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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.