| Sweden's AP3 smoothed out its entry in the infrastructure world with secondary investments |
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| 18/06/2006 | |
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It might be still too early to draw conclusions about the Third Swedish National Pension Fund's (AP3) entry into the infrastructure world, but Bengt Hellström, the scheme's head of alternative investments readily talks about AP3's reasons for considering this alternative in the first place. As the first large Swedish institutional investor to gain exposure to infrastructure in September 2005, SEK192bn (€20.7bn, £14.2bn) AP3 tapped into a secondary private finance initiative fund investing primarily in assets such as hospitals, schools and railways. AP3's alternative investments had previously consisted solely of private equity, real estate and timberland investments. "We first discussed this issue internally about four years ago", remembers Bengt Hellström. AP3, one of four buffer funds of the Swedish national pension system, had then been in operation for only a year. "At that time, we were still a fairly young institution. We had to go step by step to build our portfolio and infrastructure was not the first thing we chose to focus on. We first had to get everything in place in terms of our listed equity and fixed income allocations, as well as our private equity programme. But we can say that infrastructure is something that has been in the back of our minds during all this period." "The main reason for investing in infrastructure was at first anchored in our search for more asset diversification. But with hindsight, we can say it is about a combination of diversification and performance enhancement", he says. "Infrastructure has a diversifying effect in terms of the return patterns compared to the main assets classes. But in the low yield environment in which we are currently living, it is also very interesting from the return enhancement viewpoint." Private finance initiative The decision was finally made to commit £20 million to Henderson Global Investors' Private Finance Initiative Fund in 2005. So far, £3 million has been invested. "The fact that it was a secondary private finance initiative fund focusing mainly on social infrastructure was one of the main reasons why it was our first pick", says Mr Hellström. "As a secondary fund, it invests in infrastructure assets that are already operational and that don't have any construction risks. Thereby, we decrease our perceived risk level." Investment in earlier stage infrastructure projects, which are usually dubbed "development-stage infrastructure assets" come along with a higher level of risk, including a construction risk due, for example, to the possibility of the contractor failings. According to Mr Hellström, social infrastructure, in which such a fund invests, is also very advantageous since they are usually not dependent on their usage level, being backed by regular and steady cash-flows usually generated by local authorities. Private finance initiatives usually back social infrastructure such as schools or hospitals whose income stream is directly generated by the government, hence drastically reducing the counterparty risk. In turn, even if the number of facility users decrease over the period, the cash flows remain stable as long as the contract is running, making it similar to a fixed income investment. Both due to the relatively small size of the investment and regulatory issues, AP3 has invested through a fund instead of gaining a direct infrastructure exposure, which would have required a much higher entry ticket, and would have been riskier. "We plan to continue to invest in infrastructure indirectly", says Mr Hellström. As AP3's infrastructure investment continues to grow, this could also mean a change in how the institution deals with those assets internally. "As of now, since our investment in infrastructure is fairly small, we treat those assets as part of our private equity business. Also, similar to our private equity investments, investments in infrastructure is included in the 5% limit we have for unlisted investments. However, our view is that it should eventually be treated as a separate asset class. Julien Laplante |
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