When the London Pensions Fund Authority and the Greater Manchester Pension Fund teamed up to create a £500m vehicle for infrastructure investments, it took them 10 months to commit £60m. A year later the two pension funds are still seeking to invest the remaining £440m.
Chris Rule, chief investment officer at the LPFA, which manages £4.6bn on behalf of local authority workers in London, says finding suitable infrastructure investments is challenging.
This view is shared by many other institutional investors.
“There are too few concrete projects to invest in, too many investors looking for investable projects and too low returns,” says Matti Leppälä, chief executive of PensionsEurope, a trade association for pension funds.
The lack of suitable, available projects comes despite “a massive need for infrastructure investment”, says Mr Leppälä. In fact, $57tn is needed globally by 2030 to finance energy, water, transportation and social projects, according to McKinsey, the consultancy.
There is huge scope for institutional investors to finance projects once funded by governments, says Boe Pahari, global head of infrastructure equity and managing director at AMP Capital, the A$130bn ($90bn) Australian asset managers.
“Australian [pension funds] already have allocations of 10 per cent-plus to infrastructure, whereas in Europe, the average is closer to one or two per cent,” he says.
Mr Pahari adds: “We fully expect demand for infrastructure to grow through 2016 and beyond, as institutional investors continue to search for more stable, long-term cash flows and capital preservation.”
This is already playing out at PFA Pension, Denmark’s largest commercial pension, which recently increased its allocation to infrastructure and plans to raise this even further, says Allan Polack, group chief executive.
Mr Rule, meanwhile, says 5.5 per cent of LPFA’s assets is invested in infrastructure, but this is likely to increase to 10 per cent.
Nonetheless, many institutional investors are hesitant to invest in infrastructure — often because they lack the expertise to carry out the due diligence that is required. Few institutional investors have specialist infrastructure teams.
“One of the key barriers to pension fund investment in infrastructure is the challenge of assessing and managing risks with which pension funds are not familiar, such as construction risk,” says Mr Leppälä.
Then there is the problem of finding projects to invest in.
Duncan Hale, global head of infrastructure at Willis Towers Watson, which advises institutional investors, says: “The constraining factor around infrastructure investment is not institutional investor willingness to invest, but rather a lack of appropriate, well-structured projects.”