Infrastructure and real estate are increasingly being viewed as growth assets rather than portfolio diversifiers, with investors arguing they can play a much larger role in improving long-term retirement outcomes.
Private markets have long been discussed through distinct asset class buckets. Private equity was the growth engine. Infrastructure provided inflation protection and stable cashflows. Real estate offered diversification and income. At PMP’s Defined Contribution Forum, speakers suggested those distinctions are becoming increasingly blurred.
As DC schemes build larger private markets allocations, infrastructure and real estate are being asked to do more than simply diversify portfolios. Instead, both asset classes are increasingly being viewed as potential drivers of long-term growth, capable of improving retirement outcomes while also providing exposure to the real economy.
That shift was perhaps most evident in how Martyn James, director of investments at now:pensions, described the role infrastructure will play within the scheme’s private markets allocation. The now: growth fund is targeting CPI plus 3.5% net of fees, while the LTAF sitting within it is targeting significantly higher returns. Infrastructure will account for around a quarter of the private markets portfolio, alongside private equity and other growth assets.
“What we’re looking for from the LTAF is a target of CPI plus 6% net of fees,” James said. While some investors continue to view infrastructure primarily as a defensive asset class, he argued that DC schemes can afford to take a different approach. Younger members have investment horizons measured in decades rather than years, allowing schemes to move further up the risk spectrum in pursuit of stronger long-term returns. “We really want this to be a driver of growth,” he said.
That does not necessarily mean moving into highly speculative investments. Rather, James argued that DC investors should be willing to look beyond traditional core infrastructure and towards value-add opportunities capable of delivering higher returns. As long as portfolios remain diversified across sectors and vintages, infrastructure can play a much larger role in growth-stage investing than many schemes have historically assumed.
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The argument reflects a broader shift taking place across the DC market. As private markets allocations move towards the Mansion House Accord’s 10% target and potentially beyond, schemes are increasingly looking for multiple sources of return rather than relying predominantly on private equity.
For Surinder Toor, managing partner at Arjun Infrastructure, the opportunity set remains substantial. The challenge is not a shortage of assets, but a shortage of delivery. “There’s a big shortfall of capital available for UK investment. There’s no shortage of investment need,” he said.
Toor pointed to the scale of investment required across the UK’s existing infrastructure. The water sector alone is expected to require more than £100 billion of expenditure during the current five-year regulatory period, while energy networks, transport systems and digital infrastructure all require significant upgrades. Grid connection delays for renewable projects may extend well into the next decade, while major transport projects continue to face lengthy planning and approval processes. For Toor, these are not simply infrastructure challenges but economic ones.
“The physical infrastructure that needs investing in actually creates the efficiency,” he said, arguing that underinvestment in transport, utilities and social infrastructure has become a drag on productivity and growth.
That perspective also led him to challenge suggestions that the UK lacks investable opportunities. Instead, he argued that infrastructure investors are facing the opposite problem: an abundance of projects but too many barriers to getting them delivered. Asked what government should prioritise, his answer focused less on capital and more on planning. “I would put the planning under central control,” he said, arguing that a clearer and more consistent pipeline would unlock significant private investment.
[L-R Helyne Slade (chair), Surinder Toor, Steven Grahame and Martyn James]
While infrastructure is increasingly being positioned as a growth asset, Guy Glover, fund director at Columbia Threadneedle Investments, argued that real estate is suffering from an perception problem of its own.
Too often, he suggested, investors view property as a mature income-generating asset used primarily towards the end of a member’s journey. In reality, he said, real estate can be deployed throughout the lifecycle and, when structured correctly, has the potential to deliver significantly stronger outcomes. “Real estate is definitely a mature market,” he said. “But it doesn’t need to be boring.”
Glover argued that the sector offers far more than traditional open-ended property funds. Closed-ended vehicles, thematic strategies and targeted development opportunities can all be used to capture higher returns and make better use of the illiquidity premium available within private markets.
The result, he claimed, can be materially better outcomes for members. Comparing a traditional open-ended property allocation with a strategy that uses different real estate structures at different stages of the member journey, Glover suggested investors could ultimately be “three times better off” by retirement. “Real estate shouldn’t just feature at the end.”
[Guy Glover]
Glover challenged conventional models of portfolio construction; rather than treating property as a single allocation, he argued that investors should think about how different real estate strategies can be used during accumulation, pre-retirement and retirement. Closed-ended funds and thematic strategies could be used to maximise growth while members are decades from retirement, before gradually shifting towards income-focused and inflation-linked approaches later in life.
Glover also argued that the current market environment presents a particularly attractive entry point. Following a difficult period for parts of the property market, valuations have reset and new opportunities are emerging across sectors such as retail warehousing, residential development and operational real estate.
“It’s a really nice entry point,” he said. “Typically, after an adjustment, we’ll see double-digit returns coming through over the next five-year period.”
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Columbia Threadneedle has been positioning portfolios accordingly. During the pandemic, the firm invested heavily in airport assets and is now realising returns of almost two times invested capital. More recently it has built a significant position in the UK retail warehousing sector, attracted by rebased rents, strong occupier demand and the potential for double-digit income returns.
Yet despite the optimism surrounding both asset classes, speakers also warned against focusing exclusively on return targets.
Steven Grahame, senior investment research consultant at Hymans Robertson, argued that investors often spend too much time discussing labels such as core, core plus and value-add, and not enough time understanding the underlying risks within portfolios. “I think we’re going to start having a conversation about the risk spectrum of the underlying activity,” he said.
Grahame argued that assets that sit within the same infrastructure or real estate bucket can have dramatically different risk characteristics. He pointed to leverage, event risk and operational challenges as factors that deserve greater scrutiny, particularly during periods of market stress.
Drawing on his experience through the global financial crisis, he warned that investors should pay close attention to both capital structures and the resources managers have available to deal with problems when they emerge. “I think the risk conversation is something that needs to happen a lot more than it does today.”
While infrastructure and real estate may be taking on larger roles within private markets portfolios, investors still need to understand exactly where returns are coming from and what risks are being assumed to generate them.
The common theme running through the sessions was that real assets are no longer being discussed primarily as portfolio diversifiers. Increasingly, they are being discussed as return-generating assets capable of supporting the next phase of DC private markets growth.