A conservatively managed infrastructure investment portfolio is commonly understood to provide investors with long-term stable returns and increased portfolio diversification, as well as acting as a hedge against inflation. Predictably then, infrastructure investment attracts institutional investors with long-term liabilities to meet, such as pension funds. As a result, public and private sector pension funds are common within a fund manager’s client base, and represent 35% of the total number of institutional investors currently active within the infrastructure asset class globally.
The most common route to the infrastructure market for pension funds is via third-party unlisted infrastructure vehicles. Ninety percent of public and private sector pension funds actively investing in infrastructure look to make commitments to unlisted vehicles, while 15% make direct investments and just 7% target listed fund vehicles. Although interest in direct investment is growing, unlisted vehicles will continue to remain the primary route to market for pension funds in the future. However, the preferred route to market for pension funds is often influenced by the size and assets under management of each firm. For the larger pension funds with greater capital available, direct investments or debt financing opportunities are often a preferred route to market as a way of avoiding fund management fees, thus increasing returns and creating a more bespoke investment
Pension funds source capital for infrastructure investment from a number of different areas. Less experienced, smaller pension plans tend to invest via a general alternatives, private equity, opportunistic and/or real assets allocation, while the more proactive, and often larger pension funds create separate infrastructure-specific allocations. Twenty-seven percent of active pension funds maintain a separate infrastructure allocation, while 16% invest via a private equity allocation and 11% via a general alternatives allocation. Eleven percent invest via a real assets allocation while a further 2% through an opportunistic investment portfolio.
The relatively novel nature of the infrastructure asset class and a lack of human resources mean many pension funds utilize the services of an infrastructure investment consultant when making investment decisions. Eighty-one percent of the pension funds profiled on Preqin’s Infrastructure Online database make investments based on the recommendations of a consultant, with the remaining 14% relying on the services of an internal in-house advisory team. Consulting firms actively providing infrastructure services include Hewitt EnnisKnupp, Hymans Robertson, JANA Investment Advisors, Mercer Investment Consulting and Towers Watson.