Pensions Filling the Infrastructure Gap?

Julie Henderson at IPE.com reports that pension funds called on to invest in infrastructure:

The UK government has called on pension funds to consider investing in infrastructure, as officials admit hundreds billions of pounds of investments is needed over the next 10 years.

Speaking at a recent conference in London on infrastructure financing, Lord Davies, minister for trade, investment and small business, admitted the UK needs to stimulate private sector investment in infrastructure as “the next decade must see a new wave of investment in key infrastructure sectors, worth hundreds of billions of pounds”.

In particular, Davies said: “It’s my personal view that we need a new capital market for infrastructure. The changes in liquidity, capital ratios, and the changes in the financial services industry are profound. And therefore the financial services industry is going to find it increasingly difficult to put long-term money into project finance. So we have got to be creative in generating new sources of income.”

He continued: My personal view is that the pension fund industry, with such enormous funds under management, is going to be critical to success.”

Pension funds across Europe do invest in infrastructure for diversification purposes, usually in a bid to partly tackle inflation hedging. Only recently, Kent County Council announced it was looking to invest £30m-£40m (€34.6m-€46.1m) in a global infrastructure mandate on behalf of its £2.2bn pension fund. (See earlier IPE story: UK roundup: including Kent)

The UK government also launched a committee known as Infrastructure UK, last December, to present ideas to the Treasury on how the planning, financing and delivery of infrastructure might be achieved.

And it is expected that further information on the government’s plans for infrastructure investment will then be revealed in the 2010 Budget, expected in March or April.

The list of projects needing financial backing is huge so officials are seeking new thinking on the financing of everything from waste treatment facilities and water infrastructure to low carbon energy systems and high speed rail.

The comments were followed by a report from Preqin suggesting the number of deals completed by unlisted infrastructure fund managers was down 33% at 130 deals over the previous years. Yet the amount of money raised was up 82%, according to the report.

The data compiled from Preqin’s Infrastructure Online service showed just 27 deals were signed between 1April and 30 September last year, and the average deal size for the whole of last year was $600m (€430m) and those worth $1bn amounted to just 15% of all infrastructure contracts signed in 2009.

Over 60% of the deals completed related to European projects and 80% were in four core investment areas: energy, telecoms, transport and utilities. The remaining money was spent in educational projects, government-related infrastructure, healthcare, logistics, and waste management, said Preqin.

Debt constrictions and lack of available assets were seen to have contributed to the contraction in the infrastructure market, according to Preqin, and conditions are still difficult as many fund managers will still be dependent on increasing equity ratios or their ability to persuade vendors to reduce their prices.

In recent days, a spate of announcements on infrastructure deals have hit the wires. The Globe and Mail reports that Ontario Teachers is readying bid for U.K. utility, Northumbrian Water Group PLC.

Christian Oliver of the FT reports that South Korea's National Pension Service, the world's fifth-largest pension fund, plans to take a 12 per cent stake in Gatwick airport next week, stressing that investment in Britain will play a significant role in quadrupling its international exposure:

The NPS, which is aiming to expand its overall portfolio from $240bn (£150bn) to $400bn by 2014, came to the attention of Britain's financial community last year when it bought the headquarters of HSBC in Canary Wharf for £773m in cash.

Jun Kwang-woo, NPS chairman, who is spearheading a sweeping international expansion, said the fund would look to increase its exposure to Britain from the current level of 1.3 per cent.

"Some infrastructure-related investment ahead of the London Olympics in 2012 could be very interesting and that could generate some momentum," said Mr Jun. "The regulatory framework is very stable and reliable."

Gatwick airport was sold late last year to Global Infrastructure Partners , an infrastructure fund backed by Credit Suisse and General Electric, for £1.51bn.

Mr Jun said that taking a 12 per cent equity stake in the airport represented an investment of a little less than £100m.

GIP said the group was pleased to have NPS as a long-term relationship investor, adding that the deal was part of plans that had been disclosed on completion of the purchase of Gatwick to sell a minority interest in the airport in its portfolio management. GIP will retain a controlling stake, the company said.

The NPS Gatwick deal is being financed with bank debt accounting for 45 per cent of the purchase price.

"We are part of a consortium. As a new kid on the block, in the early phase, we would find it more comfortable to have dependable partners," Mr Jun said. "In our investment strategy, for the time being and foreseeable future, we will look for possibilities to join forces with big international players. This is an opportunity for big financial players."

More broadly, he said that UK property continued to be attractive: "Our general attitude is that we consider that investment in the United Kingdom represents a good buying opportunity despite, quite frankly, a relatively slow recovery from the global crisis.

"If you look at the property market around the world, according to our analysis, Great Britain has already undergone quite a substantial correction, more substantial than many other places around the globe."

As well as scouting for prime office property across the world, the fund is also targeting an aggressive expansion into equities. Internationally, raw materials and energy will be another key focus.

Watching all these deals go through makes me wonder if good times are back in private markets. I doubt it. Instead, what I'm seeing is selective buying of long-term infrastructure assets, and other private assets, which may or may not turn out to be good long-term investments. What is certain is that pensions will be increasingly called upon to fill the infrastructure gap.