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Below the radar

Compared with the flashy world of investment banking, insurance used to be a rather discreet, humble industry. Yet lately its prominent members have been making a splash. Last December, the UK’s six largest insurers announced plans to spend £25 billion (€30 billion; $41 billion) on infrastructure investments over the next five years, as part of the government’s efforts to kick-start a number of flagship projects. Aviva decided to double up a couple of weeks later, through a fresh £500 million allocation to the asset class.

Elsewhere in Europe, the asset management arms of insurance giants have also made waves – by investing big money raised from third parties. Germany’s Allianz regularly grabs infrastructure-related headlines, through deals such as its €433 million investment in the senior debt of the Belgium’s A11 motorway or the £175 million it plugged into the Scot Roads Partnership. France AXA’s has long been involved in infrastructure through the €1 billion+ funds managed by its private equity arm (now independent and known as Ardian).

Aviva Investors, Aviva’s asset management unit, stands out from this distinguished crowd – ironically, thanks to its rather low profile. “From me going around raising capital I don’t see them as competitors, and on our transaction front they don’t feature either,” says the investor relations director of a European-focused fund. “They seem to be doing very small deals with a small-sized fund.” At a time when Allianz Global Investors boasts more than €2 billion worth of infrastructure debt deals since inception, Aviva’s latest investment in the space, a £10 million participation in the £300 million N17/N18 motorway Public-Private Partnership (PPP) in western Ireland, hardly seems to be breaking the bank.


Yet if Aviva Investors’ current dealings appear relatively modest in size – though the REaLM Infrastructure Fund, one of its most visible products, manages about £360 million – its ambitions are not.

Ian Berry, infrastructure and renewable energy fund manager at the firm, contends that a growing number of institutions are looking for investment solutions to match their increasing liabilities – not an easy task in the context of sluggish economic growth, disappointing returns on mainstream assets, potentially higher inflation and rising levels of risk associated with supposedly safe asset classes.

That makes them increasingly keen in infrastructure – a demand matched by supply, with cash-strapped governments willing to attract long-term, private capital to fund new projects.

Yet vehicles to connect both ends sometimes seem to be lacking. “When UK pension funds look at the infrastructure market they find that it doesn’t work in their interest,” says Joanne Segars, chief executive of the National Association of Pension Funds (NAPF). She thinks part of the reason is internal to institutions: the UK pension funds market is rather disaggregated, which means its members are small on average; they tend to lack the expertise to invest in infrastructure.

But a bigger barrier is the approach so far taken by most infrastructure fund managers, which Segars reckon is “heavily based on that of private equity, where assets are held for the short-term and fee levels are high.” By contrast, she says, what institutional investors want is to buy and hold investments – most often with de-risking, liability-matching characteristics. That also holds true for insurers: “Government changes mean people have to buy less annuities,” says a placement agent, “but they’ve still got a big back book to finance.”

And that’s one of the markets Aviva Investors clearly targets. Not only does it invest on behalf of Aviva’s life funds – its mother company being the biggest writer of annuities in the UK – it also has a full-blown fund management business, through which it deploys money belonging to third parties like local authority pension funds. Berry explains that Aviva Investors’ limited partner (LP) base is diversified, but the latest mandate it publicly announced – a £40 million commitment from the £2.7 billion Devon County Council to REaLM strategies – shows a bias towards institutions at the smaller end of the market.


That’s consistent with the general thrust of Aviva Investors’ approach to infrastructure, which observers think is more suited to LPs who see the asset class as fitting within their fixed-income bucket. “One thing all our strategies share is a conservative approach: we focus on lower-risk sectors, structures and instruments”, Berry says. While returns vary across areas and assets, the firm tends to target returns in the mid- to high-single digits.

Various sectors contribute to this objective. “The areas where we’ve seen them most active in the UK have been originating and structuring loans to social infrastructure PPP/PFI assets; ground rent and property-related income; renewable energy, with an emphasis on solar; and university and social housing,” says a legal adviser with good knowledge of the firm. The common thread of these four areas, he points out, is their ability to generate stable, long-term returns. “Liability-matching is a big thing in the products they have.”

Berry is eager to underline that the offering has been crafted with the needs of various types of institutional investors in mind, spanning different risk-return profiles, investment horizons, leverage requirements, yield versus capital growth preferences and tolerance to volatility. As such – within the low-risk infrastructure space – Aviva Investors’ products still sit at different levels on the risk-return scale. In ascending order, they comprise secondary infrastructure debt, return enhancing and liability matching (REaLM) funds, multi-manager strategies and renewable energy.

Market insiders see the debt business as being well-positioned to fill a gap in the market. “Such investors occupy some of the space previously occupied by commercial banks,” says a senior lawyer. “That makes a lot of commercial sense: there’s probably a symbiotic relationship where the lower-risk lower-return loans are more naturally suited for Aviva on the lending side.”

But perhaps the platforms that elicit the most commentary are Aviva’s REaLM Funds. “I really like it as a concept. The defined-benefit pension plan should like the inflation-linked characteristics they’re targeting,” says a placement agent. Interested investors can choose to commit to any or all of the four vehicles, which respectively target equity investments in infrastructure, social housing, ground rents, and commercial and student assets.


Through the REaLM infrastructure fund, the firm shows what our adviser describes as “original thinking” towards the asset class. With a broad mandate to provide low-risk, unleveraged exposure to real assets in the UK, the vehicle initially focused its efforts on a rather idiosyncratic sector: domestic solar panel installations. “These tend to be overlooked by other investors, which generally focus on leveraged equity investments in larger-scale projects,” says Berry.

He reckons his team has now developed enough expertise to tackle such opportunities, which he thinks provide secure, reliable revenue streams with inflation-linked characteristics. In mid-2012 the fund acquired a portfolio of solar installations built on 7,000 UK homes from London-based HomeSun, in a deal estimated at about £100 million. The firm hopes it will generate a return of more than 5 percent a year above gilts, through 25-year inflation-linked revenues backed by feed-in tariffs.

Some wonder whether such strategies are scalable. “Anecdotally, I’ve heard that they’ve struggled to put capital to work,” says a fund manager. Berry disputes this point: the deal pipeline has been good and – a key point – making unlevered investments allows you to deploy more capital in one go.

Other insiders ask whether the strategy is sustainable at a time of rising competition. “A lot of big and small investors tell me: ‘this is getting mad, there’s just too much money chasing assets’. Some have withdrawn and are waiting for prices to come down,” says an investment banker close to the firm. He does believe, however, that Aviva has what it takes to be successful. “They have a huge balance sheet. And they hire teams, so they’ll probably get more and more attractive for sponsors to work with.”

Berry points out that the REaLM fund is now looking at investing equity in a set of other sectors, such as the provision of energy centres to public entities – another area where revenues are stable, inflation-proof, and insulated for energy prices swings. He also argues that his business remains protected by high barriers to entry: accessing these unusual markets requires a fair degree of industry knowledge and extensive relationships.

In fact, one fund adviser is “slightly surprised that [Aviva’s funds] haven’t got more traction than they have”. It’s possible, he says, that “a sort of hiatus” has been created by the launch of the Pension Infrastructure Platform, a joint venture between the NAPF and the Pension Protection Fund (PPF) that targets a client base fairly similar to that of Aviva Investors.

Yet with the PIP for now more focused on PFI assets (through a mandate awarded to Dalmore Capital in February), he thinks Aviva could see more capital coming its way. “Inflation-linked assets was always the holy grail of the PIP. So maybe Aviva stands to benefit now.”