Infrastructure – Feature
There is a lot of footage of Boris Johnson in a high vis talking about the financing of these projects, but the government needs to sell better why infrastructure
investment is important. Ted Frith, GLIL
structure financing review, until that’s clear we will continue with the piecemeal approach. My understanding is that Rishi Sunak and Steve Barclay are not in the least in favor of PFI, but we are asking them for guidance on what their plans are. “There is a lot of footage of Boris Johnson in a high vis talking about the financing of these projects, but the government needs to sell better why infrastructure investment is important.” In mid-November, UK Chancellor Rishi Sunak announced the launch of a new long-term asset fund with an open-ended structure designed to attract pension fund investment in illiq- uid and unquoted assets.
There are investors who believe it is possible to reconcile the inherent tension between institutional investors aiming to achieve profitable outcomes for their members and the need for cash in the third sector. One example is Social and Sustain-
able Capital (SASC), a social impact investor launched in 2014 which funds housing and community investment projects. Another is the Social and Sustainable Housing fund, which provides secured loans of between £2m and £5m to social sec- tor organisations with experience of providing housing and support to vulnerable individuals such as rehabilitation for drug addicts or domestic violence shelters. One challenge is that the size of these projects is far below the usual volumes large scale institutional investors might want to deploy. “There is a scale issue here in terms of growth, but this is part of the process that we are going through. Over time we can do much larger investments with the underlying organisations. The constraining factor is finding the right organisations to work with,” explains Ben Rick, SASC’s managing director. At the same time, he warns that more flexible growth models, such as a structure whereby the investor leases the property to the charities in question, could come with less accountability and ultimately not deliver the anticipated outcomes for the people the schemes should help. This is also an issue that the IPPR flagged up in a report on the future of supported housing.
As a recently launched investment vehicle, SASC hopes to attract funding from institutional investors over the medium term. Local authority pension funds, in particular, could offer a suitable partner for its social housing fund, he predicts. “Ulti- mately, pension funds could have a direct positive impact on the areas they represent, where the people whose money they are managing live. We will increasingly see organisations that previously said they will consider investments in £100m incre- ments commit, for example, to a £20m investment with a fund like ours,” he says.
Babysteps
The pandemic has highlighted not just the urgency, but also the opportunities in allocating institutional money to solving societal issues, from climate change to social housing. In the best case, a pension fund investing in infrastructure could not just offer its members a more broadly diversified portfolio uncorrelated from equity and inflation risks, it could also help address societal problems. But investors might have to start with small commitments and be prepared to compromise on their return expectations as they are now in competition with a public purse that could fund projects virtually for free. Nevertheless, given that about $17trn (£12.9trn) of bonds, including UK government debt, is now trading at negative rates, for a mature defined benefit scheme or an insurance giant helping to address societies problems through infrastructure funding may well be a favour- able alternative. For those hit hardest by the pandemic, it would make a world of a difference.
Issue 98 | November 2020 | portfolio institutional | 49
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