Last month I joined our co-operation partners at PensionKøbenhavn in Copenhagen for a private round table of institutional investors discussing real assets. Katrine, the CIO of PensionKøbenhavn, and I both gave presentations about our investments in property debt and infrastructure co-investments.
Katrine outlined the investments we have in a wind farm off the Danish coast. I then presented our Dutch gas pipeline investment and explained how we have been working with PensionKøbenhavn since 2012 in areas like manager research and corporate governance, as well as in real assets and infrastructure.
The round table was an eye-opener. One of the sessions was entitled War Stories. A Scandinavian investor told us about how an NGO had made life difficult for her fund because of an investment in Brazilian farmland. The criticism was unfair and probably motivated because the fund could not disclose the precise coordinates of the land for reasons of commercial sensitivity, which annoyed the NGO.
A fund manager told a tale about an investment in a Latin American wind farm. The project was supposed to replace an oil-burning power plant that fed a remote copper mine. Despite good environmental credentials, the project was beset with problems ranging from turbine supply issues to strikes at the mine, which held up construction. ‘As if that wasn’t enough,’ the manager continued, ‘the turbines were fitted incorrectly by the contractors, which affects the supplier guarantees and the on-going saleability of the project.’
Another story involved component issues with photovoltaic cells: when these prove faulty, suppliers can game the contract by re-supplying the minimum required to meet the lower level of estimated power generation, when the investors make IRR calculations based on a median calculation.
And one North American fund manager warned about the governance burden. Not only do investors need to occupy board seats and travel regularly to meetings, they may also be called upon to fight fires when things go wrong. This individual had to travel across the world to sort out problems resulting from an actual fire that interrupted the supply of electricity from the grid his fund was invested in.
Many people think real assets are a natural inflation hedge and a good proxy for defined benefit liabilities. Indeed, many managers market funds as such.
‘Don’t think real assets are necessarily a good hedge for inflation or liabilities!’ one leading academic declared. ‘Over the long term, perhaps, but over shorter periods this certainly cannot be proved.’
Katrine and I compared notes over coffee in one of the breaks. ‘The obvious solution is to devise a bespoke real assets programme and to be a true long-term investor and to pay your staff a fortune,’ she said. ‘Easier said than done!’ I replied.
Pieter Mullen is investment director at Wasserdicht Pension Funds