In recent years, a number of asset managers have touted infrastructure’s profile as an asset class. They point out that infrastructure is largely uncorrelated with other asset classes, not to mention that it matches institutional investors’ long-term liabilities perfectly.
What’s more, they have provided investors with very attractive returns of late, and high returns are king when it comes to setting asset allocation strategies in a low-yield environment.
In this light, PKA’s announcement in August that it will expand its investment in the asset class by DKK3bn-4bn (€400m-540m) over the next few years comes as no surprise.
Peter Damgaard Jensen, chief executive at the Danish pension fund, says infrastructure is becoming a significant part of the fund’s portfolio.
“In order to continue achieving stable returns for our members,” he says, “we will invest more in infrastructure in particular, which provides continuous, stable returns.”
The latest foray into infrastructure by APG - the Dutch asset manager for the €261bn civil pension service scheme ABP - is somewhat more surprising.
At the beginning of September it announced its first-ever inflation-related loan for a local road-building project, with the financing of €80m of debt for the reconstruction of the N33 road. More importantly, it expects the market to develop into a “new asset class”.
APG’s move followed on the heels of a pilot programme by the Dutch Treasury announced in February last year.
The programme involved a tender for the N33 reconstruction, and was meant to compare the costs of regular bank finance with index-linked payment as an inflation-linked component on top of a base rate.
Traditionally, pension funds have prioritised equity investments in the infrastructure arena, while banking institutions - especially European ones - have granted such projects large debt tranches over the years.
But watchdogs are now looking to tighten regulation for banks with the upcoming Basel III standard, and stricter capital requirements that will come into force in the near term have already compelled banking institutions to set aside ‘non-core’ activities such as infrastructure.
This has created a new pipeline of opportunities for long-term investors that have enough capital to wear the lender ‘cap’.
Of course, Dutch pension funds, unlike banks, prefer bonds and have not, as yet, issued straight project debt for such initiatives.
The reason for that is obvious. Providing bonds, and most especially inflation-indexed loans, to finance roads actually appears a good option for APG, and pension schemes in general. Regulators generally allow investors to charge inflation-linked prices to consumers for such public-private partnership (PPP) projects.
The practice is not without its problems, however. The Netherlands - unlike France or the UK, which issue sovereign debt indexed to inflation - has not issued inflation-related bonds to date.
This is of even greater importance, since the government benchmark bond is highly important for investors such as APG, which, to create liquidity for the debt it holds, uses a standard risk-free benchmark against which various issuers can be compared.
This, in turn, means pension funds wishing to match future pension liabilities to a national index that mirrors the inflation of their liabilities must use another country’s debt as the benchmark, since the Netherlands does not provide any.
The problem relates to the fact that a potential correlation mismatch might arise between the other country’s index and a Dutch pension scheme’s liabilities.
It remains to be seen whether APG and its Dutch counterparts will agree at some point to provide inflation-linked bonds for infrastructure projects in other countries.
After all, the UK Treasury has been working on the set-up of an infrastructure platform since November last year, and debt financing from large pension funds - be they in the UK or the Netherlands - could be of great help.