Doubling up

Talk of pension funds’ increasing appetite for direct investments in infrastructure was one of last year’s hot topics.

dissatisfied with
fund economics 

Up until recently, though, industry observers could be forgiven for thinking that this was mostly a Canadian and – to a lesser extent – US phenomenon. But Dutch pension asset managers APG helped change that perception – and now PGGM is also doing its bit.

PGGM is the asset manager for over €89 billion in pensions in the Dutch healthcare and social work sectors.

Having begun investing in infrastructure through third-party equity funds in 2005, Henk Huizing, PGGM’s head of infrastructure investments, told us that the asset manager doubled its infrastructure team from five to 10 people during 2009 to increasingly target direct investments.

That bet seems to be producing results. Although Huizing prefers not to comment on PGGM’s upcoming investments, sources familiar with the deal told that PGGM – together with fellow Dutch investors APG and DIF – is gearing up to provide half of the €500 million equity cheque required for Slovakia’s €3.3 billion D1 road deal.

So why opt to go the direct route? “Basically, for four reasons – fee structures, governance, length of investments, and portfolio construction,” Huizing explains.

Like many other LPs in the industry, Huizing is dissatisfied with the economics demanded by infrastructure funds.

We have been discussing the possibility of paying a fee based on [an asset’s] annual yield with a hurdle of between five percent and seven percent

Without going into specifics, he contends that management fees should not act as a profit generator, echoing recent comments by Robbert Coomans, adviser to the board at APG. On the topic of carried interest, Huizing says he is more in favour of an out-performance fee:

“The problem with fixed carry is that if a manager promises you an internal rate of return of 15 percent, but then he only delivers you 12 percent he still gets to take home a 20 percent carry,” he explains.

He is not averse to the idea of paying a fee based on the annual cash-flows an asset generates, similar to what Coomans proposed during Infrastructure Investor’s recent Europe 2010: Berlin conference:

“We have been discussing the possibility of paying a fee based on [an asset’s] annual yield with a hurdle of between five percent and seven percent,” he says. “This would allow GPs to get paid on an annual basis instead of having to wait for a longer period of time,” Huizing adds.

But the decision to increasingly target direct investments is not all about fees. Huizing points out that going direct also allows PGGM to plan its portfolio better. “When you invest in third-party funds, it’s harder to predict how your portfolio will look,” he explains.

Although he cites governance as one of the drivers for PGGM’s decision to increasingly go direct, he says that transparency – one of the buzzwords at this year’s Infrastructure Investor Europe: 2010 conference in Berlin –is not a problem PGGM has experienced with its GPs.

That’s not to say Huizing thinks such a question is without merit. Like others in the industry, he believes the asset class is at a stage where it would benefit from the creation of an LP platform – similar to INREV for real estate, for example. But he admits that, although discussions have been ongoing, the initiative has yet to gain clear momentum.

Huizing also contends that pensions will continue to increase their infrastructure allocations – his main client, the €80 billion Pensioenfonds Zorg en Welzijn, has just increased its infrastructure allocation from one percent to two percent for this year.

That’s good news for cash-strapped governments. But it won’t be easy money: Huizing warns pensions need political and regulatory stability as well as coherent infrastructure programmes before increasing their resources to any given country. And that may be increasingly hard to come by in these troubled economic times.