These funds are not alone – Avon Pension Fund and Dorset County Pension Fund have invested £187m and £40m respectively into IFM Investor’s Global Infrastructure Fund.
IFM’s head of business development, Annabel Wiscarson, says although the asset class is really only a little over a decade old, most funds are actively looking at it or have plans to do so. But the biggest problem is always getting access, and this is why it is no surprise these funds are forming alliances.
“Australian pension funds have led the way, but you cannot do it overnight,” says Wiscarson. Though there’s no reason schemes cannot go it alone and some have been successful here in the UK as well as Cananda and Australia, it will always come down to resources.
“To do that you need to find the right team and invest well, but also manage the assets for the long term which is where the real risks lie,” says Wiscarson.
DEBT APPEAL
Infrastructure isn’t all about the equity deals any more and funds have been tantalised with the opportunity of accessing infrastructure debt. However, while the yields of debt – and its higher position in the credit hierarchy – make it more attractive, Wiscarson believes it is no less taxing to assess.
“While it offers a relative value, finding the right products can be difficult,” she says. And there is another layer of governance to consider, too.
“If a UK scheme is looking at infrastructure debt to replace an element of their fixed income, they are likely replacing gilt exposure. The debt exposure is unlikely to be UK-only, which may require a foreign exchange hedge.”
Gershon Cohen, head of infrastructure funds at Aberdeen Asset Management agrees that appetite for infrastructure is increasing, but it remains an evolving sector and still faces many challenges.
Debt is a case in point. Banks were the main provider of finance for the bulk of infrastructure, says Cohen, but the global financial crisis and Basel III resulted in them withdrawing retreating. It was then that debt funds, asset management groups and the likes of the European Investment Bank saw an opportunity to plug the funding gap and gain access to infrastructure debt.
“However,” says Cohen, “the capacity and ability to lend for the long term at competitive margins means the banks have come back with a vengeance.
“This is a key dynamic and has lots looking at starting up debt funds, meanwhile banks are flooding the market with competitively-priced debt.”
DECISION TIME
Another perennial problem is the ability to make decisions in good time to take advantage of opportunities. While investors are seeking long-term inflation-linked cash flow, it can take some years to allocate in a meaningful way. This may influence some to consider existing – brownfield – assets over greenfield ones, says Cohen, and that may not be the best solution.
“While it’s true these brownfield sites may be good assets, investors should be looking at other assets to be sure they’re not just moving with the market. Looking back in 10 years’ time, it may not prove to have been a bad decision to have bought a particular brownfield asset, but it may not necessarily have been the right one.”
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