Lured by high-profile government infrastructure investment programmes and growing asset churn by utilities themselves, equity investors have flooded into the space. Many banks have spun their infrastructure funds off into standalone entities – for example, Eiser Infrastructure Partners was spun out of RBS/ABN Amro, and Antin Infrastructure Partners came out of BNP Paribas. HSBC’s specialist investments arm became InfrRed Capital Partners in May last year after a management buyout. On a much larger scale Deutsche Bank’s RREEF business is now under exclusive negotiations for sale to Guggenheim Partners.
Alongside these ranks of infrastructure funds clamouring for assets are an increased number of sovereign wealth funds, insurance companies and pension funds also reallocating funds to the sector. When China Investment Corp (CIC) bought nearly 9% of Kemble Water (owners of Thames Water) in January it was an indication of things to come. And even with many pension funds merely increasing their allocation from 0% to 1% there is substantial new money looking for a home in this asset class.
But the nature of this home is likely to change. "Many pension funds are investing directly now as well as going through funds," explains Daniel Wong, senior management director and head of infrastructure and utilities at Macquarie. For example, in October last year Spanish infrastructure operator Global Via Infraestructuras, which manages road and rail concessions, entered into a partnership with pension funds PGGM of the Netherlands and OP Trust of Canada under which the funds invested an initial €400 million into the business directly. The deal was advised by JPMorgan and Macquarie Capital.
Deals such as this demonstrate the more active stance by many pension funds eager to get access to infrastructure assets. Tired of paying private-equity-style fees for what is seen as a passive investment, institutional investors are looking for alternative ways to break into the market. "A lot of investors are pushing against the 2 and 20 model," says Abadie. "In private equity managers can argue that they are turning a business around. The sell is harder in infrastructure where the asset is perceived to be a long-term, steady performing asset. A lot of managers are therefore under a lot of pressure to change their terms. Some investors are increasingly looking at investing directly rather than through funds." This dissatisfaction is one of the factors behind a new UK initiative to spur pension fund investment in infrastructure. As part of its national infrastructure plan, the UK government has signed a memorandum of understanding with the £11 billion ($17.5 billion) Greater Manchester Pension Fund, the £4.1 billion London Pension Fund Authority, Hermes GPE and Meridiam Infrastructure to boost investment in early-stage greenfield projects. It has also signed a proposal with The National Association of Pension Funds and the Pension Protection Fund to establish a new platform for investment that could cap management fees at 0.5%.
These schemes recognize that the UK pension funds, in addition to being small and disparate, have turned up late to the infrastructure party. Canada’s Ontario Teachers Pension Fund has been active in the market for decades. The fund has $7.1 billion of its $107.5 billion assets outstanding invested in infrastructure. In contrast, BT’s pension fund, one of the more active in infrastructure, is planning to boost its allocation from £500 million to £800 million, still only 2.16% of its £37 billion assets under management.
These initiatives have met with a mixed response in the market. "Institutional investors do not like one-off greenfield projects that are ill defined. They want an experienced team. A lot of what the UK government is trying to finance is aspirational projects that do not have a time line," says one infrastructure fund chief executive. "There is a shortage of development equity to get these projects to a fundable state."
Others in the industry feel that the government should be concentrating on stimulating debt appetite. The UK pension fund initiative is believed to include debt investment but it will primarily be focused on the equity side. "The UK PPF initiative is interesting," says Abadie. "There is already excess supply of equity in this space, so why is the government intervening? Debt is the real problem – that is what the government should be focusing on. One of the three initiatives is with the ABI around institutional debt. I look forward to seeing how successful that initiative is."
