Pension funds and fund managers have been blamed for an apparent reluctance to invest in infrastructure by two recent reports. One report, by alternatives data firm Preqin, claims even institutional investors with existing allocations will approach the asset class cautiously over the next few months.
The second, INREV's Investment Intentions survey, highlights a possible mismatch between investors and providers, with 65% of real estate fund managers not offering infrastructure products despite 52% of investors saying they are likely or very likely to make allocations to the asset class.
Given its liability-matching potential, why would pension funds not consider infrastructure? And for those that do, how best might they invest in it?
Hymans Robertson partner John Hastings points out that infrastructure equity funds are not necessarily appropriate for de-risking defined benefit schemes.
"Private sector schemes are all closed to new entrants, and they don't have a 25-year view on equity," he said. "If you look at asset allocation, it has changed. More pension schemes are going into debt rather than equity."
Nonetheless, there is still an appetite for infrastructure investment, not least because mature projects deliver pension payment-matching cash flows that are both predictable and long-term.
According to the National Association of Pension Funds, UK schemes allocate 1.5% to infrastructure, compared with 5% globally and closer to 10% in Australia and Canada, where some schemes' allocation is nearer to 15%.
One problem for the UK is the preponderance of small pension schemes without the governance budgets to consider new allocations. Few UK pension schemes could match the recent CalSTRS $500m (€376.2m) investment in US and European infrastructure, for example.
That could mean smaller pension schemes relying on blind-pool infrastructure funds to meet their allocation targets. The Merseyside pension scheme has switched out of bonds to invest £20m (€23.9m) in AMP's anticipated £1bn fund targeting mature European infrastructure assets. Globally, 38 infrastructure funds raised $16bn last year - much of it fresh capital - compared with $31.8bn raised by 41 funds the previous year.
But, given the current broad aversion to blind-pool funds, there is little reason to believe infrastructure will be the exception. "Many investors have invested in infrastructure funds, and it's highly likely they'll continue to do so," said Peter Hofbauer, head of infrastructure are at Hermes GPE. "But not everyone is enamoured with the blind-pool approach."
If pension schemes are that big, of course, they are more likely to invest directly, which will inevitably mean a joint venture. But if the operating partner exposes infrastructure investors to one source of counterparty risk, government partners expose them to another.
Almost all governments are eyeing pension funds as convenient sources of infrastructure investment. Even leaving aside the amount of capital sought by BRIC economies for large-scale programmes, you have other governments, such as the Philippines, tapping its largest pension scheme for $750m for a public-private partnership (PPP) fund; not to mention the UK mooting a plan to raise £20bn from domestic pension funds and others.
Hermes GPE, which manages £4.8bn for pension funds and other institutions, in November 2011 began a series of discussions both with pension schemes and the UK Treasury aimed at devising a framework to enable investor access. What that plan will look like is unclear - which in itself is a concern for initial enthusiasts such as the Greater Manchester local authority pension scheme, an investor in the EISER infrastructure fund, which has since criticised the lack of a concrete proposal.
There is little doubt that inadequate investment structures have deterred some pension funds from investing. ATP is a case in point. The DKK579bn (€77.9bn) Danish pension scheme has, to date, invested more than €1bn in PPP projects, all of it outside its home market, which it says lacks sufficiently attractive ones.