Download Infrastructure drive raises price concerns 4th November

Infrastructure drive raises price concerns
4th November 2014
Andrew Bolger, Financial Times
Insurers and pension funds that need decent returns to match their long-term
liabilities are increasingly attracted to infrastructure as an asset class.
M&G Investments has just closed its third infrastructure fund, attracting
commitments of more than £1bn. Martin Lennon, co-founder and head of
Infracapital, the infrastructure arm of M&G Investments, says co-investment pledges
will take the total to more than £1.3bn – exceeding its initial target of £900m.
“Infrastructure businesses are essential and as such they enjoy considerable demand
and offer long-term yield – often with inflation-linked characteristics, which is
important for our clients,” he says.
The fundraising attracted capital from pension funds, asset managers and other
insurance companies from Europe, North America and Asia, alongside the UK-based
insurer Prudential, which owns M&G Investments. Investments already made
include UK-based Affinity Water; Falbygdens Energi, a Swedish district heating and
electricity distribution company; and Calvin Capital, a UK metering business.
Global infrastructure assets under management through unlisted funds are currently
at their highest point, standing at $282bn as of March this year, a near threefold
increase since 2007, according to the data provider Prequin.
Institutional investors’ appetite for infrastructure investment continues to increase,
with 57 per cent of investors planning to commit more capital to the asset class in the
next 12 months than they did over the previous year, and 42 per cent intending to
increase their allocation over the longer term.
However, most investors remain reluctant to invest in greenfield projects – those
that involve construction risk – even though they comprise about 70 per cent of the
infrastructure pipeline worldwide, because such projects lack a record of stable cash
flows.
This has led to fears that the price of brownfield assets will be driven up to levels that
will threaten expected returns.
“With dry powder [uncalled capital commitments] also at an all-time high of $107bn,
there are increasing concerns over the availability and pricing of assets in relation to
the amount of capital chasing available investments,” says Prequin.
Frances Hudson, global thematic strategist at Standard Life Investments, believes
reasonable opportunities still exist in the mid-market, but says competition is fiercer
for the bigger projects, which tend to be dominated by Canadian and Australian
pension funds and global infrastructure banks.
Ms Hudson says the changing regulatory framework and risk transfer associated with
government-supported projects has also limited the attractiveness of some
investments.
“The determination of regulated prices in energy and utilities via complex formulas
can be off-putting while, elsewhere, the prospect of windfall taxes has loomed large,”
she says.
Gavin Stewart, investment strategy director for Scottish Widows, says the insurer has
about £1bn invested in infrastructure debt in the UK and is prepared to invest more
– including in Europe.
“We recognise the need to take some construction risk but we are very selective,” he
says.
Standard & Poor’s estimates infrastructure financing needs worldwide could total
$3.4tn annually through to 2030. While the rating agency expects governments and
banks will remain the dominant investors in infrastructure programmes, it also
reckons $500bn will be needed each year to make up the shortfall.
North America-focused unlisted funds account for the largest proportion of industry
assets under management with $137bn, compared with $87bn for Europe-focused
funds and $31bn for Asia-focused funds. In terms of dry powder, North America has
seen the greatest increase since December 2013, up from $41bn to $52bn; in
comparison, European dry powder has remained at $33bn.
Insurance companies worldwide are targeting an allocation of about 3 per cent of
their assets under management to infrastructure investments over the next 20 years,
from 2 per cent at present.
“Assuming assets managed by insurers continue to represent more than 40 per cent
of institutional investors’ total assets under management, the worldwide allocation
by insurers could be about $80bn per year,” says the rating agency.
At the end of last year six insurers pledged to invest £25bn in UK infrastructure
projects over the next five years. Legal and General, Prudential, Aviva, Standard Life,
Friends Life and Scottish Widows have signed up to an agreement, although it
emerged that some of the £25bn pledged would go towards housing rather than
projects outlined in the government’s £375bn national infrastructure plan.
Axa, the French insurer, has announced a €10bn commitment over a similar period,
while Allianz and Munich Re had also announced material commitments to the asset
class.