Feature
INFRASTRUCTURE: GOING GREEN Global unlisted
infrastructure has shown itself to be a strong performer, fairly insulated from the performance of
the global economy. Mark Fawcett, Nest
ers 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 fol- lowed suit.“We are comfortable paying more for some asset classes over others because we recognise the trade off, but some fees charged remain prohibitive for many DC investors. More fund managers still need to sharpen their pencils.”
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 very excited to do more.” Frith does note, however, 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.
Like the majority of investments, green projects are central to the growth of infrastructure. Greater Manchester Pen- sion Fund’s Paddy Dowdall cites the importance of renew- able energy. “There is a need for a vast amount of renew- able energy, plus the networks to support that and maximise the effectiveness of such generation, including battery storage and electric car charging infrastructure, requires a huge amount of investment. New residential development requires a huge amount of energy supply,” he says. “We have a well-diversified portfolio pipeline and are look- ing for new opportunities, but one interesting example is a platform to invest in battery storage,” Dowdall adds. Infracapital’s Michele Armanini also places an important emphasis on a shift to the opportunities presented by greenfield sites. “While the operational brownfield infra- structure market is now maturing, greenfield infrastructure is still seen as a relatively new way of investing for pension funds,” he says. “By providing access to infrastructure earlier in the asset cycle, greenfield investment can result in more attractive yields during the operational phase when compared with traditional brownfield investment.” Entering at the greenfield phase allows investors to come in ‘at cost’, meaning long-term investors can typically enjoy a significant return premium over brownfield invest- ments during an asset’s lifespan, including enhanced yields, Armanini says. “Greenfield infrastructure also appeals to investors because of its ability to bring clear benefits to the economy,” he adds. While foregoing yield during construction, which can vary from several months to several years, greenfield projects essentially become brownfield assets once operational, carrying all the associated attractive characteristics – including secured, reliable cashflows linked to inflation, alongside the potential for capital growth. “Greenfield infrastructure is not without risk, so asset man- agers must have a robust risk-monitoring, structuring and management process in place,” Armanini says. “Effective cost management, allowance for overruns in timetable and budget, as well as careful structuring of contracts, are all important risk management techniques.”
Although Graham observes that while institutional investors are important in the infrastructure narrative, it cannot be built by them alone. “Institutional investment cannot be the pana- cea that addresses all infrastructure needs. We can be a part of the solution, but not all of it.”
May 2022 portfolio institutional roundtable: Private markets 33
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