BMI View: Reinforcing our bullish view of the role that cash-rich pension funds will play in the infrastructure finance sphere, a European heavy-weight, PensionDanmark, has announced a long term commitment to the sector. Regulated utilities in the European and North American markets will be the sectors and regions of choice, though the fund said that it is planning a venture outside of Europe and the United States at a later stage . Low bond yields are the main reason for this portfolio diversification, and we see PensionDanmark's decision to explore infrastructure as reflective of a wider industry trend.
BMI expect s interest rates to remain anchored near zero for the foreseeable future, thus (in tandem) keep ing bond yields in negative territory in real terms . Based therefore on BMI's long term forecast for policy rates in Europe and North America, we expect that an increasing number of pension funds will actively pursue higher-yield, alternative asset class investments. The long dated maturity and inflation-linked, stable returns from infrastructure assets (especially regulated utilities in OECD markets) , match the mandate and risk profiles of the pension funds industry.
|Not A Good Outlook For Yields|
|Central Bank policy rate, % end of period|
Over the medium term therefore, we would also expect to see the rising number of pension funds that are getting into the market translate into higher fundraising, which has been in a tentative recovery phase since 2009. However, there is a caveat to this expectation stemming from the much more active role taken by pension funds as managers and owners of assets, thus by-passing the infrastructure funds sector altogether. Therefore, a moderating of growth in fundraising could also be reflective of a more structural change in the infrastructure funds community, with some of their largest clients i.e. the pension funds, taking a more independent approach.
PensionDanmark said that it has earmarked EUR800mn for investments in regulated utilities in Europe and North America, specifically transmission grids, water supply, and biomass power generation, but excluding wind farms, where it already has exposure. This will be a first tranche investment that will take place over the next three to four years and be equivalent to 4% of its current total assets under management. It will then release a second tranche of another EUR800mn over the next four to five years, taking its allocation to equivalent to 10% of total assets, and which could be allocated to assets outside of Europe and North America as well. It has established a new vehicle, Copenhagen Infrastructure Partners to manage its infrastructure ventures.
It seems that Copenhagen Infrastructure Partners will be looking at direct equity stakes in projects, though allocations in competitively priced infrastructure funds could also be an option. It is reportedly also looking at its own fundraising at a later date. Fundraising has picked up since the collapse of the market in 2009. According to data by Probitas Partners, in the first three quarters of the year, fundraising reached nearly US$17bn. If it can surpass the US$20.8bn raised globally over 2011, then 2012 will have marked the third year of rising infrastructure fundraising.