Dear UK, they love infrastucture: why don’t you?

It’s nice to have your prejudices confirmed; not least because if it happens long enough, they stop being prejudices and become firm, evidence-based conclusions. With every passing month and every passing year, we are seeing that investment in infrastructure is looking more and more appealing to the investors best placed to provide capital to it. This is a story which the toiling trade journalists that labour behind monolithic paywalls have written many times before, and they look set to write it many times over.

I’m going to quote some fairly dense figures now, but I hope you’ll bear with me as it proved that rattling on about pension funds and infrastructure is more than tall talk.

Exhibit A: A report by analysts at Preqin earlier this year cites a poll of an unspecified number of institutional investors (probably mainly pension funds and insurers) in 2012, and found that 58 per cent wanted to increase the money the allocate to infrastructure over the next 12 months (until the second half of this year). Over the longer term, that percentage rises to 62 per cent.

For investors who want to maintain their allocations to infrastructure, the figures are 38 per cent and 36 per cent. Just four per cent wanted less to do with infrastructure in 2012-13, and two per cent over the longer term.

Source: AMP Capital/Institutional Investor

Source: AMP Capital/Institutional Investor

Exhibit B: Another report, this time from AMP Capital (the asset manager of Australian insurer AMP Group)* finds that these aspirations are indeed being translated into movement of money. Out of 62 international institutional investors surveyed – representing US$1.9 trillion of capital – a net 47 per cent** said they increased their direct investment in infrastructure equity in the first quarter of 2013. That’s the biggest percentage for any of the asset types listed. 14 per cent of respondents said they’d increased their exposure to ‘listed’ infrastructure – i.e. not investing directly in infrastructure projects but in infrastructure funds – and 17 per cent said they’d increased their exposure to infrastructure project debt.

By contrast, traditional investments such as government bonds and equities in the investor’s home country fared badly. Only a net two per cent said they planned to increase investment in the former, and nine per cent said they wanted to decrease their exposure to the latter. The report also found that Europe was the region that most strongly favoured infrastructure as an asset class for investors to focus on.

Given the UK’s infrastructure needs, should we pop the champagne corks? Well, yes and no. Globally, investor appetite is increasing, and that means there will be money to invest in UK plc if other conditions permit. But BIG funds look for BIG deals that yield BIG returns. For smaller investments of the order of a few tens or couple of hundred million sterling, we are more reliant on local investors.

As my post last week and my earlier article for Total Politics observed, there are still many pension funds and insurers in Britain who don’t like infrastructure projects and who expect a product that is basically a government bond but with higher returns. Others, less extreme, are happy to invest in proper infrastructure, as long as it’s already been built. This doesn’t really do much for the government’s National Infrastructure Plan, which is all about building new stuff. The irony isn’t lost on those investors – well, not all of them – but they aren’t budging, believe me.

The challenge remains convincing the hard core of institutional investors who have a deep, in-built prejudice against infrastructure. Perhaps as the evidence in the opposite direction mounts, they will realise that what they thought was informed conclusion is just prejudice.

*Report produced by Institutional Investor on behalf of AMP Capital

**i.e. after subtracting the percentage who said they wanted to decrease their allocation


About René Lavanchy

You can contact me at rene dot lavanchy at googlemail dot com.
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