‘Infrastructure is moving center stage’
The European investment bank (EIB) spilled a net €12.25bn into infrastructure projects in 2018, accounting for roughly 19.1% of the total amount invested by the institution last year (€64.19bn).
As for the Juncker plan, the European commission estimated some €52.7bn have been allocated to 511 infrastructure projects from the implementation of the plan in 2014 to the end of 2018, via the European fund for strategic investments.
In Belgium, 22 infrastructure and innovation projects received support of the Juncker plan in 2018.
It is in the Belgian capital that four infrastructure investors discussed trends and risks of the asset class at the occasion of the first European Investors Day event held on 6 June at the Steigenberger Wiltcher's hotel by L’Agefi and Politico.
Unveiling his personal view on infrastructure, Nicolas Firzli, general director of the World Pensions Council, remarked “infrastructure investment is moving center stage”.
“Infrastructure may have been a boring engineering issue in the past but not anymore. A forum attended by Xi Jinping, Vladimir Putin and some 50 ministers from the whole Eurasia region recently took place in St Petersbourg. A main topic was the New Silk Road. And this is happening at the same time Boris Johnson, who remains among favourites to succeed Teresa May at 10 Downing Street and who used to be hostile to infrastructure, delivered a speech in which he fostered pension funds and countries worldwide to co-invest with the UK government in Britain’s infrastructure assets”, Firzli said.
The infrastructure asset class just faced two record years in 2017 and 2018. Consultant Preqin assessed allocation to infrastructure funds last year totalled €85bn. Florent Del Picchia, head of euro debt infrastructure at Aviva Investors, said there is room for further fundraising increase in 2019, highlighting high investment needs and that the public sector or banks still mostly fund projects.
“It is a little more complicated on the equity side than on the debt side as volumes are smaller. Funds tend to exit after 10 to 15 years in equity infrastructure funds and the buy and sell timing issue is more significant”, noted Del Picchia whose company manages around €10bn in infrastructure assets.
In 2018, Belgian alternative manager PMV funded 65 infrastructure projects for an invested capital of €168m, of which new investments accounted for €16m, said PMV’s general manager Michel Casselman. The company is considering mainly low risk infrastructure projects.
Similarly to Casselman, Wim Vermeir, group head of investments at Belgian insurance company Ageas, favours low-risk infrastructure as he seeks returns and prefers defensive assets. During the Brussels EID’s panel, he made the case for a flexible approach to infrastructure.
“I clearly say to my infrastructure team that if they do nothing this year, it is not a problem. We have no target in the infra market and we compare the asset class with others. We can go for SMEs financing, real estate loans, Dutch mortgages”, he said.
Know your contracts
Firzli drew attention on the need for investors to bear in mind that things can go wrong with infrastructure mainly because of the asset class’ illiquid feature. One investor’s risk he raised is the country risk he termed “the elephant in the room”.
“In many ways, the current French yellow vest movement looks like a rehearsal of the red caps movement that started in October 2013 in Britanny. Responding to a demand of the French State, the company Ecomouv designed highway portals for truck drivers to pay a tax. It was modern, ESG-driven, hence ticking all boxes. Italian insurance firms and pension funds funded directly or indirectly the building of these portals. Then the red caps protesters destroyed the portals and the French government had to backpedal on its commitment. The Italian institutions which funded the building of the portals threatened to sue the French government and earned over €1bn in the end”, he explained.
The World Pensions Council’s general director added that law matters much therefore investors have to hire teams of civil engineers, architects and lawyers who will spend months to draft a 5.000-page contract before investing.
Juncker plan: "More could have been done in easing the granting of building permits."
Michel Casselman, general manager, PMV
Knowing and managing the content of infrastructure contracts is fundamental for PMV’s Casselman, arguing it makes a difference. “On the equity infrastructure side, you can anticipate the risks before they come out. You invest for 20 to 30 years, a period during which you will manage the asset. The teams are changing and 20 to 30 years later, none of the people that negotiated the contract work for the firm anymore”, PMV’s general manager highlighted.
About climate risk, he depicted it as an element that is always around but very hard to detail and to assess immediate impact of.
Aviva Investors’ head of Euro Debt Infrastructure Del Picchia, who agreed investors in European infrastructure are well protected by regulation, said the difficulty dwells in “knowing if and when known risks will materialise”.
“There are several risks including regulation and recession. But risks become difficult to assess as changes in society are occurring at faster pace than ever. If car-sharing becomes a norm, car parkings will become useless, even more if the concept of flying cars gets real. We need to anticipate that and today it causes me more concerns than regulation”, Del Picchia explained.
Wermeir, CIO AG Insurance, said in infrastructure, investors must stick with their investments until maturity without the choice to pull from them. He declared “on the one hand, the focus on greener infrastructure reduces the number of opportunities in the market, like in real estate, as a number of buildings are completely obsolete regarding environmental efficiency.”
“On the other hand, it is creating a new market so it is not that negative.”
Juncker plan is “good”
Says PMV’s Casselman, the infrastructure pipeline is huge in Europe but full of struggling projects.
“We have not done enough at European level. The Juncker plan was about helping European real economy to grow but also lowering hurdles to make business. Infrastructure has not moved much on this. We need more harmonised processes. Of course, individuals should have a say on ongoing infrastructure projects but there must certain limits to that”, he said, adding that more could have been done in easing the granting of building permits.
For Firzli, Europe can take example on the United Kingdom as net new money is flowing into British infrastructure projects in spite of the Brexit country risk. He also sees an issue in the fact that in addition to granting concessions at national, regional and municipal level, mainland Europe’s governments are authorised to invest as co-investors in infrastructure projects, to be clients in the asset class and judges as a last resort if investors want to sue them.
Ageas group investment head Wermeir branded the Juncker plan “a good plan” but said his team does not take into account the Juncker label stamp when considering infrastructure investments. Aviva Investors’ Del Picchia said the Juncker plan had been a big success so far even though auditors casted doubts on its real benefits. “It is difficult to know how much would have been done without the plan. Solvency II has had a positive impact on the asset class. It is right to say big infrastructure projects do not need this kind of support but it proves useful for smaller-sized infrastructure projects like building renovation”, Del Picchia argued.