Mike Weston, chief executive of PIP makes no apologies for dealing in brownfield assets: “We are very clear that what we wish to offer is positioned as low level of risk returning cash flows as a bond substitute.”
Brownfield has been used by PIP as these assets fit better within its risk/return profile, says Weston, which targets the lower end of the risk spectrum of public-private partnership/private finance initiative/ solar and photovoltaic (PV).
Investment in the Thames Tideway project, in particular the London Super Sewer (ironically a greenfield project) can be done by PIP due to the government guarantees provided which mitigate much of the construction risk. But that isn’t true of many of the infrastructure projects in the pipeline. Although the national infrastructure plan consists of £450bn of projects, few are suitable for private investment and where that is sought, they don’t offer the right risk and return structure, says Weston.
PIP already has £348m committed and £221m invested and Weston is working with Aviva on a second fund covering solar and PV investments. Weston is convinced there will be many more schemes investing in infrastructure, but growth is hampered by its structure. Consultants understand the opportunity, but see PIP as a matchmaker rather than asset manager and until it is FCA regulated, they must take a lot on trust.
POLITICAL RISK
Though Weston defines solar and PV as lower risk, not all would agree. Aside from a reliance on technology and problems with storage of energy, like social infrastructure, political interference is a real problem – especially if you are making a lot of money from the contract.
But Weston remains unfazed, dismissing the Spanish government’s change to feed in tariffs as a response to the crisis and should not discourage investment.
“Political interference is a risk in major infrastructure projects because they are, by their nature, large and expensive and something that politicians want to get involved in,” says Weston.
This must be accounted for by any scheme considering a 20 or 25-year investment in illiquid assets, because this covers a number of political cycles and investors should anticipate change. “You can be almost certain that politicians will change the rules,” says Weston, “but not retrospectively as this would undermine the whole legal structure and governments need investors to have confidence in their contracts. There is no shortage of potential investment to go into infrastructure, but what we need from the government is a pipeline of projects to invest into.”
The demand for infrastructure never abates, but the days of government paying for it all have gone. This, combined with developing structures created by the funds, for the funds like those from PIP and LPFA, would suggest infrastructure investment is only likely to grow at rapid pace.
BOX-OUT: GMPF JOINS LPFA IN INFRASTRUCTURE INVESTMENTS
In January, the Greater Manchester Pension Fund (GMPF) joined forces with the London Pensions Fund Authority (LPFA) in a £500m programme of infrastructure investment. Councillor Kieran Quinn, chair of the GMPF, explains why they chose LPFA over PIP or an asset manager.
“LPFA shares our views on the benefits of investing in infrastructure. We feel this initiative can complement the Pensions Infrastructure Platform, that to date has had a slow start,” he says.
“Our collaboration with LPFA will facilitate superior governance arrangements and local accountability, together with the ability to tailor investments to local pension fund requirements and liability profiles in terms of the degree of risk that is desired and the potential return and cashflow requirements.”
The structure of the mandate is designed to be flexible, says Quinn, to take advantage of the opportunities presented.
“However,” he adds, “examples of possible investments include core and noncore assets, operational and greenfield projects, debt and equity investments. From a sector perspective – transport, housing/commercial and regulated assets such as transmission or utility companies, but the funds will focus on Greater Manchester and London, with a high degree of flexibility for suitable opportunities.”
The move for GMPF is mostly about diversification, but stable, inflation-linked long-term cash flows are of course attractive and in partnership with the London scheme, can achieve scale investments and greater efficiency. It’s early days, yet, Quinn is “happy with the way the collaboration is working” and further collaboration with the London schemes may be on the cards at a future date.
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