UK - Pension funds are natural buyers of infrastructure assets and funds but they are being presented with products which do not meet their specific needs, BAE Systems Pension Funds Investment Management said.
Chief investment officer David Brief told delegates the three large schemes he runs, with some £11bn (US$16.6bn) assets under management, all have between 3.5% to 5% allocated to infrastructure, but mostly at the lower end of that range.
Having looked at the asset allocation of Australian and Canadian pension funds, where infrastructure holdings are typically 10-12%, he was convinced that it could provide the long dated income with the level of protection required.
So in 2002/3, the three schemes started looking for an infrastructure product with a long term horizon - meaning 15-20 years, but preferably 30 years, run by experienced management teams with demonstrable track records, delivering IRRs (internal rates of return) in high single digits or low double digits, with institutional type fees. The exit envisaged was a rollover into continuation funds, quoted or unquoted, rather than private equity type trade sales or floatations.
What he was offered were newly-launched infrastructure funds with no track records, a time horizon of 8-10 years, a private equity-type mindset characterised by high fees, and run by inexperienced management teams promising IRR's in the mid to high teens, "plus some horribly conflicted offering from investment banks".
"There were not many funds that were not tied to insurance companies or banks, but we wanted to avoid manager risk. Only two or three had any kind of track record. We never believed the claims of the investment managers in respect of the projected returns, so we have not been disappointed there," he explained. The schemes now invest with eight fund managers and 11 funds only. No group has more than 15% of the total mandate or 0.6% of the total assets.
Asked if he considered the decisions taken on infrastructure had been successful, he said it was too early to tell, and other factors, including the traumatic markets of the last two years, would affect that judgement. "But we are reasonably happy because it is a 20 year programme."
He noted the growing need for private sector infrastructure financing, but added that proposals have to be better structured to meet investors' needs.
He said those seeking funding must also seek a broader pool of investors, rather than re-visiting the same targets.
Investments which are likely to have underperformed recently are those where the entry price was too high, where gearing has been higher, and projects focused on pro-cyclical assets such as transport. Those involved with technologies which have been quickly superceded have also been hit.
Speakers at the conference noted that while infrastructure is often associated with the development of emerging markets, there was a pressing need for replacement programmes in developed markets, but projects are being held up due to central government funding constraints, and political agendas where elections are due.
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