Feature
It’s not that there aren’t plenty of projects out there, but the increased focus on areas such as renewable energy has made many a lot more competitive.
Ted Frith, GLIL Infrastructure
tors. “Global unlisted infrastructure has shown itself to be a strong performer, fairly insulated from the performance of the global economy. We believe this will continue and be a useful diversifier of our portfolio, while reducing our reliance on other growth assets, such as equities,” he says. “The direct relationship with the asset can also help us manage key ESG risks. In particular, we believe investing directly into green energy infrastructure will play an important role in helping us achieve our net-zero ambitions.” For Ted Frith there is an essence in the attractiveness of infra- structure. “Core infrastructure appeals to pension funds like our members because it offers long-term, stable cashflows and inflation-linked returns that align well with the liabilities of a pension fund. “Social and ESG-linked projects in particular also appeal to the objectives of our members and thosew they represent,” he adds. “After all, as well as fulfilling their primary fiduciary role, pension funds also consider which investments are attractive for other reasons, and investors increasingly want to see money spent on reducing carbon emissions and tackling climate change.”
The focus on infrastructure investment has never been greater and, it represents a clear benefit to the broader economy, in terms of driving growth. “As well as playing a beneficial role in a portfolio, and helping to support the climate change agenda, infrastructure investment in general has a strong positive
impact on economic growth,” Frith adds. “It is possible to see the tangible benefits as we refresh and evolve services and facilities for the benefit of local communities across the UK.” Infrastructure is, therefore, a natural investment for pension schemes and insurers, but it’s not without its pitfalls. “It is an exciting time, but as ever risky,” Dowdall says. “The long-term nature of these investments coupled with the natural illiquidity of the asset class mean that when paying the prevailing market prices there is only a fine margin of error in asset specific due diligence given the potential risk of an inflexion point in long- term interest rates and inflation.”
Offering an insight into infrastructure equity investment for a pension fund, Fawcett has some words of warning. “The costs of investing in something like infra equity have typically been too high for defined contribution (DC) schemes. But Nest has been able to use its scale and long-term focus to negotiate good fee rates. We have also found workable solutions with our infra equity fund managers to overcome issues such as daily pricing.”
In turn, the issue over pricing needs to be addressed. “To help further open up the market to other DC schemes, there needs to be a better discussion about cost and value – as they are not the same thing,” Fawcett says. “We challenged the private credit market to review their fees and investment structures and think ahead to the opportunities available with the growth of defined contribution pensions. They stepped up to the plate, and the infrastructure equity managers we are working with have followed suit.”
Delivering growth
The scenario of institutional investors focusing on infrastruc- ture is vital going forward, Frith says. “Crowding private capital into infrastructure in the UK will be essential to support tax- payer funded initiatives if we are to deliver half of the govern- ment’s aspirations. We have been investing in core UK infra- structure on behalf of pension funds for more than six years and are excited to do more.” Frith does, however, note that much has been achieved in a short period. “A great deal of investment has been made dur- ing the past two to three years and, with the progress of initia- tives like the government’s UK Infrastructure Bank and Level- ling Up whitepaper, we stand ready to explore further projects that can deliver stable, long-term inflation-linked returns for the benefit of our pension fund members,” Frith
says.Although Graham observes that while institutional investors are impor- tant in the infrastructure narrative, it cannot be built by them alone. “Institutional investment cannot be the panacea that addresses all infrastructure needs. We can be a part of the solu- tion, but not all of it.”
A longer version of this article was published in March 2022 December – January 2023 portfolio institutional roundtable: Infrastructure 33
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