What pensions want

You might have been hearing a lot of talk lately about what a lovely pairing infrastructure and pension funds make.

Coomans: in-house team

Some governments – such as the UK’s – have even been actively discussing how to facilitate a long-term marriage. The idea is to convince pension funds to reach deeper still into their considerably deep pockets to help finance the infrastructure ambitions of cash-strapped states.

Pensions, for their part, have been showing their love for infrastructure, increasing their allocations in the aftermath of the financial crisis as they seek to hedge against inflation and better match their liabilities. One pension fund to do that recently was Dutch civil service pension fund ABP. 

With €200 billion of assets under management as of July 31 2009, ABP, the world’s third-largest pension fund, said it will allocate an extra €2 billion to infrastructure investment over the next three years. That increased amount will be deployed by investment arm APG, a fully owned, independent management company set up by ABP to handle its investments and manage its assets.

Robust pipeline

Infrastructure Investor approached Robbert Coomans, adviser to APG’s board of directors, to find out what motivated ABP’s decision; only to discover that APG, under Dutch law, is not allowed to publicly discuss its clients’ strategies. It is, however, allowed to discuss what it – and by extension its clients – want out of infrastructure.

At a time when governments are openly saying they want pensions to fund their massive infrastructure programmes, the first obvious question to ask is: what does APG and its pension clients want from governments?

“We are interested in governments getting more projects out in the market, as long as they meet our requirements,” Coomans answers. “We need a robust pipeline of projects, otherwise it isn’t worth our time to go into a market,” he explains.

While Coomans doesn’t exactly specify what those requirements are, he does say that APG is well equipped to analyse infrastructure projects. He says that if governments started guaranteeing construction risk tomorrow, APG and its clients would not necessarily open the floodgates to infrastructure.

“I’m not sure [covering construction risk] will increase our appetite for infrastructure,” he says. “When the projects are well structured, construction risk is not such a big deal. Maybe governments’ involvement will lower the cost of funds. But APG Asset Management is a large organisation employing over 600 people, so we are equipped to deal with this sort of risk. For smaller groups without this expertise, I’m sure these measures will make a difference,” he argues.

Not that he disagrees with the oft-repeated notion that pension funds can provide more long-term debt to infrastructure projects. “We are already debt providers to infrastructure and, given that infrastructure naturally hedges against inflation, we are interested in getting more inflation-linked debt into projects.”

But again, APG already has its own, in-house team structuring its debt loans, so the fund manager is less interested in the benefits government guarantees could provide for instruments such as infrastructure bonds. Acquiring this sort of expertise was part of APG’s approach to infrastructure once it decided that the asset class had come into its own.

APG was set up by ABP in late 2008 to manage its assets. Since then, it has expanded its services to other Dutch pension funds and is currently managing about €240 billion of pension assets as of December 31 2009, representing over 30 percent of all collective pension schemes in the Netherlands. That means the fund manager administers the pensions of four million Dutch people, with one in five Dutch families depending on APG for its pensions.

Inflation protection

“We started looking at infrastructure in 2004 to diversify our portfolio and protect our clients against the biggest risk they face: inflation. By 2006, we saw there were enough qualitative reasons to class infrastructure as its own asset class, fundamentally different from private equity and real estate – the two asset classes with which it is most frequently compared,” Coomans says.

Since then, APG has taken a three-pronged approach to infrastructure: investing in infrastructure funds; co-investing alongside these funds in selected projects; and investing directly in infrastructure projects, although Coomans stresses that they always take minority positions and are not involved in managing the assets.

Like many limited partners, he thinks the ‘2 and 20’ fee model imported from private equity is rarely appropriate for infrastructure. “I agree that [last year’s] discussion [on fee structures] was needed,” he says. “At first, infrastructure funds just copied the private equity model. But you have to take into account that infrastructure is a different type of investment. This is not private equity, with its target returns of 20 percent. Consequently, the risk is much less so you have to be reasonable.”

Which doesn’t mean APG has a rigid view on fee structures: “We accept that management fees should be enough for GPs to run their offices. But they shouldn’t be a profit maker on their own. What we try to do is analyse the way the fund works when discussing fees. If you have a €5 billion fund with an office of 50 people then a 2 percent management fee is a profit generator. But if you run a €500 million fund with 30 people, then the story is different,” Coomans explains.

That flexibility extends to what type of infrastructure vehicles APG invests in.  Although Coomans says the fund manager prioritises regional vehicles over global ones, he is “not against greenfield [funds]” nor is he averse to confronting emerging market risks, as long “as you know what you are doing”.

Regarding the future of the asset class, Coomans is cautiously optimistic: “Whenever you look at the need for infrastructure investments between now and 2030, you come up with some $40 trillion in investments needed. Whichever way you look at it, there will be a huge need for infrastructure and, as such, opportunities in the sector will grow. But let’s not get too optimistic because even now, with all this talk of stimulus funds, there haven’t been that many projects put out there that we can access,” he warns.