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Social infrastructure market 'too small, risky' for pension funds

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GLOBAL - Pension funds have been put off of investing in so-called 'social infrastructure' by political risk and the relatively limited size of the asset pool, according to a study by EDHEC-Risk Institute.

In its study - entitled 'The Pension Fund Investment in Social Infrastructure Report' - EDHEC differentiates between social infrastructure investments - which deliver public assets and services in exchange for a revenue stream paid directly by the public sector - and economic infrastructure - which collects revenues from end users and can include toll roads.

The institute said social infrastructure could be a "highly attractive" asset for pension funds as a means of matching liabilities with long-term projects, but two main issues made the investment unattractive.

Frédéric Blanc-Brude, research director and author of the report, said: "Addressing the uncertainty created by political risk through a transparent and independent regulatory framework for long-term buy-and-hold investors like pension funds would make individual social infrastructure assets much more desirable investments in an asset-liability management context."

However, according to Blanc-Brude, until a much larger asset pool has been created, pension funds will be unlikely to treat social infrastructure as an asset class demanding specific allocations.

"[Creating a larger asset pool] would considerably increase the flow of funds towards social infrastructure that cash-strapped governments are now keen to see," he added.

EDHEC's report also cites political risk for investors. Blanc-Brude said future reforms should aim to create a transparent and independent regulatory framework committing the public sector more effectively, while capping returns.

The report claims the current size of the social infrastructure asset pool is such that modest allocations by major pension funds would lead to a "rapid rarefaction" of these assets.

In total, $100bn (€75.7bn) was invested worldwide in social infrastructure between 1995 and 2010, mostly in the UK, according to EDHEC.

"This could be the most challenging dimension of the promotion of infrastructure investment by pension funds," Blanc-Brude said.

"Infrastructure debt - the bulk of social infrastructure capital investment - is unlikely to be treated as a separate asset class by pension funds and thus to be the object of a specific asset allocation at the strategic level."

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