The Direct Approach: Pension Funds and Direct Infrastructure Investment

by Morgan McKinnon-Snell

  • 17 Jul 2017
  • INF

With larger amounts of assets at their disposal, pension funds* are becoming more prominent direct investors in infrastructure, and are now able to compete more frequently with dedicated infrastructure firms for assets. Preqin’s Infrastructure Online contains detailed profiles of 56 pension funds that have invested directly in infrastructure opportunities in the last 10 years, participating in 275 direct investment deals. The average size of deals completed by these institutional investors over the period is $1.3bn, significantly higher than the rest of market at $525mn for all deals completed in the period. This trend towards direct investment is highlighted by the acquisition of the entirety of DIF Infrastructure Fund II’s portfolio (including stakes also held in the assets by DIF Infrastructure Fund III) in July 2017 by Netherlands-based APG, on behalf of the public pension fund ABP. This €700mn transaction is expected to be completed in the next few months.

The First Movers
As shown in the chart above, pension funds’ direct investments have increased in both number and value in recent years, with 2016 seeing 33 transactions completed for a record $48bn. Much of the early activity in 2007/2008 was driven by Canada-based pension funds, which accounted for 56% of all deals completed by pension funds. Notable pre-2009 deals include CPP Investment Board’s (CPPIB) $899mn contribution to a $7.4bn acquisition of North American power distributor Puget Energy; and TIAA’s acquisition of a 50% stake in the $1.7bn deal to build and own the I-595 Express Corridor in Florida, US, which eventually led to TIAA purchasing the remaining 50% stake in October 2011. Highlighting the early adoption of the direct model in Canada, just three pension funds – CPPIB, CDPQ and Public Sector Pension Investment Board – accounted for 31% of direct deal flow and 48% of reported aggregate deal value in the past ten years.

The Strategy
Unsurprisingly, the data suggests that the large majority of pension funds investing directly target core strategies: 78% of deals completed are categorized as secondary stage assets, and 80% of transactions have involved transport (36%), energy (33%) or utilities (11%) assets. Reflecting this preference for core investment, 89% of direct pension fund activity in the last decade has been in developed markets, namely North America, Europe and Australasia. Recent examples include OMERS’ participation in the A$9.7bn acquisition of the Port of Melbourne in Q2 2016 and AustralianSuper’s involvement in the A$16.2bn privatization of Ausgrid, a major Australian power utility, in Q3 2016.

*Analysis includes public pension funds, private sector pension funds and superannuation schemes.


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