Capital magnet

The great and the good of the infrastructure asset class arrived in force: confirming that Infrastructure Investor’s Berlin Summit is quite simply the place to be when early March comes around. As each keynote speech and panel session went by, a packed ballroom stayed packed – testament to a total registration for the event of around 700.

In the opening keynote, Sir Merrick Cockell, deputy chairman of the London Pension Fund Authority (LPFA), spoke of the growing investment power of UK pensions as they find ways of collaborating to compete with sovereign wealth funds. Those in the vanguard of this development were described by Cockell as “game changers”.

He pointed to Lancashire County Pension Fund’s (LCPF) recent bid for the government's stake in Eurostar as a sign of UK pensions’ growing ambitions in the asset class. The bid did not ultimately win but was reported to have made it to the final stages.

However, Cockell conceded that the UK media’s reference to Lancashire as the land of the hotpot (a culinary specialism) while expressing surprise at its involvement in the bid meant there was “a long way to go to build credibility”.

He pointed out that government efforts have thus far largely focused on attracting foreign investment into UK infrastructure while ignoring the 89 pension funds making up the Local
Government Pension Scheme.

‘Super pools’

Cockell, who is deputy chair of the London Pension Funds Authority (LPFA), said UK pensions are beginning to take matters into their own hands by forming collaborative arrangements to build economies of scale. These have sometimes been referred to as “super pools”.

One example is the LPFA’s £10 billion (€13.8 billion; $14.7 billion) joint fund with the LCPF. Had the LCPF bid for Eurostar been successful, the investment would have gone into this fund. With the possibility of other schemes being invited into the fund, Cockell indicated it could eventually be worth some £40 billion.

The LPFA has also teamed up with the Greater Manchester Pension Fund to form a special purpose vehicle into which each has committed £250 million.

With the benefit of collaborative scale, Cockell said the UK pension “sleeping giant” was beginning to wake and could compete with sovereign wealth funds for large infrastructure assets in future.

In a subsequent panel we heard from the sovereign wealth fund themselves and discovered that, for them, emerging markets are increasingly front of mind – including for China Investment Corporation (CIC).

Tao Mi, infrastructure director at the $653 billion institution, explained that CIC was “feeling the inflated pricing” of assets in the OECD. This was prompting it to seek better risk-adjusted returns in less established markets.

“Being a government entity located in Beijing is not very helpful when entering auctions in developed markets. In emerging markets, on the other hand, there seems to be a critical need for infrastructure that no one so far wants to tap. So we've decided to reconsider our infrastructure programme to push more into developing countries.”

He said CIC was particularly attracted to East Africa, where “strong population growth, natural resources, and improving governance lay out the foundations for us to be confident we can deploy large amounts of money.”

‘More flexibility’

As part of its revamped strategy, Mi added that the fund was increasingly keen to invest in greenfield projects. “Sovereign wealth funds tend to have a much bigger balance sheet than other institutional investors; their capital is evergreen. So they have much more flexibility to structure deals and be patient. The J-curve effects incurred during the construction period can be absorbed by our large portfolio.”

He said infrastructure could have a crucial role in integrating resources from various sectors, allowing investors to be able to offer a “package deal” to emerging markets – involving for instance energy, agriculture and infrastructure components – as these strive to create jobs and unlock economic growth.

He cited several greenfield container port projects in Tanzania and Kenya as examples of investments CIC is currently pursuing. “Logistics is really the bottleneck in those countries. So today we're investing in the port terminal but we might also consider funding the surrounding facilities and even some railway.”

The promise of emerging markets was endorsed by other speakers, including those on a panel dedicated to energy investing.

Steve Bickerton, managing partner at Prostar Capital, quoted an International Energy Agency statistic revealing that 65 percent of the growth in energy demand is coming from Asia Pacific. “Many Asian countries are completely dependent on imported energy,” he said, referencing South Korea as a prime example of a market with a strong manufacturing base that is dependent on an imported, long-term, reliable supply of energy.

Bickerton added that South Korea was an example of a country in the region where investment is actively encouraged. However, in somewhere like China you need to be “very selective” in how you go about gaining exposure.

Paul Hanrahan, co-founder and chief executive of American Capital Infrastructure, endorsed Bickerton’s view. “People have tended to stick with markets with which they are familiar,” he said. “But that’s changing due to policies that are encouraging investment and due to investors now having the expertise to look at new markets.”

Hanrahan cited an investment by his firm in Nigeria as an example of how risk in emerging markets can be overestimated, saying that the investment has backstops from the government and from the World Bank, meaning that it has a “quite attractive” risk profile.

Positive dialogue

Some in the room may have been tempted to think that risk lies not so much in emerging markets today as in developed markets – especially given increasingly unpredictable regulatory actions in certain markets. Cathryn Ross, chief executive of UK water regulator Ofwat, was on stage to calm fears.

Ofwat itself met with a less than enthusiastic response when publishing its final determination for the UK water sector towards the end of last year, which pushed up the cost of capital. However, although Ross conceded that the end result may not have been one investors were ecstatic about, she insisted that the dialogue between regulator and investors had been a positive one.

“We had over 400 conversations with investors and we were praised for our clarity – there were no surprises – and for our level of engagement,” she said, In other words, you may not have liked the regulator’s final decision, but at least you might acknowledge the benefit of having known what was coming.