Banking on infrastructure

Investments in roads, rail, water, power and other utilities are growing in popularity among pension trustees and fund managers. The long-term and quite steady nature of the returns on offer is a near-perfect match for the requirements of a pension fund.

An example of such an investment is the public-private partnership model which was used to finance and build much of Ireland’s motorway network. The investor who puts up the finance gets access to a steady and quite predictable stream of income from toll charges over a sustained period of time with little of the volatility associated with some other asset classes. For its part, the State benefits from the capital cost of the project being taken off its balance sheet.

This model can be used for almost any public capital works such as energy generation and distribution facilities, sewerage and water systems, rail, air and sea links, telecommunications installations, hospitals, schools and much else besides.

This represents an attractive opportunity for investment funds, according to Rob Meaney, head of responsible investments with Mercer Ireland. "Infrastructure is a very long-term investment and is a good match for pension funds," he says. "The next 10 to 15 years will see a huge redevelopment of public infrastructure to make it more sustainable. It is estimated that 50 per cent of the finance for that will come from private markets and that will offer investment opportunities."

"It's part of the same investment universe as environmental, social and governance (ESG) investing," says AIB head of retirement planning Tony Doyle. "Why aren't we investing some of our pension funds in infrastructure and public-private partnerships? The csuntry needs roads, hospitals, houses and schools and pension funds have the capital to fund them. These are long-term projects which generate long-term returns, backed by the State in many instances. In Germany, pension funds are involved in housing. We have a huge housing problem here and that is something else that could be looked at in terms of infrastructure investment."

‘Search for yield’

But there are hard-nosed bottom line reasons for pension funds to get into this area. "One of biggest challenges facing pension funds is the search for yield," explains Bank of Ireland head of pensions and investments Bernard Walsh. "Cash deposits are negative, there is $17 trillion in government bonds worldwide trading on negative yields at the moment, and pension funds need something to deliver reasonable returns over time. The world of infrastructure is vast and includes toll roads, hospitals, schools, water schemes and a lot more and it offers that yield."

He says the growth in popularity of infrastructure investing is evidenced by the growth in the number of industry papers on the topic being published. “We see a lot more now. Bank of Ireland has a certain level of infrastructure exposure as part of its portfolio approach.”

One of the downsides of this type of investment is lack of liquidity. If you need cash quickly, it can be quite difficult to sell a motorway or an acute hospital on the open market. There is another way to avail of the upside of the investment without sacrificing liquidity, however. This can be achieved by investing in global listed infrastructure.

These are funds which invest in infrastructure assets around the world and are traded on stock markets. They allow pension funds and other investors to participate in the asset class without having to fund the underlying assets directly.

These specialist global listed infrastructure funds offer investors a professionally assembled and managed exposure to infrastructure with the added advantages of diversification and ready liquidity. They enable pensions funds to invest in infrastructure in the same way as they would invest in equities.

They also offer a degree of insulation against global stock market volatility. According to the latest research, they deliver about 90 per cent of the gains made by stock markets but only 60 per cent of the falls – very attractive to a pension fund trustee.

But they are not entirely without risk. Recent weather events in Japan and the US serve as stark reminders of the risk natural disasters pose to infrastructure assets. There really are no sure things in the investment world.