Setting a high-water mark

It’s what many would call making a splash. Earlier this week, a consortium comprising International Public Partnerships Limited, Amber Infrastructure, Allianz Capital Partners, Dalmore Capital, DIF and Swiss Life Asset Managers was chosen as preferred bidder for the UK’s £4.2 billion (€6.0 billion; $6.6 billion) Thames Tideway Tunnel (TTT).

A flagship project of the country’s £400 billion National Infrastructure Plan, the 25-kilometre tunnel is part of a network which will carry sewage and storm water discharges from the broader London sewerage system. The grouping responsible for owning, funding and delivering the project hopes to reach financial close later this summer.

Notable for its high profile and remarkable size, TTT stands out for at least one other reason. Dalmore Capital, a UK fund manager, is investing on behalf of the Pensions Infrastructure Platform (PIP), an initiative by the country’s National Associations of Pension Funds that aims to unleash domestic pension investment in infrastructure. And at more than £370 million, the equity cheque committed by PIP dwarfs every other investment it has made since its 2013 creation.

The move goes against a couple of preconceived ideas about the appetite and ability of pension funds to invest in infrastructure. For one, there’s the idea that such prudent organisations are resolutely averse to taking construction risk. Second, there’s the perception that, even if they wanted to, they would rarely be in a position to compete with more knowledgeable, more skilled low-cost-of-capital institutions.

The former observation has some truth in it: it is hard to deny that UK pensions have so far been far keener on brownfield, yielding assets rather than new projects. PIP’s first fund, also managed by Dalmore and focused on public-private partnerships (PPPs), has a mandate to invest in existing infrastructure. Its second vehicle, managed by Aviva Investors, is restricted to rooftop solar.

Then again, provided sufficient protection is granted, the most enlightened pensions don’t seem to be opposed to the principle of investing in greenfield. We understand that the structure provided around the TTT transaction offered investors just that, allowing the investment to yield inflation-linked revenues through construction and operation while benefitting from government support and an investment-grade rating.

Some observers take issue with the need for the government to provide guarantees, arguing that they are costly to taxpayers. Out of the universe of institutional investors, however, pension funds are perhaps those which are most content with a lower rate of return on their investments – as long as it is safe. While protection may indeed impose extra costs on the taxpayer, the capital the latter benefits from through investment in projects is arguably cheaper (and more patient). In some cases there should be ways to make the deal a fair one for everyone.

In other cases there won’t be. But then it is also unrealistic to expect pension funds to plug their money in the riskiest deals. Those should be left to racier investors – or sometimes to the public sector, if the economics are tricky but the project nonetheless needed. Meanwhile, channeling pension fund money in brownfield projects brings liquidity to the overall market, allowing developers, early investors and/or public sponsors to free up capital for new projects (an example of this being the Australian model).

To the second preconception about UK pensions – that they’re ill-equipped to win the best deals – one could counter this by recalling a quote by Susan Martin, chief executive of the London Pensions Fund Authority: “At the moment the government is talking to large sovereign funds from Qatar, Abu Dhabi or China for large projects like HS2 or the Thames Tideway Tunnel. Gaining greater scale should allow us to sit at the table with them for some of these projects.”

She said these words back in December – upon unveiling an asset-liability management partnership with the Lancashire County Pension Fund (LCPF), covering assets potentially worth more than £10 billion, that was officially launched earlier this month and announced a process to appoint a board today. In time, the initiative hopes to inspire other pensions to join in and allow them to compete with other institutions on a more equal footing.

This won’t work every time: LCPF’s surprise bid for a 40 percent stake in cross-Channel train operator Eurostar last February was trumped by a rival offer from Canada’s La Caisse de dépôt et placement du Québec and London-based Hermes Infrastructure. But the very fact that the bid was placed shows that UK pensions now want to be taken more seriously – and, as PIP’s successful bid for a stake in TTT suggests, in some instances they’re achieving such recognition already.