EUROPE – Pension funds are beginning to regard infrastructure as an asset class in its own right rather than as part its real estate allocation, according to officials at RREEF.
John McCarthy, head of RREEF Infrastructure Europe, said European pension funds are showing increasing interest in infrastructure as part of its diversification in alternative investments and allocating funds as a result.
"Interest in the infrastructure market has been led somewhat out of Australia where they adopted infrastructure as an asset class in its own right although that approach is being mirrored at a different pace in Europe," said McCarthy.
"Some institutions are still allocating from their real estate assets but institutions are doing the analysis and tacking the asset class onto their investments. It tends to be larger institutions who are more aggressive in this approach. It further legitimises the asset class and is also being picked up by asset consultants who are looking at the market, particularly in the UK, to give exposure to infrastructure," he added.
McCarthy’s comments follow news the real estate giant has raised over €2bn for its pan-European closed-end infrastructure fund since its launch in August 2006, the bulk of these funds flowing from pension funds and institutional investors from 11 European countries, alongside some Asian and North American investors.
Managers for the fund have already signed four major infrastructure deals to acquire assets in transport infrastructure such as toll roads, airports and ports – including a 49.9% stake in Peel Ports, 48.6% in German motorway service operator Tank & Rast as well as being lead sponsor and adviser on the development of the first phase of the Vienna north-eastern bypass, known as A5 PPP Ostregion Package 1.
RREEF said its own allocations will see around 60% of the funds move into transportation but the firm is also looking closely at developments in the utilities market, social infrastructure, including hospitals and educational facilities, as well as specialist sector
"We are looking more broadly across the utilities space, at water, gas and electricity, as well as renewable energy, solar power, where the development is significant," continued McCarthy.
"There continue to be public auctions of assets that people are looking at, such as Southern Water and United Utilities so we are looking to see whether we can make sense of those opportunities."
Interestingly, pension funds and the investment market are beginning to try and further divide the infrastructure sector into specialist categories of asset classes beyond the ‘real estate’ and ‘infrastructure’ classes, suggested McCarthy.
That said, any shift to do so may take time because many investors are still trying to determine what different investments should be labelled as.
"The gradual split of infrastructure classes is really a function of maturity of the market, in the same way people moved from direct to indirect, unlisted to listed, and industrial to commercial versus retail," McCarthy added.
"But the infrastructure space has yet to pick up these lessons in terms of how it develops although part of the problem is how to divide it. The market is still evolving and, notwithstanding the noise, infrastructure is still very new so it’s difficult given the newness of the markets and trends to be comfortable there is sufficient activity in one sector to justify a pure sector approach.
"Weighting still tends to be made by sector and geography and there is a greater preference for funds which have a regional [infrastructure] focus rather than global," he said.