Infrastructure – Feature
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 in contrast new projects with construction and technology risk,” he says. “While we have a focus on lower risk assets, we expect our managers to also seek out higher returns by taking construction risk with proven technologies, for example, financing construction of a new 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-adjust- ed returns of the portfolio due to its diversifying characteris- tics. GLIL targets a return of CPI plus 4% to 6%.”
Diverse portfolio For Armanini, infrastructure is about growth and impact. “Through buy-and-build strategies, our focus is on acquiring, building and managing a diverse portfolio of European infra- structure assets that can deliver long-term sustainable growth while having a positive impact on society,” he says. Recent examples include its investment in Zenobe – a market leader in the UK for grid-scale batteries and electric buses. “As the use of renewables increases, companies like Zenobe can provide the support required to cope with sudden variances in supply,” Armanini says. “Another is our investment last year in EnergyNest, a Norwe- gian thermal storage company which specialises in capturing and recycling surplus heat generated from industrial processes – or using it to generate renewable electricity,” he adds. In its 2021 whitepaper Scaling up institutional investment for place-based impact, the Impact Investing Institute studied the risk profiles of various asset classes available to pension funds, with a particular focus on alternatives, such as private equity, infrastructure and hedge funds. “Drawing on the Pensions and Investment Research Consult- ants’ annual review, we found that return for unit of risk is highest in these alternative assets, including property, provid- ing a compelling financial case to invest in these asset strate- gies,” the Institute’s Gordon says.
Infrastructure interest
The reason institutional investors want exposure to infrastruc- ture is usually threefold: the long-term investment associated with the asset class, ESG or social impact motivations, and the inflation-linked flows.
“The income streams from investments of this area increasingly Issue 111 | March 2022 | portfolio institutional | 51
important for a maturing scheme like ours and are a key part of meeting our primary objective,” says Graham of the South Yorkshire Pension Authority. “That 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.” For Dowdall, there is a main reason why the Greater Man- chester Pension Fund invests in the asset class. “All three can be achieved, but the primary aim always has to be the long- term inflation linked cashflows to pay our pension liabilities,” he says.
INFRASTRUCTURE AND LEVELLING UP
The government’s Levelling Up whitepaper offers many positives on the infrastructure front. “Infrastructure invest- ment represents an integral part of the government’s Lev- elling Up agenda, and it will be interesting to see how pri- vate capital can be invested to help rebuild key public services such as schools, roads and hospitals across the regions,” says Ted Frith, chief operating officer at infra- structure investor GLIL. In tandem with this, the UK Infrastructure Bank is attempt- ing to identify the most pressing and viable projects in need of funding for local, regional and devolved adminis- trations. “If it plays this role successfully, it could spark a surge in infrastructure investment that will help regenerate our economy and support the needs of local communi- ties,” Frith says. “For funds like GLIL, the UK Infrastructure Bank and Lev- elling up agenda present a significant development in the market, but what we ideally need is for our local and regional leaders to be clear about their investment priori- ties, so that we can assess the projects,” he adds. “The government is facilitating this, and the UK Infrastructure Bank is an important step.” For Sarah Gordon, chief executive of the Impact Investing Institute, the publication of the Levelling Up whitepaper and the ambitious goals it laid out was a welcome step for- ward – particularly the announcement of a 5% local invest- ment target by local government pension schemes. “This new target will encourage pension schemes to con- sider the real opportunities presented by investing for impact in UK towns, cities and regions across all of the investment opportunity areas that make up our place- based impact investing model – from SME finance to infra- structure,” Gordon says. The announcement, however, is only half of the story, Gor- don says. “If the ambitious aims of the whitepaper are to be met, and pension funds fulfill their 5% target, local schemes will have to be supported by government along with other organisations to allocate to these types of investments.”
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