Infrastructure’s influence over institutional investor portfolios is growing. Roads, bridges, trains, trams, electric vehicle charging points, hospitals, broadband networks and wind farms are just some of the assets that help the economy to operate smoothly.
Long-term income to match the liabilities carried by pension schemes and insurers when the yields on quality bonds have been low since the last financial crisis is why institutional investors have turned to the asset class.
Political will is also on their side. The government needs to repair the UK’s crumbling infrastructure, while it needs to bring the economy into the digital age. It is a similar story in Europe and North America, which unlike the oil-rich nations of the Middle East cannot afford to pay billions of dollars to repair, replace and upgrade their infrastructure.
So the UK government is turning to the savings managed by defined benefit and defined contribution schemes.
The government set out its case in December. The then new chancellor Jeremy Hunt made the push for more institutional infrastructure investment particularly from pension funds a central pillar of his policy proposals.
A few months earlier, at the PLSA’s annual conference in Liverpool, Alex Burghart, during his short-lived time as pensions minster, was eager to spread the word of the government’s infrastructure ambitions. This was during the equally short-lived premiership of Liz Truss.
In the surreal evolvement of many governments in a short period of time, the commitment to infrastructure is one that has been an impressive continuation of a policy held since Boris Johnson became prime minister in 2019. By undertaking this, Hunt was keeping consistent with the government’s levelling up agenda.
This context is important. It immediately places infrastructure within a political milieu that cannot be ignored. Investors are influenced to fulfill government ideas – more investor capital put into infrastructure boosts UK plc and such investment in local infrastructure meets levelling up social requirements. The Whitehall mandarin or special adviser who concocted this probably received a knighthood.
Infrastructure support
Whether by clever policy planning or pure accident, the government has stumbled on to something with their infrastructure rhetoric. GLIL, an infrastructure collaboration between like-minded institutional investors, embraces the government’s approach to infrastructure.
Ted Frith, GLIL’s chief operating officer, says: “We’re supportive of the government’s call for institutional investors to drive capital into infrastructure, including renewable energy projects in the UK, because the expected cashflows are beneficial to the broader pension fund portfolio.”
Part of the government’s drive to get pension funds involved with infrastructure is to boost the UK’s economic position. One that Frith says is valid and one that also has wider societal benefits along the way.
“As well as contributing to national economic growth, infrastructure investing helps pension schemes to make a valuable, economic contribution to local communities as well as provide stable returns for their members, at a time when investment activity is under more scrutiny than ever before,” Frith says.
Local communities can be reshaped by substantial infrastructure investment that can recast old buildings into social or affordable housing and to build new homes from scratch. In a small but also significant way, the Lambeth Pension Fund invested into the London CIV UK Housing Fund to meet its objective of boosting social and affordable housing in its local community.
The great transition
Another part of the overall infrastructure investment narrative is that pension schemes are able to access stakes in projects that are supporting the UK’s transition to a more sustainable, lower carbon economy. “Investment in infrastructure is consistent with the government’s growth agenda and its net-zero ambitions, and it will generate significant employment across the UK,” Frith says.
The net zero and green credentials argument is getting stronger within infrastructure, as projects big and small are constructed with ESG considerations at their heart. The government’s Green Infrastructure Framework has been launched with the intention of providing a structure to analyse where greenspace in urban environments is needed most.
And there are practical reasons for investors to embrace infrastructure. “Through infrastructure investing, pension schemes have access to reliable, inflation-linked returns, with significant cash yields,” Frith says.
A point supported by West Yorkshire Pension Fund’s chief investment officer Leandros Kalisperas, who lists the benefit infrastructure brings to the fund’s portfolios. “Inflation linkage, predictable identifiable cashflows, asset duration and income yield,” he says.
Councillor Adrian Garden, the London Borough of Lambeth’s pension committee chair, also highlights how his fund’s commitment to housing provides diversification, impact and secures long-term income. Proving that infrastructure investment is multi-layered in its benefits.
That said, Kalisperas offers another investment perspective on the asset class. “Risk and return profiles for infrastructure assets are heterogenous, as they are for many private assets, which makes them hard to benchmark, often leaving an absolute return focus,” he says.
“This can make it harder for chief investment officers to have confidence in allocating greater amounts when looked at in the full round of the strategic asset allocation,” Kalisperas adds.
Investors to the rescue
But ultimately, the investment case in infrastructure is a solid one: centred around the diversifying returns and providing long-term cashflows. Anne Valentine Andrews, global head of alternatives, infrastructure and real estate at Blackrock, presents this case, despite other overbearing factors from the likes of the government.
“We believe infrastructure can help diversify returns and provide stable long-term cashflows – even with risks such as governments imposing artificial price caps amid political pressure,” Andrews says.
In addition, she adds: “Infrastructure earnings are often less tied to economic cycles than corporate assets. Contracts can be long-term and span decades.”
