Feature Aligning objectives
Infrastructure is also a diversified asset class, ranging from clean energy through to transport. “This means institutional investors can select the opportunities which most align with their overriding objectives – whether this be predominantly cli- mate-focused, social-focused or otherwise,” Gordon says. Investment in real assets can also provide income streams as they are underpinned by revenue generating models, with returns often inflation-linked, providing a particularly good match for pension payments. “Investing in local infrastructure is therefore a compelling example of our place-based impact investing approach – securing risk-adjusted financial returns while enhancing local resilience, advancing regional develop- ment and improving people’s lives,” Gordon says. Fawcett also sees the advantages for Nest’s members. “Illiquids present great opportunities for our members as a source of
NEST: AN INSIGHT INTO INFRASTRUCTURE INVESTMENT
Workplace pension provider Nest has taken a threefold infrastructure approach. Last year the master trust appointed three infra equity partners – CBRE Caledon, GLIL and Octopus Renewables – to invest in projects in the UK and around the world, with a particular interest in renewable energy. “The types of infrastructure Nest could invest in include fibre networks, electric vehicle charging hubs, water and waste treatment plants and roads,” says Nest’s chief investment officer Mark Fawcett. CBRE Caledon’s mandate is to help Nest invest directly in global core and core-plus infrastructure projects. “They provide access to an infrastructure fund sponsored by the firm, with the opportunity to also co-invest in select invest- ments to help Nest members take advantage of bigger projects,” Fawcett says. “GLIL Infrastructure is a unique organisation, representing a joint venture between a number of major local authority pension plans,” Fawcett says. “Nest will invest in the fund along with GLIL’s members, with its open-ended fund giv- ing
access infrastructure.”
Octopus Renewables is the largest investor in utility-scale solar power in Europe, as well as a leading UK investor in onshore wind and biomass, managing a global portfolio valued at more than £3bn. “Nest has appointed the firm to boost its investment in clean energy infrastructure and has already deployed money into projects such as a solar farm in Reading and biomass power plant in Brigg,” Fawcett says.
32 May 2022 portfolio institutional roundtable: Private markets to new opportunities in UK core
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 adds other attractive factors for investors. “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 use- ful diversifier of our portfolio, while reducing our reliance on other growth assets such as equities,” he says. “The direct rela- tionship 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.”
Core of infrastructure 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,” Frith says. “Social and ESG-linked projects in particular also appeal to the objectives of our members and those 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.”
Beware the pitfalls
Infrastructure is, therefore, a natural investment world for institutional investors, 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 current prevailing market prices there is only a fine margin of error in asset spe- cific 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 used its scale and long-term focus to negotiate good fee rates. We have also found workable solutions with our infra equity fund manag-
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