Feature
Everyone loves infrastructure, especially the government. Indeed, in 2020 the chancellor, Rishi Sunak, set out the UK’s first infrastructure strategy. This was followed almost two years later with the Levelling Up whitepaper, which has infrastruc- ture scribbled all over it, like a lovelorn teenager. Institutional investors, particularly pension funds, also love the asset class for a host of reasons. But for all this love, the biggest challenge associated with infra- structure is the simplest and the most obvious: the lack of appropriate projects to invest in. How can something so loved be so elusive? The government has a major role here, possibly becoming an effective infrastructure-dating agency, so inves- tors and projects can meet their ideal match. “Government intervention is the most likely and most signifi- cant catalyst to increase the number of investable greenfield pro- jects,” says Paddy Dowdall, assistant executive director of the Greater Manchester Pension Fund, citing one area that is no doubt the future of infrastructure (see boxout, Infrastructure: Going green). “This could be in the form of direct procurement of social infrastructure, renewable energy subsidies-price cer- tainty grants for brownfield re-development, or co-investment on a subordinated basis,” he adds. Sarah Gordon, chief executive of the Impact Investing Insti- tute, agrees, noting that while the government has encouraged institutional investment, it could, and should, extend its work further to focus on impact investing. “We believe [the govern- ment] can go one step further by using public investment to catalyse institutional investment in historically under-served regions of the UK. “Alongside helping to crowd in investment, government can also empower people and communities in these places to engage with private capital,” she adds.
New technology Michele Armanini, greenfield managing director of Infracapi- tal, M&G’s unlisted infrastructure equity business, concurs. He highlights several areas where the government needs to do more to make projects viable to institutional investors, with the emphasis on new and innovative initiatives. “When it comes to encouraging institutional investment into sustainable infra- structure projects, the government and regulators must embrace new technologies in a way that enables them to scale quickly and share risk fairly across the public and private sec- tor,” he says.
On a positive note, Armanini has seen examples of this, with the UK government’s development of effective models, such as Contracts for Difference, to support and incentivise invest- ment in sectors like offshore wind. “This level of support and targeted intervention has dropped off substantially, and private sector investors can now invest in this sector with confidence,
knowing they can make an economic return and will not be left with stranded assets,” he adds. George Graham, director of South Yorkshire Pensions Author- ity, argues there are other ways of shifting the infrastructure needle. “The key change that would improve matters here is to find more ways to bring the skills and expertise of fund manag- ers together with the people running projects and to create some template projects that can be replicated fairly easily, from say, one district heating scheme to the next.” It is also a more complicated picture, presenting other chal- lenges. “For UK investors in UK projects, the challenge is often competition from overseas investors with deep pockets,” Gra- ham says. “This is great for the projects, not necessarily good for us as an investor.” In addition, Graham adds: “An increasing challenge, as the def- inition of infrastructure broadens, is projects lacking scale and needing significantly more work to be investable.” For Graham, there are other ways the government can try to improve the situation. “It can maintain a consistent policy stance and reducing the time to get projects out of the plan- ning stage would help greatly,” he says.
Transition investment Nest’s chief investment officer, Mark Fawcett, offers a different perspective on the lack of infrastructure projects narrative. “We disagree,” he says. “If we consider the investment required to transition the world to a low carbon economy, then it is clear there are plenty of projects coming down the track. Also, with government debt across the world at heightened levels due to the pandemic, we should expect private capital to be in demand for a wide range of infrastructure investments.” Offering another perspective, Ted Frith, chief operating officer at investor GLIL Infrastructure, points to the influence of renewa- ble energy on the issue. “It’s not that there aren’t plenty of pro- jects out there, but the increased focus on areas such as renewa- ble energy has made many a lot more competitive,” Frith says. “The infrastructure market has attracted a large amount of cap- ital looking to invest in these sectors, which in turn drives up the price,” Frith adds. “Investment opportunities have always relied on a range of factors lining up at the same time, but right now you need to work harder and be smarter to find the pro- jects that are appropriate, accessible and provide diversification for the fund.”
And Armanini adds: “It’s true that there has been a growing appetite for infrastructure assets, but we equally have seen a proliferation of investment opportunities, driven by macro trends such as digitalisation and the drive to net zero.” This in turn brings opportunities, Armanini says. “In Europe, where our investment activities are focused, there is an estimated €650bn (£544bn) of additional investment required
May 2022 portfolio institutional roundtable: Private markets 29
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36