This trend is already evident. According to a survey from asset manager Nuveen, institutional investors are set to almost double their allocation to infrastructure this year, as they alter portfolios to deal with persistent inflation and volatility.
Investors are therefore creating their own new narrative on infrastructure, resulting in a move from it being a theoretical benefit for investors to one in which they embrace as part of the wider investor landscape.
For the West Yorkshire Pension Fund, infrastructure is a key investment. “Infrastructure is important to the West Yorkshire Pension Fund from two key perspectives: investing in the UK and with a focus on greener infrastructure, and accessing inflation-linked returns which help match our liabilities,” Kalisperas says.
The West Yorkshire scheme has a 7% allocation in infrastructure: a function of the strategic asset allocation, Kalisperas says, which in turn, is derived from the scheme’s funding requirement and asset risk-return projections.
And Frith highlights that GLIL, as a collaboration between UK pension funds and pools for the last seven years, has seen its members deploy more than £2.7bn into largely UK infrastructure projects with a significant focus on the energy transition.
A further £1bn of committed capital is to be further deployed in the UK. A clear indication that the capital drive into infrastructure from institutional investors is already happening, big time.
Suitable assets
But Frith marks out an important criterion on how the infrastructure journey going forward can be improved. “More needs to be done to increase the supply of infrastructure investment opportunities with the appropriate risk versus reward profile for pension schemes,” he says.
Another big issue within the debate from an investor perspective is a lack of supply of suitable infrastructure projects for investors to invest in. But for Kalisperas, this comes back to the same argument highlighted by Frith.
“If by ‘suitable’ we mean projects that offer a good risk-return payout, then yes,” Kalisperas says. “However, it is also about the high level of investor demand in recent years which for one reason or other may have a lower cost of capital than UK pension funds.”
How can the divide in the investor-investment needs within infrastructure projects be addressed? Frith says that the creation of the UK Infrastructure Bank can play a key role in bridging this gap between investors and investments.
“One of the key developments has been the creation of the UK Infrastructure Bank, which is approaching its second anniversary,” he says. “We see the bank as a platform that the government can use to help bring more projects to the market.”
Frith’s point is that the capital is there in the pension fund community to support these projects and the regional and national governments have a significant demand for funding – accepting the government’s premise that pension capital should be directed towards infrastructure.
“But it feels that more needs to be done, however, to create a longer list of suitable projects for pension funds to invest in. We continue to hope that the UK Infrastructure Bank will play a significant role in this regard as it matures,” he adds. Kalisperas also highlights the case of a unified approach in addressing the infrastructure investment gaps to create suitable opportunities.
“There are clearly multiple parties that need to play their part in this. Moderate cost vehicles such as GLIL that have developed capacity and capability to invest in infrastructure assets at scale should be considered a good start,” he says.
A $15trn hole
And for all the debate surrounding the UK government, there is a wider issue to address looking at infrastructure challenges on a more global level. Meaning issues around the supply of infrastructure projects are not just down to the Conservative government – or even previous Con-Dem coalition, or the Labour government that came before that.
World Bank data points to a gap of about $15trn (£12trn) between existing investments and what is needed to meet global infrastructure demand over coming decades. That is some shortfall.
A point highlighted by Kalisperas. “All countries need to upgrade their infrastructure and pension funds are long-term investors which can match the long-term nature of infrastructure,” he says.
It highlights that Westminster political debates, centred on party politics of vague left and rightist ideas, are not at the heart of the problem. Nor will they solve the problem.
But Kalisperas notes the importance of pension funds sticking to what suits them as funds. “The terms of our involvement have to make financial sense from an investment perspective and t our investment strategy as we have a fiduciary duty to members.”
A record year
For all the challenges and considerations investors have to take on board when investing in infrastructure, GLIL’s work is leading the way in infrastructure investment.
“2022 was a record-breaking year that saw us conclude four significant transactions,” says Frith. “We have a £3.6bn investment fund with more than £2.7bn deployed into a growing portfolio of assets – from ports, trains and roads to renewable energy, utilities, and schools.”
GLIL’s investments include the acquisition of a significant stake in M6 Toll in the West Midlands, as well as its first investment in o shore wind with the purchase of a 12.5% stake in Hornsea One, which at the time was the world’s largest operational o shore wind farm.
“We also made significant further investments into Semperian, which focuses on the delivery of high quality public sector buildings, such as schools and hospitals, as well as into 11 onshore wind farms in the Republic of Ireland,” Frith adds.
GLIL’s work is not going to stop there. “We remain committed to allocating capital to core UK infrastructure assets, and thereby generating sustainable, above-target, long-term returns for millions of pension fund members,” Frith says.
And given the macro-economic outlook, infrastructure is an appealing investment not just on all the reasons that have been mentioned – but also because it ultimately delivers.
For example, between December 2019 to December 2022, infrastructure investments delivered an annualised total return of 7.36%. It even generated positive returns in the challenging 2022 environment, according to Boston Consulting and indices company EDHECInfra.
Nice numbers to build any portfolio on.
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