PGGM Puts Direct Investments and JVs at the Heart of its Infrastructure Investing Strategy

By Michael Dunning

GP managed infrastructure funds have been casting an anxious look over their shoulders as a growing number of institutional investors have chosen to invest directly in infrastructure assets. Direct investing, or co-investing alongside a GP managed fund, is changing the way infrastructure investors approach the asset class. It’s changing the type of investments GP managed funds make; it’s changing the focus those funds place on operating and managing infrastructure assets; and it’s changing the fees they charge to manage institutional capital.

For institutional investors, it’s changing the way they resource their businesses as they seek to follow the Canadian and Australian direct investing pioneers such as the Ontario Teachers’ Pension Plan (OTPP) and Borealis that have been using direct investments to gain exposure to the infrastructure asset class for many years.

Leading the charge among European institutional investors is the Dutch pension fund administrator PGGM, which manages EUR105bn of retirement savings for employees in the Netherlands’ healthcare and social services sectors.

Last month PGGM announced an innovative new joint venture with Royal BAM Group, also of the Netherlands, to invest in infrastructure assets. The 50/50-owned enterprise will focus on transport and social infrastructure PPPs.

The initial target value for the joint venture is EUR390m, which involves the transfer of EUR150m worth of existing PPPs from BAM’s portfolio. The remaining EUR240m will be allocated to new projects, which are still to be acquired. PGGM is providing the lion’s share of capital for existing projects, whereas future investments will be undertaken on a 50/50 basis.

“It makes sense to combine a long-term investor and a very big European construction company,” says PGGM’s head of infrastructure, Henk Huizing, in an interview with InfraNews. “For BAM, it is important that they have the equity to make new bids. It is important for us to have a long-term stream of PPP assets that are relatively low-risk operational and yielding assets.”

This is not the first time PGGM has moved to create a joint venture to combine its financial muscle with a developers’ operational know-how. Late last year it teamed up with Lend Lease to create a GBP220m (EUR250m) fund. Although not as big as the BAM deal, the partnership also focuses on PPPs and includes investments in current operational and future projects. One of the attractions of such deals for pension funds and other institutional investors is the absence of volume risk and low counter-party risk.

GP Managed Funds Have Fallen Short
However, there are a number of other factors that have been driving PGGM towards schemes like the BAM and Lend Lease deals. High on the list were the fees that GP managed funds charged – management charges are now around 1% although they used to be more costly at around 1.5%-2% - and the failure of certain GP managed funds to deliver the returns they had promised.

“Funds are expensive”, says Huizing bluntly. “Also, as a pension fund you don’t have control over your assets or the construction of your portfolio. In theory, and in practice, you can end up with a portfolio you didn’t intend.”

The relatively mixed performance of GP managed infrastructure funds is another major factor. Those funds that have focused on PPP-type projects have generally performed much better over the past number of years than those that have targeted assets that are exposed to volume and price risk. That mixed performance, notably among the latter type of funds, has more-often-than-not been related to the quality of asset selection. If a single asset in a fund underperforms it can mean that the fund’s proposed target returns are never reached and investors have to then live with the consequences.

There is a route institutional investors can take in order to avoid those problems.

“If you invest directly you can choose the assets you want and construct the portfolio you want. Another very important element is that those infrastructure funds have a lifetime that is typically eight, 10 or 12 years. We invest in infrastructure assets that have a lifetime of 30 or 40 years,” says Huizing. “We see infrastructure investment providing a long-term, continuous and stable cash-flow, so you should have an annual yield year-in year-out. We started direct investing two years ago and have made some significant and strong-performing investments.”

To read the full article, click here: http://www.infra-news.com/analysis/investor-watch/872278/pggm-puts-direct-investments-and-jvs-at-the-heart-of-its-infrastructure-investing-strategy.thtml

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