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South Yorkshire Pensions Authority. “Our fund managers are working on larger scale renewable projects and addressing intermittency,” Graham says. “Directly, we are looking at ways to finance the bringing forward of major development sites, which include things like the site infrastructure,” he adds. “These are all focused on providing income streams which are increasingly important given the fund’s cashflow dynamics.” GLIL’s portfolio spans an array of projects, from renewable energy to logistics, transport, utilities and social infrastructure as well as Semperian, which invests in local services, such as schools and hospitals across the UK. “Our fund members rep- resent pensioners from across the country,” Frith says. “We are, therefore, supportive of providing better opportunities and public services wherever they are needed.”
Rewards may vary
The risk-reward profile of infrastructure is at the centre of South Yorkshire’s assessments. “We would regard projects of this sort as around the midpoint of our risk exposures as the income streams are fairly secure and for more local projects, where we tend to be a direct investor, we act as a senior lender with step-in rights which reduces exposure further,” Graham says. “The rewards vary but the hurdle rates we use to determine which projects to consider give a margin over the actuary’s return assumption, which means we are achieving our core objective to ensure we have enough money to pay pensions.”
For Fawcett and workplace pension provider Nest, the risk-re- ward picture varies. “There are core assets with stable cash- flows which are relatively low risk and then there are new pro- jects with construction and technology risk,” he says. “While we have a focus on lower risk assets, we expect our managers to also seek higher returns by taking construction risk with proven technologies through, for example, financing construc- tion of a wind or solar farm.” Frith says GLIL looks, on the whole, at core infrastructure pro- jects. “By definition, the cashflows are much more certain than many asset classes that our pension fund investors allocate to. Therefore, the volatility of returns is expected to be low.“However, returns are also lower than certain other asset classes, for example, private equity,” Frith adds. “At a portfolio level, investment in infrastructure can improve the risk-adjusted returns of the portfolio due to its diversifying characteristics. GLIL targets a return of CPI plus 4% to 6%.”
Local benefits
The reason institutional investors want exposure to infrastruc- ture is threefold: they are long-term investments; have ESG or social impacts; and inflation-linked flows.
If we consider the invest- ment required to transition the world to a low-carbon economy, then it is clear there are plenty of projects coming down the track.
Mark Fawcett, Nest
“The income streams from investments of this area are increasingly important for a maturing scheme like ours and are a key part of meeting our primary objective,” says Graham of the South Yorkshire Pensions Authority. “They also support our broader goals in terms of sustainability. And they are more attractive than other investments that do not have the full com- bination of these characteristics.” But for Sarah Gordon there are other attractions. “Investments in infrastructure have a powerful multiplier effect and can play a critical role in supporting local communities and the local economy – improvements to infrastructure can help unlock an area’s potential and support improvements in a myriad of other areas, from the viability of new homes to accessing edu- cation and work opportunities,” she says.
Stressing the investor benefits of infrastructure, Armanini says: “Infrastructure assets typically benefit from strong incumbent market positions, which can protect investors from wider market volatility and offer resilience during economic downturns. The essential nature of infrastructure assets can represent a reliable foundation for delivering returns that are uncorrelated with other traditional asset classes.” Fawcett also sees the advantages for Nest’s members. “We think illiquids present great opportunities for our members as a source of higher and more stable returns. Our members are investing for decades, in some cases up to 50 years, so we can put their money away for the long-term and help generate an illiquidity premium.” In addition, Fawcett discusses other attractive factors for inves-
32 December – January 2023 portfolio institutional roundtable: Infrastructure
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