‘We can't buy an airport,' KBC's Edwin Meysmans tells Shayla Walmsley. It seems European infrastructure funds are the next best thing
For Edwin Meysmans, managing director of the €950m Belgian private-sector scheme Pensioenfonds KBC, investing in infrastructure represented a modest attempt to hedge liabilities via an inflation-sensitive asset class. The pension fund's approach to infrastructure funds was equally straightforward: stay clear of emerging markets, and keep an eye on pricing.
"We took our first steps towards investing in infrastructure around two years ago via a European infrastructure fund" - the Macquarie European Infrastructure Fund - "then we doubled our investment in the same fund last year," says Meysmans.
Given the self-imposed constraints of the pension scheme - no emerging markets - the Pensioenfonds KBC is among smaller European pension funds identified by Danny Latham, First State Investment's head of infrastructure investment for Europe, as crowding cautiously at the developed market end of pure infrastructure.
If the continuum of infrastructure begins, figuratively speaking, with developed-world pure infrastructure on the left, public—private social infrastructure somewhere in the middle and leveraged quasi-infrastructure in frontier markets towards the right, KBC has pitched its allocation almost at the entry point. "We were very focused about where we wanted to invest. We wanted to stick with Europe, rather than investing in emerging markets such as China or Vietnam," says Meysmans.
As a Belgian pension scheme, KBC is arguably an exception to the European rule because the fund does not address longevity and has no annuities to consider. Partly because the pressure for returns is absent, Belgian pension funds tend towards stability in asset allocation. They also tend not to invest in alternative asset classes, with the emerging exceptions of unlisted real estate and infrastructure. A few, such as the Suez-Tractebel pension scheme, which is in itself set up as a SICAV, have looked towards other alternatives such as commodities.
It was only in 2005 that KBC set a target of 10% for real estate, including infrastructure - a mere 3% shift from its equity allocation, but a relatively bold move given that real estate had long had a 7% allocation, albeit one driven largely by underperformance of equities. At that time, the KBC scheme ruled out investing in hedge funds, ironically, not only because of a lack of transparency but because there were simply too many funds from which to choose.
Unsurprisingly, when the scheme made its investment in infrastructure, timing was everything. "When we invested, there weren't that many [fund managers] in business," says Meysmans. "Afterwards, everyone came to the market with a fund."
KBC's decision to boost its infrastructure investment in 2007 came with diversification of the scheme's 10% real estate allocation. The tweak - driven by its desire to match liabilities - included an increase in the infrastructure allocation to 10%.
Another potential benefit of the exercise, which also included real estate diversification into timber and direct real estate investment, was to reduce volatility in returns. In contrast to APG - and in line with an awareness of scale among Belgian pension funds that borders on propriety - direct investment was neither an expectation nor an ambition.
"We're too small to invest directly," says Meysmans. How many pension funds in the world, he asks, "are investing directly, except those the size of ABP, the Norwegian oil fund or CalPERs? We can't buy an airport. With funds, investing is fairly easy."
Any further investment the scheme makes in infrastructure will likewise be via funds focused on developed markets, and with a focus on hedging volatility. The trouble is, there is yet to be a correction to the price inflation of recent years.
For the KBC scheme, that means holding off from further capital commitments at least for the near future. "We've taken the decision not to increase the allocation to infrastructure for a while because there are so many funds around that the price of assets has increased. Competition is driving prices up. We won't get the returns we would expect with asset prices so high."
Certainly, recent data indicate there will be no imminent end to demand for infrastructure vehicles - not least because the stable nature of the target assets offers relative resilience to fluctuating market conditions. Recent research by Private Equity Intelligence (Preqin) suggests pension funds represent the single largest group investing in infrastructure, making up 52% of the investor universe.
Separate research from Capital Innovations indicates a growing trend towards segregation of infrastructure from real estate or private equity - an indication of growing sophistication and awareness of its income-producing and inflation-hedging potential.