Infrastructure roundtable discussion

What are the options available to infrastructure investors in general and how do they choose the right approach for their needs?

Andrien Meyers: An investor should think, “If I have infrastructure in my portfolio, what role is it playing?” Is it there to fulfil a fixed-income role, or inflation protection or some form of liquidity, even?Ian Berry: We talk about outcomes which allows us not just to think about infrastructure. So what we can deliver from infrastructure, be it debt or equity, may be a little similar to what we do with real estate debt.Mike Weston: Once you’ve decided how you want to do it, you need to ask if you do it yourself and perhaps build your own capability?Georg Inderst: There are now many options available for different investors. Over the last 10 years we have seen all sorts of vehicles developed: listed and unlisted, debt and equity, funds and direct, brownfield and greenfield, and so on, so that it is easier for the end investor to find what fits into their portfolio. I prefer the opportunistic approach, to say, “What do I need? What fits into my investment strategy?” Rather than to say, “Oh, first I have to define infrastructure as an asset class.” That’s a discussion you will never end.Weston: More and more segmentation just makes life difficult for pension funds, because they don’t have governance bandwidth to do Indian solar, American roads or South American debt.Berry: One of the challenges, if we just focus on infrastructure, is lots of choice, but what is the data to support choosing one of the options? Because most infrastructure is very long-term, how much information can you take from performance over one, two, three, four, five years for an asset that’s meant to perform for 30 years?Adrian Jones: The banks have an immense amount of data on project finance structures, which they have now shared with rating agencies. If you go back through the 2005 to 2008 period, everything that people did wrong there can be clearly seen in the data, and flagged in terms of creep of scope, and of leverage, and using inappropriate financial instruments.Meyers: What teams do you have in place in order for you to look into that data, in order to ensure that you know what you’re doing, to an extent? It depends, as an investor, what your capabilities are.Jonathan Ord: Yes, and that’s why we went down the collaborative approach. We’re able to leverage the resources of another organisation; ourselves and Manchester. You see this in the Canadian market where the pension funds work together a lot on assets.Peter Hobbs: Georg and I have worked for years trying to create a robust historic infrastructure time series that you can model and put against equities and real estate. Poor data is one of the major challenges of the infrastructure asset class. One of the problems is that infrastructure is arguably the best-performing asset class over the past 15 years, but this has been driven by its one-off repricing, so can you use any of that historic data – is it meaningful?Meyers: What capabilities are there, in-house or externally, to ensure that you’re investing in this asset class for the right reasons?Jones: We raised funding, on a pooled basis, to co-invest with our parent from the outset. Our parent took a forward-looking approach. It saw what was happening to fixed income, generally. It knew what was being offered by banks. It recognised, to get the scale, it would have to share, and so it appointed us to basically build pools. But everyone has to be slightly forward-looking, anticipatory. All of the investors who turned down opportunities to join our platform during 2012 and ’13 may be regretting that decision now because of what’s happened to spreads and rates, and everything else. So we’re working on this as a fixed income substitute mind-set. Historically, the people who did the yield-type PPP equity were looking for a return which was gilts plus 500bps. And back then, that was 8% to 9%, 10%. The reality for people is that fixed income is 200bps to 300bps, versus good investment grade if you are lucky. Low-risk structure is mid-single digits, and it’s really the high leverage, true equity thing that gets you into the double digits.Ord: It will be interesting, actually when rates go up. How attractive is this asset class then?Weston: One of the problems we see is this mindset where people think eight [percent return]. When products come in, the answer’s always eight. And you say, “There’s no way that asset is going to yield eight.” That’s one of the problems in getting a group of pension schemes aligned. Because if there’s no alignment, and you’ve got 25, 30 years before you know whether you’re successful or not, you can tweak the model in the background, so after 25 years’ time it isn’t eight but five.Inderst: Some people use listed benchmarks, others an absolute return benchmark such as CPI plus three, four or five, or Libor plus a few percentage points. And, of course, others use what is available on the unlisted space, including the MSCI/IPD index. It goes back to the question which was raised earlier. “What do you want to achieve? What do you expect infrastructure to do in your portfolio?”