The London Pension Funds Authority (LPFA) has been undergoing a review of its investment strategy since late-2012, which should lead to an increase of its weighting towards illiquid assets (to 40-50% of its total assets). This grouping of asset classes includes real estate and private equity, but infrastructure looks more than likely to benefit significantly from the review.

“We are very excited and very keen on the illiquid space in general,” says chief investment officer Alex Gracian. “As a pension fund, we are long-term investors and we want to try to maximise the illiquidity premium and get stable returns.”

Gracian admits that LPFA is not alone in identifying the potential for infrastructure to play an important role for large investors. Investors like LPFA therefore face the dual challenge that comes from an asset class that is both relatively new and increasingly competitive. The fund is therefore taking what could be described as a careful and considered approach.

“Everyone wants a piece of the action in infrastructure,” says Gracian. “It’s very much in vogue, whether in terms of sovereign wealth, endowments and obviously pension funds. We make a clear distinction. We will spend time and effort to find the best-quality opportunities.”

He believes infrastructure will become more of a mainstream asset class for UK pension funds. “As I go to various meetings and talk to other people in the space, you can see that there is a lot of excitement and interest. I think the problem is finding good quality assets. I think demand outstrips the availability. It is very much an asset class that’s in vogue and growing, but it’s about having the skillsets and taking the time to hone out the good quality opportunities.”

With this in mind, LPFA has been increasing its in-house resources, including the appointment of Kerry Adby and Dermot McMullen to the board as non-executive directors. Adby, managing director at Copernican Securities, has experience of working with the Canadian Pension Plan Investment Board in Canada and was a pensions adviser to the World Bank. McMullen has worked at Bank of America in a number of industries, including construction, mining, real estate, shipping, and the oil and gas sector. “We’ve built up a lot of skillsets internally, and we have a wealth of expertise on the board to support us.”

LPFA’s infrastructure strategy is still very much under review. Preferred sectors and types of assets, for example, are open for debate. But Gracian does reveal that the pension fund is generally positive on opportunities in the UK, and not just because it is a UK investor. “It’s a mixture,” he says. “It is the home market, but there are also good opportunities.”

Even the target allocation has not been decided. It is currently around 4% of the total £4.6bn fund. “We are not yet able to put a definitive figure on this as we are still working through the finer details of asset allocation,” says Gracian. “The final decision will, of course, depend on a whole host of factors, such as the expected returns, risks involved, cash-flow profile, inflation linkage, duration, geographical diversification need and available projects.”

The strategy is yet to be set in stone but what is clear already is that LPFA will pursue a flexible approach in a bid to capitalise on opportunities as they arise rather than setting a rigid framework. In theory, this means the pension fund might make direct investments and co-investments, but it has not ruled out investments in funds, or even listed markets. LPFA will also be able to invest both in equity and debt.

 

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