds told FTfm in the first week of February.
“Britain’s infrastructure is dated and is becoming a real bottleneck. Infrastructure projects should be a natural asset class for pension funds because they offer the long-term, inflation-linked returns that funds are hunting for,” says Joanne Segars, NAPF chief executive.
She says pension managers are keen to get more involved in bricks and mortar but run into too many difficulties.
The platform should go a long way to tackle some of the problems such as “lack of in-house expertise, the small size of many UK pension funds, investment fees and fears of construction risk”.
Like Ms Segars, Daniel Wong, head of infrastructure and utilities at Macquarie Capital Europe, says there is much investor interest in UK infrastructure and sees the country as one of the most stable environments for investment, particularly for developed projects.
Five years ago, most of the investors in UK infrastructure were Canadian or Australian, but in the past three years continental European and UK investors are in the mix, he says.
But he says one of the sticking points to attracting equity to new projects is that the “government is not bringing enough [new build] projects to meet demand”.
On the infrastructure debt front, Allianz Global Investors will launch a debt fund in the UK in the next few months, the first of its kind, aiming to raise £1bn initially, to help build schools, hospitals and roads, and also plans to bring out a similar fund in Europe in the summer.
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