| Infrastructure investments about to win the hearts and minds of European institutions – look at Canada and Australia |
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| 18/06/2006 | |
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Some institutions can hardly have enough portfolio diversification. Given the current rush for index-linked, long duration, assets, the future is bright for infrastructure assets that can be either invested directly, usually through a consortium of investors, or indirectly through a managed fund offering more flexibility. After having already conquered places such as Canada and Australia, this alternative is well-positioned to carve out its niche among the asset allocation of European institutional investors. "The Australian infrastructure investment market, which has already been active for 10 to 15 years, has evolved into a very mature and widely-accepted separate asset class, next to real estate and private equity", explains Lonneke Löwik, a member of RREEF's Real Estate and Infrastructure team in London. "In Europe, traditional institutional investors and pension funds have been considering infrastructure assets for roughly a year and a half and are still relatively new to this asset class. They are in the process of fully understanding it and seeing how it fits within a multi-asset portfolio." In Australia, where some large superannuation funds allocate over 20% of their assets to infrastructure, a combination of two factors laid the ground for the development of the infrastructure market at the beginning of the 1990s. "About fifteen years ago, the government required private sector funds and increased infrastructure investment attractiveness by introducing infrastructure bonds, At the same time, compulsory pension savings resulted in a large pool of money to be invested", says Ms Löwik. As a result, the infrastructure market has become an alternative to the small-sized Australian equity, bond, and real estate markets. The same thing is now happening in Europe with cash-strapped and deficit-wary governments scrambling to find new sources of financing, and pay-as-you-go schemes giving up some ground to long term investors assimilated to traditional pension funds such as France's Retirement Reserve Fund, which has already committed a small amount to infrastructure in its strategic asset allocation. "The European investment market is the same as the Australian market about 10 years ago", says Ms Löwik, adding that the high price of real estate is also encouraging investors to look to infrastructure as an alternative. Reflecting that situation, public private partnership (PPP) projects popped up throughout Europe in 2005, with Standard & Poor's reporting numerous transactions reaching the bidding stage or financial close, offering plenty of investment opportunities that have not been necessarily exploited by European institutions. However, investors are slowly gaining exposure to infrastructure through PPPs. So far, S&P says that most PPPs have been financed through the bank loan market in Continental Europe. "This partially reflects their size – often less than €100 million – but also the lack of an investor base familiar with, and interested in buying, PPP-related debt." Canadian experience Looking at the Canadian experience is likely to give ideas to European institutions. "We fundamentally believe in the long term and we think that infrastructure is an ideal investment for a pension plan with long-term liabilities", says Paul Renaud, the chief financial officer * of the Ontario Municipal Employees Retirement System (OMERS) which has just announced that it was interested in acquiring Associated British Ports Plc along Goldman Sachs and GIC Special Investments Pte Ltd, the private equity arm of the Government of Singapore Investment Corporation. "Infrastructure assets provide better and more consistent returns in the long term than the public markets", says Mr Renaud. "Moreover, most of the infrastructure investments we realise are regulated, which means that there is a pretty tight tolerance level in terms of investment returns downsides and upsides." Coming from the CFO of OMERS, this is no small talk since this pension fund, one of the largest in Canada with assets of CAD41bn (€29bn) has planned to invest 15% of its assets in infrastructure from its current 6% allocation. Back in the 1990s, OMERS even created a subsidiary called Borealis that is responsible for making all its investments in infrastructure, which are all direct. All in all, OMERS' private investments – a category that includes infrastructure, real estate and private equity – are set to account for 40% of its global asset allocation at some point in the future. "Today, we are about half-way towards this objective", says Mr Renaud. "However, we don't have any specific time horizon to reach this target because we are much more concerned about making disciplined and proper investments than reaching this level. We are realistic and we have been putting a lot more money to work in those investment classes in the last couple of years", he says, adding that it will likely take up to three to five years to reach the 40% target. "But we don't have a mandate to be there by then. We have a mandate to make prudent investments." European investors, which invest far smaller amounts in infrastructure than a scheme such as OMERS, have so far generally preferred to gain their exposure through smaller investments in unlisted funds. A direct investment usually requires large amounts – infrastructure assets are often valued at over €1bn – and can also be off-limit due to regulatory issues in certain countries. The Norwegian pension fund OPF has recently subscribed to the Macquarie European Infrastructure Fund. Large Dutch funds such as ABP and PGGM, whose investment approach bear similarities to Canadian and Australian pension funds', have taken large stakes in the ABN Amro infrastructure fund. As of now, most European investors still account for their investments in infrastructure either as part of their private equity or real estate portfolio, but that could change as the amounts invested grow, says Lonneke Löwik. "Institutional investors in Australia and Canada already make separate asset allocation to infrastructure beside real estate. In Europe, if infrastructure investment continues to evolve, we expect it to become a separate asset class too." Julien Laplante * Mr. Paul Renaud is set to become the CEO and president of OMERS Capital Partners, the private equity investment arm of OMERS |
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