Pension Fund Investment in Infrastructure

Abstract

As the need for investment in infrastructure continues to grow, private sector financing for infrastructure projects has developed around the world. Given the long-term growth and (potentially) low correlation aspects of infrastructure investments, pension funds have also shown interest in increasing their exposure to this area, along with their move into alternative assets. Such investments cover a wide spectrum of projects – from economic infrastructure such as transport, to social projects such as hospitals – and involve different forms of financing (primary vs. secondary, debt vs. equity, private vs. listed, direct vs. indirect). Data explaining the size, risk, return and correlations of this diverse asset class is therefore limited, which may be making pension fund investors cautious. Given investing in such assets also involves new types of investment vehicles and risk for pension funds to manage – such as exposure to leverage, legal and ownership issues, environmental risks as well as regulatory and political challenges – such caution may well be justified. However, if governments wish to help infrastructure developers tap into potentially important sources of financing such as pension funds, certain steps can be taken. This paper is designed as an overview piece, discussing if pension funds should invest in infrastructure on a theoretical basis, whether they do in practice, and, if not, how (and if) regulators can encourage and assist them to do so. Investissements des fonds de pension dans les infrastructures Les besoins en investissements dans les infrastructures continuant de croître, le financement de projets d'infrastructures par le secteur privé s'est développé dans le monde entier. Étant donné la croissance à long terme des investissements dans les infrastructures et la corrélation (potentiellement) faible de leurs rendements, les fonds de pension ont envisagé d'accroître leurs engagements dans ce domaine, parallèlement au développement de leurs placements alternatifs. Ces investissements portent sur une large gamme de projets – allant de projets d?infrastructure économique comme les transports à des projets sociaux comme la construction d?hôpitaux – et impliquent diverses formes de financement (primaire ou secondaire, dette ou fonds propres, titres cotés ou non, direct ou indirect). Les données relatives à la taille, au risque, au rendement et aux corrélations de cette catégorie d'actifs très diversifiée sont par conséquent limitées, ce qui peut inciter les investisseurs des fonds de pension à une certaine prudence. Étant donné que les investissements dans ces actifs impliquent également des instruments et des risques d?un nouveau type qu?auraient à gérer les fonds de pension (emprunts, problèmes juridiques et de propriété, risques environnementaux et problèmes réglementaires et politiques) cette prudence se justifie sans doute. Cela dit, si les pouvoirs publics souhaitent aider les responsables du développement d'infrastructures à avoir recours à des sources de financement potentiellement importa...

An Empirical Analysis of Pension Funds Assets Influencing Infrastructure Financing in Nigeria

“…Pension fund investments are expected to increase the availability of long-term funds, enhance competition, induce financial innovation, and improve corporate governance. (Inderst 2009).…”

“…However, some larger funds globally are beginning to invest through private-equity funds, or, occasionally, even directly. In international climes such as Australia, Canada, and Denmark, pension funds may be considered as leaders in this field (Inderst, 2009).…”

The muddy waters of financialisation and new accumulation strategies in the global water industry: The case of AGBAR

“…1 Rather what have been integrated into new investment vehicles are water infrastructures, services and ultimately the revenue streams generated by households. The wave of privatisation in the 1990s opened up the provision of water to new sources of private ownership, operation and investment which since around the turn of the century has attracted a broader array investors and new forms of financial engineering (Inderst 2009). This has been of an uneven and spatially variegated intensity.…”

Institutional Investors and Green Infrastructure Investments

“…This has typically involved a base management fee of 1 to 2 percent and performance fees of 10-20 percent, with an 8 to 12 percent hurdle rate (Inderst, 2009). This is exacerbated by the addition of another layer of transactions or intermediaries with high costs of doing business, resulting in a loss of opportunity to reduce financing costs and a bias to the higher-margin end of the business that may not be where institutions can really have an impact.…”