Infrastructure: Getting by with a little help from your friends
The UK government has long promised infrastructure assets for pension funds to invest, but with international schemes often larger, Taha Lokhandwala looks at how can the domestic ones participate
For as long as the European investment market has been a low-yield environment, pension funds have been casting about for alternatives, with infrastructure an oft-touted option. The UK market has been no different. But, with more than 6,500 defined benefit and hybrid schemes with £1.1trn (€1.5trn) in assets, the fragmented market makes it hard even for eager pension funds to get exposure, despite a promise from the UK government of sell-offs and projects to finance. UK schemes are often left on the sidelines watching investors from abroad swoop in with more capital, bigger teams and better bids.
This year, a group of UK investors clubbed together to make sure they got their fair share after Canadian investors once again came in for assets. Led by Hermes Infrastructure, several funds including the £40.2bn BT Pension Scheme, the £10bn Santander UK Group Pension Scheme and several local government schemes invested in two prized UK assets, Eurostar and Associated British Ports. Both deals were joint ventures between Hermes and Canadian pension investors Caisse de dépôt et placement du Québec (CDPQ) and the Canada Pension Plan Investment Board (CPPIB).
UK pension fund capital is being drawn into the asset class. However, from the Canadians’ point of view, that capital is not the drawing factor in these co-investments. The £585m Eurostar deal sees Hermes take just a 10% share, with CDPQ picking up 30%. And while the split in the Associated British Ports deal remains unknown, Hermes Infrastructure head Peter Hofbauer acknowledges that CPPIB had not been drawn in by the size of the Hermes fund. “They felt we could add value to both those transactions, and certainly with ports,” he says. “CPPIB did not partner with us for our capital but felt we had experience in the sector, plus the benefit of having a local UK team.”
Hofbauer concedes the Canadian investors had enough capital to do the deals on their own, but he also emphasises the importance of having a domestic partner when it comes to UK asset sell-offs such as Eurostar. “We think it’s a good model,” he says. “We have opportunities in the UK, partly driven by the fact people do not need us just for our capital and have chosen to partner with us and give us the opportunities to invest in transactions that in our own right we would not have the capacity to fund.”
The Hermes fund had £3.1bn in commitments as of April, with less than half invested. Antony Barker, director of pensions at the Santander Pension Fund and investor in the two assets, says the partnership was an obvious one, given the size of the deals. “When somebody is selling something in the hundreds of millions, you wouldn’t want a fund structure where 60% was used on one deal,” he says.
Barker says the other key to the partnership deals was the Canadian investors’ standing in the market and its benefit to Hermes and his own scheme. Many infrastructure assets are not sold at public auction but by bilateral agreement, meaning an investor has to be ‘in the know’ or risk missing out. “Unless you are collaborating with known dealmakers in the market, there’s a high chance the deal could transact without your knowing anything about it,” he says. “The Canadian pension funds have been investing in this area a lot longer and in multiple jurisdictions. They also take a perspective on valuation on a global basis rather than one deal in isolation.”
The deals are good for all investors. Associated British Ports fits into Hermes’ core infrastructure strategy, and Eurostar is a prized asset. Given CDPQ’s existing relationship with Eurostar majority-owner, the French rail operator SNCF, the fund is in a good starting place. For the Canadian funds, they have invested billions in the UK market as they continue expanding diversified portfolios, and the UK funds gain exposure to their own infrastructure.