Risk-assessment and scale will play a pivotal role in institutional investment in real assets, delegates heard at the joint IPE/IP Real Estate Real Assets & Infrastructure conference in London.

Risk management “needs to start at the very beginning” of the investment process, Tobias Reichmuth, chief executive of SUSI Partners in Switzerland, said on a panel discussing the evolving role of real assets in institutional portfolios.

Fellow panellist Barbara Weber, investment committee member at Switzerland’s IST3 Infrastructure Global Fund, said market risk “cannot be underestimated”.

“Risk at asset level needs to monitored,” Weber said. “Unless you understand a sector well, it’s worth taking your time to study an asset before making a decision.”

IST3 is, Weber said, now backed by €700m of capital from 17 Swiss pension funds.

Speaking on the same panel, Chris Rule, CIO at the UK’s London Pension Fund Authority (LPFA), said it focuses more on familiar domestic investment rather than foreign investment.

“We have a UK bias where we have connections,” Rule said. “An international investment would need more time.”

The LPFA is looking for a “50/50” mix of capital growth and income, Rule said.

“We are looking for a diversification benefit and for a degree of inflation linkage,” he added.

In a presentation on increasing allocations to real estate, Macquarie Infrastructure & Real Assets head of research Daniel McCormack said there were “diversification benefits” in adding real assets to a portfolio.

“Real assets give you better performance,” he said. “The case for real assets is pretty compelling.”

TIAA-CREF’s head of global private markets asset management Jose Minaya said investing in real assets was “a challenge” and required “scale”.

“Our goal is to find the right platform – that’s the challenge today,” Minaya said. “To really play this in a direct way, you need scale, and that’s a big barrier to entry.”

Infrastructure is, he added, expensive and illiquid.

“But if you’re willing to take on that illiquidity, then the returns are there,” Minaya said.

Returns, on an absolute and risk-adjusted sense, are better, McCormack said.

“Capital will continue to flow in a low inflation, low-interest-rate environment.”

John Campbell, chairman of Campbell Lutyens, however, said it would be a brave investor who completely bet against inflation.

“You do not get inflation protection against all infrastructure classes,” he said in a keynote speech. “Investors need to get on the curve, not behind the curve, and need to be early movers.”

As institutional investors increase their allocation and knowledge of real assets, the dilemma of investing directly or through funds was also raised at the event.

Campbell said investors were “unlikely” to move to a direct approach, given the number of “boutiques” now set up.

“The talk of going direct devalues the commingled approach,” he said.

Rule said, with deals not “falling into your lap”, investors needed to build relationships.

“Being in a fund with a 10-year life isn’t necessarily wrong,” Rule said. “Critically, it’s about alignment.”

The LFPA is deploying £500m in the next few years in partnership with the Greater Manchester Pension Fund.

Mike Weston, chief executive of the UK’s Pensions Infrastructure Platform, said there was a move away from co-investment towards consortium investment.

However, Weston, speaking on a co-investment strategies panel, said it was preferable if investors decided “early on” if an investment was not for them.

Co-panellist Duncan Hale, head of infrastructure research at Towers Watson, said a “quick ‘no’ builds credibility and is preferred”. 

Hale said most institutional investors were looking at co-investments as a way of lowering fees and gaining control.

Investing directly, said Oldrik Verloop, Aquila Capital co-head of renewable infrastructure, requires “quite a commitment, and there are many ways of gaining control”.

“Whether it’s a commingled fund or a consortium, alignment is needed early on, and getting the right consortium is really important,” he said.

In the UK, public/private partnerships (PPPs) could be making a return, triggered by increased investor demand, delegates heard.

Legal & General Investment Management managing director of real assets Bill Hughes said there was “political will” behind infrastructure in the UK, with government “showing commitment and support”.

Campbell said it was “a national disgrace” that the UK’s spending on infrastructure was so low.

“Capital is needed – infrastructure cannot be developed any other way,” he said.

The government is helping, Hughes said, with the real assets sector needing “patient capital”.

Wim Vermeir, CIO at Belgium’s AG Insurance, raised the issue of how investors were working with governments.

“On one side, you have politicians saying we need more long-term investment in infrastructure,” he said. “Then you have regulators who say you need to be prudent.”

With countries such as Spain moving away from a “culture of subsidies”, lobbying, said Reichmuth, is crucial.

“It’s very important to talk to energy ministers,” he said.

Weber said talking to regulators directly and lobbying at a higher level was key.

“I’d be very surprised if that doesn’t succeed,” Weber said.