Government Pins Infrastructure Hopes on Pensions

(November 6, 2012) — Pension investment in infrastructure projects could hit record levels, should new proposals that allow local government funds in the United Kingdom to double their exposure to the asset class be agreed.

Local Government Secretary Eric Pickles, today announced a plan that could unlock £22 billion from public sector pension funds. These pensions, which collectively manage £150 billion, are currently limited to committing just 15% of their portfolios to infrastructure under the terms of their investment rules.

Proposals issued to a consultation period would see this limit rise to 30% of a pension portfolio, potentially freeing up £22 billion that is currently held in other assets to be channelled into infrastructure projects.

In total, these pension funds would have around £45 billion to invest in infrastructure projects – which the UK government hopes would be invested in the domestic economy.

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Pickles said: “Unlocking Town Hall pension pots so they can be used to invest in vital infrastructure projects is a common sense decision that will help this country complete on a global scale and get Britain building.

“This is potentially a huge development and investment opportunity we simply cannot afford to ignore that also allows us to maintain long-term value for money for the taxpayer.”

The announcement comes after a push into the asset class by the National Association of Pension Funds (NAPF) and the lifeboat for bankrupt corporate pensions, the Pension Protection Fund (PPF), launched a platform to allow institutional investors access to infrastructure projects.

The UK government has also targeted a £2 billion investment in the asset class by pension funds.

However, infrastructure specialists at French bank Societe Generale said for the moment there was a blockage that was preventing those looking to initiate projects connecting with potential investors.

Matthew Vickerstaff, global head of structured finance and global head of infrastructure & asset-backed finance at Societe Generale, said there was pent up demand – on both sides – for these types of investment, but linking the two sides was not always easy.

“There is around $400 billion in projects to finance that had previously been covered by investment banks and multi-lateral credit agencies, but since liquidity has dried up and capital ratios are being inspected closely by regulators this demand is not being met by these usual partners,” Vickerstaff told aiCIO.

Banking regulations, such as Basel III, are shortening the time over which banks are willing to lend, meaning some of the larger infrastructure projects are finding fewer willing partners. Pension funds and other investors with long-term liabilities are better matches for this kind of investment, but marrying the two sides is difficult, Vickerstaff said.

“There are opportunities for pension funds, but many do not necessarily understand structured finance and the ‘story’ behind infrastructure projects in terms of revenues or their increases over time, for example. It is more complicated than a bond investor looking at general issuance,” said Vickerstaff.

He said Societe Generale was talking with and educating pension fund investors, and there was a desire to understand how they could take advantage of the pent up demand for funding – and of regulation that could look favourably at this type of long-term investment.

Asset managers such as Allianz Global Investors and AXA Investment Management have been beefing up their infrastructure teams to try and tap this burgeoning market.

Some liability-driven investment managers and consultants advising on the strategy have also suggested infrastructure investment could add be added to the mix.

The government consultation documents can be found here. The closing date is December 18, 2012.

(October 5, 2012) — A $1 investment by pension funds in private equity has yielded a return of $2.30 over 10 years, easily outstripping gains from stocks, bonds and real estate.

These assertions come from a report released by the Private Equity Growth Capital Council, a Washington, DC-based lobbying, advocacy, and research organization. The firm is “focused on defending and promoting the private equity and growth capital investment industry,” as noted on its Wikipedia page.

Another claim by the firm: Pension funds’ investments in private equity outperform other asset classes based on median 10-year annualized returns, based on an analysis among 151 public pension funds. “There is no question of the value of private equity to public pension funds,” says Steve Judge, president and CEO of PEGCC, in a statement. “Private equity delivers for retirees and workers across the United States, helping secure the retirements of millions of Americans and strengthen the organizations they work for.”

The report by the Private Equity Growth Capital Council also found that the asset class in question accounts for 9.6% of large public pension fund allocations and that pension private equity portfolios in the lower quartile yield better 10-year annualized returns than the upper quartile of public equity portfolios by nearly 2%.

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So does this report by a private equity “lobbying” association hold weight?

According to Barry Feldman, a senior research analyst at Russell Investments, the research firm’s report must be viewed with a grain of salt due to the opaqueness of the asset class. Stellar gains in private equity must be viewed with skepticism, according to Feldman, due to the sector’s lack of liquidity and high fees that cut into overall returns for institutional investors.

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