For pension funds the attraction of investing in infrastructure projects – roads bridges and airports – is that they can provide stable long-term returns and a good match for long-dated liabilities.
However the drawback is that few pension funds have the expertise to assess the risk and returns of individual infrastructure projects.
The Macquarie European Infrastructure Fund (MEIF), launched last year by Macquarie Bank, aims to resolve this problem. The fund is a wholesale vehicle targeting investment in infrastructure and related assets in European OECD countries.
Earlier this year it announced that it had reached investor commitments of over e750m, and was on course to achieve its target of e1bn before its final close later this year.
Jim Craig, head of Macquarie Europe and managing director of MEIF, says: “Institutions told us that while they liked infrastructure as an asset class it was difficult for them to invest in sector specific funds.
“For a single project like a toll road you have to focus on a very specific risk characteristic, being the traffic risk in the area, and most of the European funds don’t naturally have the expertise to look at that.
“That pushed us towards a diversified infrastructure fund. With a diversified fund the investment decision is much more focused on whether you are comfortable with infrastructure as an asset class and comfortable with us as a manager, rather than whether you are you comfortable about how many cars are going to drive into Birmingham.”
The fund was launched with two seed investments, a 50. 1% interest in the UK utility South East Water and 100% of Arlanda Express, the high-speed rail service linking Sweden’s Arlanda airport to Stockholm’s city centre. These were picked deliberately as high profile, visible assets.
“Because many of our investors were first-time investors in infrastructure, we thought it was important to be able to show them tangible infrastructure assets rather than talk about them as a concept. So we identified two assets that we thought exhibited typical
infrastructure characteristics.”
Infrastructure investments belong to two main categories: regulated assets and patronage assets. South East Water is an example of a regulated asset. Regulated assets are natural monopolies, regulated in the level of revenue earned or charges imposed. The returns on regulated assets are often low but stable.
Arlanda Express is an example of a patronage asset. Patronage assets – typically transport-related developments – depend on a form of patronage for their revenue. They are also highly dependent on demographic factors. Cash flows from these assets can be more reliably predicted than those from other asset classes, says Craig: “Good airports round the world grow at roughly twice GDP. The number of people we get on the train is directly proportional to the growth of the airport.”
The problem for European pension fund managers is where to place infrastructure investment in their portfolios. In Canada and Australia pension funds have their own asset class for infrastructure investments and will allocate typically 5-7% of the portfolio.
In Europe, the situation is less clear, says Craig. “Some investors see us as close to property even though we think we represent a much more secure income stream than property. Others think of us as alternative investments, although we are low-risk, medium-return.”
Among pension funds, the larger ones have been most prepared to make room for infrastructure investments. The Netherlands’ ABP, was an early investor in the fund. Craig hopes it has set an example that others will follow.