Norway: The Problems (and Some Solutions) for Infrastructure Investors

(November 22, 2013) — Norges Bank Investment Management (NBIM) has described the biggest challenges it faces when tackling the opportunity of infrastructure investing.

In a discussion paper, the investment manager for Norway’s Government Pension Fund-Global said the diverse nature of infrastructure assets caused problems with benchmarking performance and deciding where to put it in the portfolio.

Infrastructure investments can exhibit bond, real estate, or equity characteristics, the report said, which means the risk-return profile of the asset can differ greatly, depending on the choice of investment vehicle.

This leaves “no ‘right’ way” to benchmark such investments and poses a problem for the notoriously transparent nature of Norwegian investing.

The paper also discusses the multiple risks investors face when investing in infrastructure, including bid risk (the chance that their contractor might not win the deal), construction risks once the project has begun, and operational and management risks once the project is completed.

Liquidity risk (given it is often difficult for investors to have an “exit plan” from infrastructure assets), political risk, and regulatory risk were also highlighted.

And even though experienced investors can lessen some of those risks with a toughly negotiated contract, NBIM warned there are some hazards that can’t be managed away.

“Anecdotal evidence suggests that there are some systematic risk factors at work. These factors may be related to issues such as global market cycles, regional and political crises, and regulatory trends. The magnitude of such risks has, however, yet to be properly researched and should be an area for future research,” the report said.

NBIM has, to date, found it too difficult to invest in infrastructure, largely due to its opaque nature. While it has progressed into real estate with great aplomb in the past two years—including acquisitions of Sheffield’s Meadowhall shopping centre and Parisian commercial real estate—it has so far steered away from infrastructure assets.

Speaking to aiCIO in 2012, Elroy Dimson, chairman of the fund’s investment strategy board, said the prices were too high for the Norwegian fund to consider, and the lack of transparency was a big concern.

“Infrastructure is attractive and inflation-linked, but the problem for the moment is that they don’t know if they are under or overpaying for the assets,” Dimson explained.

The pricing issue has been highlighted by other institutional investors too: Preqin data released this week found 49% of infrastructure investors disagreed or strongly disagreed that fund managers’ and investors’ interests are properly aligned regarding costs and fund terms.

In addition, 73% of infrastructure investors surveyed by Preqin said the level of the management fee charged by fund managers is a key area where alignment of interests can be improved.

Despite investor demands that fund managers move away from the traditional “2 and 20” private equity fee structure, a significant 61% of 2012/2013 vintage infrastructure funds and those currently being marketed charge an investment period management fee of 2% or more.

Elliot Bradbrook, manager of infrastructure data at Preqin, said investors were increasingly unwilling to buy into the this structure when gaining exposure to lower risk-return profile infrastructure assets.

“Although improvements have been made in recent years, it is vital that fund managers are able to effectively articulate the reasoning behind the fees being charged, and continue to consider the appropriate structure of the terms and conditions employed their funds in order to align interests effectively and achieve success in the competitive fundraising market,” he concluded.