British, Dutch forge paths for infrastructure investing

Government-backed initiatives ease way for pension funds to invest in asset class

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Maximizing: Alan Rubenstein said the low fee structure will boost returns for funds.

Governments in both the U.K. and the Netherlands are helping to pave alternative routes to infrastructure investing for pension funds.

The first group of investors under Britain's new Pensions Investment Platform is expected to be announced within the next six weeks, according to sources familiar with the matter. The government-backed initiative was created to pool pension assets to directly invest in domestic infrastructure projects and allows investors to potentially sidestep the typical private equity structure — and its high fees.

Another separate initiative led by consultant Redington Ltd. and law firm Pinsent Masons LLP is also under way to find more efficient ways for pension funds to invest in infrastructure, according to Robert Gardner, founder and co-CEO of Redington, based in London.

Britain's PIP is expected to launch early next year with initial investments totaling about 1 billion ($1.6 billion). It will be jointly established by the National Association of Pension Funds, an industry organization representing about 1,200 pension funds with aggregate assets of 800 billion, and the Pension Protection Fund — the U.K. equivalent of the Pension Benefit Guaranty Corp. The 12 billion PPF, which has a 5% allocation to infrastructure, will also be an investor in the platform.

The platform will be established “on a not-for-profit basis, with a low fee structure to maximize returns for the pension funds,” said Alan Rubenstein, chief executive of the PPF, based in London.

Joanne Segars, London-based NAPF chief executive, added: “This is an initiative for pension funds by pension funds. ... It's truly designed around the needs of investors.”

Mr. Rubenstein added: “The impetus for us was that from the perspective of pension funds, what they want (from infrastructure investments) is a relatively long-dated, low-risk, inflation-linked cash flow stream. ... What's available — typically based on a private equity structure — is not delivering what pension funds are looking for. That has led us down the track that we've gone.”

While Mr. Rubenstein declined to specify details of the platform's structure before plans are finalized, he said several existing models have been analyzed. One notable example is Industry Funds Management, an infrastructure manager based in Melbourne, Australia, with about US$10 billion in assets under management that is owned by 32 pension funds. A second organization is Borealis Infrastructure, which has about C$9 billion (US$9.2 billion) in assets and is owned by the C$55 billion Ontario Municipal Employees Retirement System, Toronto.

“Neither is quite the same as what we're doing, but IFM is closer,” Mr. Rubenstein added. Unlike Borealis and IFM, the PIP might consider overseas institutions to invest alongside U.K. pension funds.

More resilient

Institutions are increasingly attracted to infrastructure for “capital protection and long-term growth with a hedge against inflation,” said Daniel Wong, European head of the infrastructure and utilities group within the infrastructure advisory team of Macquarie Capital Group based in London.

“Equities have been extremely volatile. Government bonds also can be volatile in certain countries as well as having extremely low yield,” Mr. Wong said. “Infrastructure investments have generally been more resilient than investments on listed markets, as well as corporate bonds and sovereign bonds.”

While initiatives such as the PIP aim to reduce the role of money managers as the middleman in infrastructure investing, Mr. Wong doesn't see it as a threat to his firm. Globally, pension fund exposure to infrastructure is still relatively low or “zero in most cases,” and has strong potential to grow, Mr. Wong said.

In the Netherlands, government officials have taken a different approach to helping pension funds meet their goals through infrastructure investing. In late August, the Dutch Ministry for Infrastructure and Environment selected a public-private partnership for a pilot program to expand and maintain the N33 highway over a 20-year period. Fiduciary manager PGGM — which is owned by the e118 billion ($152 billion) Pensioenfonds Zorg en Welzijn, Zeist — is an equity holder in the partnership.

About e80 million, or 70% of the highway project's debt financing, will be financed by APG Asset Management using inflation-linked debt, spokesman Harmen Geers said. APG has about e311 billion under management, and its largest client is the e261 billion Stichting Pensioenfonds ABP, Heerlen.

For some years, Dutch pension funds have been urging the Dutch government to issue inflation-linked bonds as an investment option that could help them meet future liabilities, sources said.

“So far, they have refused,” Mr. Geers said. “Obviously, now that the government can borrow at such a low rate, there's currently really no need for them to do so.”

However, similar to other governments around the world, the Dutch government is under pressure to reduce spending amid the ongoing need to improve and maintain infrastructure, sources said. For example, at least e10 billion is required over the next several years, according to estimates. As a result, Dutch authorities in cooperation with APG initiated a pilot program to allow public-private partnerships, in which up to 70% of the project's cost can be financed through inflation-linked debt backed by the government.

“Now that the pilot program has proven that there is appetite for inflation-linked financing, we sincerely hope and expect it will open the door for more and larger infrastructure projects to be funded in this way, and other pension funds will be given an opportunity to invest in inflation-linked debt as well,” Mr. Geers said.

According to British government estimates, about 250 billion will be needed for national infrastructure projects over the next five years, according to the U.K. National Infrastructure Plan published in 2011. Most of that will not likely come from pension funds; nevertheless, the U.K. government has been working with various groups including the NAPF/PPF to encourage more pension funds to invest in infrastructure. One of the latest proposals includes some level of government underwriting of certain projects, sources said.

Awaiting a plan

“What's needed (from the government) is a long-term plan for infrastructure, which isn't there yet,” said Robin Ellison, pensions partner at Pinsent Masons, London, which is also working with pension funds to come up with a vehicle to invest primarily in infrastructure debt. “Infrastructure has a long time frame, but governments work in a short-term frame. There's a political disconnect,” making it difficult for investors to make long-term decisions, he added.

Another potential obstacle facing U.K. local authority pension funds is a 15% cap for investments in limited liability partnerships. Ms. Segars of the NAPF added: “This is something of great concern to us. ... We're calling on the government to make changes to these rules.”

The initiative by Pinsent Masons and Redington is meant to complement, rather than compete against the PIP. For example, the latter is more focused on debt, whereas the NAPF/PPF platform might combine debt and equity. While the PIP platform concentrates on U.K. infrastructure, the Pinsent Mason/Redington initiative is also considering overseas investments to create “a diverse set of loans,” Mr. Gardner of Redington said.

“The key thing is to target a spread that will help meet pension fund requirements for the appropriate level of risk,” Mr. Gardner said.

This article originally appeared in the September 17, 2012 print issue as, "British, Dutch forge paths for infrastructure investing".