REAL ESTATE - "There is a shortage of ‘boring stable’ infrastructure investment product which is much in demand by institutional investors," according to Jane Welsh, senior consultant at Watson Wyatt.
Speaking at the Investing in Infrastructure conference in London last week she said, "clients want long-term cashflows, but what is available is a lot of limited-life vehicles with private equity characteristics. What clients are being offered is a quick killing. But they don’t want the excitement, they just want stable cash flows."
She added: "We are also concerned that the infrastructure investments are being managed at private equity fees which is an incentive for managers to make the investments too risky which clients don’t want."
Other conference participants included Timo Löyttyniemi, managing director of VER, the Finnish State Pension Fund, who outlined the fund’s reasons for investing in infrastructure. "We are hoping to generate a sufficient return on capital above 7%. Infrastructure also offers stability, good diversification, low correlation with other asset classes and a hedge against inflation."
He continued: "We are just starting in infrastructure so just to have the exposure is sufficient. As the market evolves we will look at geography and currency and inflation risk but for now we just want exposure."
One benefit that is often cited about infrastructure investments is that it provides a good hedge against inflation. But Corine van Heijningen, infrastructure portfolio manager at PGGM, said: "The degree to which infrastructure provides a hedge against inflation is project-dependent: it depends how the debt is structured."
Robbert Coomans, head of infrastructure investment at ABP Investments, said that his strategy was to invest in a limited number of funds where ABP Investments would be a strategic partner or co-investor. "We want to invest larger amounts of money where we have a greater say in steering the portfolio in the way we want, in other words not all greenfield and not all speculative."
He said that he expected more than half of all of ABP’s infrastructure investments to be in the form of co-investments in three to four years. "We don’t want to invest in listed instruments because we don’t want the portfolio to be influenced by the movement of capital markets," he said.
As for risks, Van Heijningen cited regulation as the main risk where infrastructure investments are concerned. "For example, in the case of a utility regulation can be an advantage and disadvantage. If there is a review of pricing it depends what the regulator considers to be an adequate return for the equity providers. So the regulatory system can be what makes us decide to enter some markets and not others."
Löyttyniemi said that the main risk to is how to plan the capital input into this asset class. He also cited the interest rate risk. He also noted that "the risk of a fall in demand from an event like the first oil shock is not shown in the normal volatility statistics."