A £500 million ($752.1 million) joint infrastructure venture, involving the largest local government pension scheme fund in the U.K., in October chose a renewables-focused fund as the home of its first commitment.
In October, the £16 billion Greater Manchester Pension Fund, Manchester, and the £4.6 billion London Pensions Fund Authority, London, committed £60 million of the infrastructure allocation to fund the construction and operation of British renewable energy assets. The joint venture was introduced in January.
Managed by Iona Capital, the commitment also made its first investment of £9 million for a biomass plant, Leeming Biogas.
Executives at the two pension funds decided a year ago that they wanted to invest into direct infrastructure assets to a greater degree, with a specific bias toward U.K. assets, said Chris Rule, chief investment officer at LPFA. “We felt that by working together, we could use each other's resources and expertise as opposed to having to necessarily go out and expand our own teams.”
With that in mind, the joint venture was formed, with an aim to deploy a total £500 million into the infrastructure space through direct investment.
Renewables forms one of the factors with the partnership's infrastructure commitment.
“We don't have any target for any sectors — we have investment guidelines under which we operate, designed to maintain a degree of diversification,” Mr. Rule said. That diversification covers the phase of projects to which it commits, sector, whether it is exposed to cyclicality, is regulated or unregulated. “From that point of view, renewables definitely is one of the areas where we see a pretty strong population of potential investments.”
Brownfield opportunities — operational assets that already are in existence, such as wind farms — are large in number, he said.
However, the £9 million investment in Leeming Biogas is a greenfield investment, which is more challenging because projects are at an earlier stage. Mr. Rule highlighted construction, technology and demand as potential risks with greenfield projects. But there is a draw for investors, he said. “If you want to do greenfield, you tend to get higher return expectations.”
By investing in renewables of this type, some risk is reduced. “We are using tried and tested tricks, so we are eliminating some of the technology risk associated with some of the bigger infrastructure projects. We are buying into regulated cash flows,” and the project has upscale potential. “The business case can be based on pretty much guaranteed inflation-linked returns - one of the attractions of any investment in this asset class. We do not see it as a hedging asset, but to the extent that it can be linked to inflation, that is good,” he said.
Mr. Rule said he does not expect allocation to similar assets of more than 25% of the total portfolio. The £500 million total commitment by both pension funds is expected to increase over time, and, he said, the two are “actively engaged” with other pension funds that might join the venture. Therefore, that 25% limit — alleviating issues associated with being too concentrated in terms of allocation — “could be a significant monetary amount.”
The infrastructure portfolio is aiming for returns 3% to 5% above inflation returns. “We do expect to do better than that on assets like biogas. Renewables returns are higher than that, and with greenfield projects and these technologies and tariffs, we are able to anticipate significantly higher returns than our minimum threshold,” he said.
Mr. Rule said the partnership is known to be interested in direct access to infrastructure investment, and as a result it is fielding incoming enquiries from developers, agencies, project sponsors and sellers. Many opportunities are not right — at the time of the Iona Capital deal, the joint venture was looking at three other potential projects, only two of which it is continuing to work on.