Watch out for a rate rise

Peter Hofbauer, head of infrastructure at Hermes GPE, warns that returns on infrastructure investments might be affected when interest rates rise.

The head of infrastructure at London-based private market investment firm Hermes GPE, Peter Hofbauer, is pleased that the firm has “no set time period” for investing more than £2.5 billion (€2.9 billion; $3.8 billion) it manages on behalf of its clients.

After all, with asset prices rising in the core infrastructure space which Hermes GPE targets, it is no surprise to hear Hofbauer say: “We are cautious about valuations. There has been a lot of central bank-generated liquidity and the Bank of England has made a pertinent assessment of resultant increases in asset prices.” By implication, this is no time to be in a hurry to invest.

Less publicised, Hofbauer believes, is the likelihood of an eventual upward move in interest rates – which is surely bound to happen at some point, even if not in the near future. “Where investors are buying assets on a return relative to current low real interest rates, they may be impacted if real interest rates increase. This impact will be greater on investments that display fixed rate characteristics rather than floating rate characteristics.”

In the interview, Hofbauer also states his belief that – as a representative of UK institutional investors (its largest client being the BT Pension Scheme) – Hermes GPE is in a privileged position with respect to stakeholders.

“There is a dearth of local, UK institutional investors around and the reception we get is very positive. There are not many UK institutions on the roster. The private side is dominated by international pensions and sovereign wealth funds. We’re a local partner of choice and to date we have been welcomed by management, vendors and partners alike.”

He also reckons this welcome extends to the firm’s involvement in certain industries, such as water – the firm having acquired a minority stake in Thames Water on behalf of the BT Pension Scheme in May last year.

“We’re engaged at the company and industry level to shape the development of the industry and add to its attractiveness – for example, through lower leverage, which the regulator supports as well. Deals like this [Thames Water] represent an evolution to long-term institutional holders from the originators, including the GPs that took a number of them private.”

The full version of the interview appears in the June 2013 issue of Infrastructure Investor and may be accessed here.