It’s a very similar path, actually, to IFM in Australia, isn’t it? Is there a relationship there?
We know IFM really quite well. You’re right, there is a real parallel there. A dozen Australian superannuation funds got together and did this. Over the last 20 years or so, they’ve evolved into something more akin to a normal asset manager, spreading into other asset classes and raising capital across global markets. Yes, there are distinct parallels. There were also connections between IFM and PIP in the early days of set-up. We still have quite regular dialogue with them about stuff they’re doing. They have certain focuses in terms of their own asset classes where they would like to run money. If it worked on both sides then the degree of similarity would make them an obvious partner to work with. At this point in time we’ve not done anything with them but we’re friends. You could look at IFM as an indication of where PiP could potentially go.
You said there are lots of opportunities out there, but are they the right kind of opportunities?
Well, as a new entrant, our activity levels have ramped up significantly since Ed Wilson joined us as investment director in August, we are now going out to market and trying to get involved in discussions about the potential opportunities. Our view is, as we are UK-focused, then we should really know about everything that is going on in UK infrastructure. We’re discussing an awful lot of things at the moment. There are lots of opportunities there but are there lots of opportunities that have the right potential return profile? Clearly it’s an attractive area of the market. Lots of UK pension schemes want to get involved and there are people from overseas, not just the Canadian or Australian funds, but funds from various parts of the world, even family foundations. Real assets that generate decent returns, inflationlinked, are attractive and they generate a lot of interest. Looking across the piece at the opportunities that are out there at the moment, it wouldn’t be difficult for us to build a portfolio that would satisfy the needs of PiP’s investors. Clearly we’re not going to win every deal, the pricing on some deals will not be attractive and we wouldn’t want to pursue them. We’re beginning to see more supply coming as people wake up to the fact that there are real money investors out there willing to buy these things with us. There’s LPFA, Greater Manchester, Lancashire, USS – for example they’re all willing to bid for stuff as well. The fact is that we do have significant UK pension schemes wanting to buy assets. This will change the perception of the intermediaries out there that actually, yes, it’s worth talking to pension schemes. It’s not just talk, they can actually complete and make stuff happen.
Have the government’s plans to scrap solar subsidies created any problems with members invested in the Aviva solar fund?
There is a degree of uncertainty. But I think there are around 600,000 installations in the UK and there are still a lot that are being put in by developers that will need refinancing at some point. So even if everything stopped today, the view is that there are certainly enough installations out there to be able to fill up the fund. Looking ahead it might just be a finite opportunity. The really good thing is there has been no hint in anything the government has done that retrospectively changes anything. So if your contracts are signed and secure, you’ve got 20, 25 years of inflation- linked returns and that doesn’t change.
You mentioned renewable energy. Are you favouring any particular type?
No, our remit is completely multi-strategy. We are focused on delivering those RPI plus 2-5% return levels, consistent, inflation- linked, low risk, UK-based. As long as it’s infrastructure, as long as the overall portfolio meets those characteristics then we’re agnostic about what goes in to the fund.
Is that the same case you’d make for the criers of, “Where is the greenfield stuff? Where is the new stuff that pension funds were supposed to be funding?”
I think that greenfield/brownfield definitions are actually a bit outdated. I think these things came into being when you were talking about some PPP projects. Historically, big projects like hospitals, roads and bridges carried a significant construction risk so if you were interested in investing in infrastructure in a low-risk way you bought brownfield operating assets. What we’ve seen with something like TTT [Thames Tideway Tunnel], which is going to be the biggest construction project in the UK once Crossrail is finished, is pension schemes invest in what is a greenfield asset. But it’s a greenfield asset where the construction risk has been significantly mitigated by government guarantees. Yes, you take the risk out and the return comes down. We’re not sitting here naively saying, “We want low risk and we still want double-digit returns.” If you take the risk out, we can still get returns that are RPIplus- five. As pension schemes, that’s what we need to meet the liabilities so we’re happy to do that. So greenfield, brownfield are perhaps rather blunt terms. Like any asset class that is maturing, you need to be looking through to the individual project and asking, “What really is the risk?”
You think it needs to be more nuanced?
It’s just more fundamentalist. I think the other question in terms of greenfield/ brownfield is what is the government putting out there in terms of projects? If they are prepared to do major greenfield construction projects and put some guarantees in place that effectively makes it more brownfield-like, then describing it as one or the other and saying UK pension schemes should do this, that or the other, is really a bit irrelevant when you’re looking at the individual project. I think the government needs to get its own thinking in order. Our message to them is that there is lots of pension scheme money that we’d like to invest in low-risk longterm assets that produce inflation-linked cashflows at a return level that enables them to pay their pensions. They’re not after more, just enough. If government is prepared to structure projects to deliver that, there will be no shortage of investment from pension funds. If they don’t structure projects in that way then pension schemes aren’t going to invest because ultimately the trustees have one objective, one fiduciary responsibility and that’s to generate enough returns on their assets to pay pensions. Government can say what they like, if trustees evaluate the project and say, “This is not an appropriate risk return balance, it doesn’t enhance our ability to pay pensions.” Then they’re not going to invest in it. Government can huff and puff, but in those circumstances it’s just not going to happen.
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