Stephen O’Shea from Igneo Infrastructure Partners discusses why infrastructure continues to be popular with pension fund investors and outlines the benefits of using direct infrastructure managers.
Real assets has been an asset class very much in favour with investors over the last few years. Allocations continue to increase, with pension funds particularly attracted to the long duration profile of the opportunities. Within the wider real assets arena, direct infrastructure has been a clear focus for investors. Why has this been the case and what is the most effective approach to managing direct infrastructure investments?
Why infrastructure, why now?
To start with, let’s consider why infrastructure has proven so popular with pension fund investors. The primary attractions are clear:
- Asset/liability matching: The long-duration nature of many infrastructure assets (such as energy, transportation, utilities, and communications networks) aligns well with the liability profile of many pension funds.
- Low volatility: Returns from unlisted infrastructure assets have proven less volatile versus other asset classes, such as equities. Given the long-term nature of the underlying assets and their typically regulated or contracted revenue models, this is not surprising.
- Genuine diversification: Core, unlisted infrastructure assets demonstrate low correlation to economic and market cycles, and therefore provide genuine portfolio diversification benefits.
- Dependable yield: Often with contracted or regulated business models permitting long-term sustainable returns, income streams benefit from indexation and high visibility and predictability.
- Stability: Essential service provision, long-term debt profiles, and regulated/contracted business models make infrastructure assets relatively resilient to economic volatility, rising interest rates and inflation, and thereby offer stable returns over the long term.
Perhaps given the current global economic backdrop, it is unsurprising that infrastructure has maintained its mantle as one of the most attractive areas for pension funds. However, while these attractions are applicable to the overall asset class, different approaches to the management of infrastructure assets within a portfolio can yield different results.
Different approaches yield different results
One of the most powerful and effective elements of an ESG-led proactive asset management strategy is the opportunity it creates to forge a genuine partnership with the investee businesses. This is most effectively achieved through the direct infrastructure investment route where, as sole or lead shareholder, direct infrastructure investors proactively work with company management teams implementing and driving long-term business plans creating long-term sustainable value.
One of the largest global direct equity infrastructure investors, Igneo Infrastructure Partners, has been doing this for 30 years. Managing around US$15bn* of client assets, Igneo provides an insight as to how asset managers can add operational value and build sustainable growth. As the lead shareholder, direct infrastructure investors such as Igneo drive business strategy at board and operating level and help define and thereby manage risk.
As a global manager, Igneo’s portfolio of businesses are located across continents and are represented by a diverse range of sectors. The opportunity therefore exists to share experiences and expertise, promote technology transfer and generally leverage the learnings across the wider portfolio and add value to individual businesses. For ESG-led and proactive managers such as Igneo, a prerequisite to investment is the ability to apply operational knowledge and innovation to develop sustainable businesses that stand as leaders within their fields.
*Source: First Sentier Investors, as at 30 June 2022
ESG – an investment opportunity
This process of adding value is driven by an approach to proactive asset management that has been ESG-led since we began investing in direct infrastructure businesses. An understanding that partnering with investee businesses to help integrate ESG best practice is not a cost, but an opportunity. Real value is created through securing the long-term sustainability of businesses, improving workplace health and safety, strengthening governance across the business, establishing improved diversity and long-term management succession planning within the workforce and implementing net zero emissions plans.
An ESG-led focus on proactive asset management helps identify, manage and mitigate risk, as ESG failings in high-profile businesses causes reputational risk and inevitably impairs asset values. Constructive ESG engagement with company management not only mitigates risk, but presents opportunities to add value.
On environmental issues, investments in green technology can improve energy efficiency, reduce emissions and lower operating costs, such as through the substitution of fossil-based energy sources with renewable or hybrid alternatives. Macro trends and growth drivers, such as electrification of transport, require additional investment to expand energy grids, build charging infrastructure and promote wider adoption of renewables and energy storage.
Direct infrastructure investors can access these investment opportunities and provide the capital required to deliver innovations and secure the benefits they can bring.
With the correct approach to asset management, direct infrastructure managers are able to enhance the returns available from the asset class. Managers such as Igneo can leverage expertise gained from across their portfolio to enhance processes, mitigate risk and create long-term sustainable value. It all comes down to a proactive management approach that is genuinely ESG-led. The reward is building sustainable infrastructure businesses to the benefit of all stakeholders, not least investors.
