Andrew Short asks if plans to get additional investment in infrastructure, announced in George Osborne's autumn statement, will be attractive to UK pension schemes or a bridge too far?
The Treasury is pulling its hair out trying to find ways of bringing pension funds into infrastructure investment. In his autumn statement, George Osborne announced he will try to unlock £20bn of pension fund assets to invest in private infrastructure in a bid to "overhaul the physical infrastructure of our nation".
However, there does seem to be an unusual amount of vagueness of the plans. We've also been here before - the National Infrastructure Plan 2010 detailed the unlocking 200bn of capital from the private sector. (PP Online, 17 Oct) When pressed the treasury could not confirm if anything had been invested in the asset class as a result.
So what about the plan MKII - there has been a lot of talk about the memorandum of understanding signed by some of the UK largest pension funds but no real detail about how projects will be presented and how pension funds will be brought into the mix is not clear.
The attraction of infrastructure is understandable for schemes such as the Universities Superannuation Scheme, BT or any other large funds with the resources to employ specialist to investigate these very complex deals. The promise of long-dated, inflation protected cashflows - the standard chat of those banging the drum for infrastructure investing - is a decent draw.
But let's not forget the equity versus debt debate. The traditional structure of these projects can make them appear similar to private equity ventures. A thin layer of equity is provided by an investor, say a pension fund, and the rest of the project is financed by debt. This gives a 10% equity/90% debt structure.
This structure can be problematic for those invested in the equity slice and as it is equity it has all the characteristic volatility. Except they are often highly leveraged, and also some assets may be highly cyclical. Getting the direct infrastructure debt is an investment category reserved for only sophisticated institutional investors.
Pension schemes need to get at this debt although most of it traditionally languishes on bank balance sheets funding inflation linked swaps. However, banks have stopped funding these deals and the Treasury has acknowledged this in the plan and that's why they've been banging down the doors of pension funds.
However, to make these deals attractive the Treasury will need to structure new deals so that pension schemes can get their hands on the debt, but how will they do this?
We'll have to wait until the full details are released but there has been lots of speculation that they may create an internal fund management-type structure in the Treasury.
Barclays Corporate head of infrastructure debt David Cooper believes there will need to be an external fund manager to the Treasury to manage the assets
"If government are too involved in the creation of the fund manager then there's an obvious conflict of interest, bearing in mind they are likely to be government assets that pension funds will be buying," says Cooper.
Cooper also questions the merits of this: "If the fund manager was going to sit in government, you'd potentially question everything from the price paid for those assets to the position the fund manager might adopt in any dispute," he adds.
