London CIV is working up proposals for a global infrastructure mandate worth up to £200m amid concerns over the risks and returns on offer from UK investment opportunities.
The move comes after London CIV rejected options to invest with the Pensions Infrastructure Platform (PIP) and GLIL, an infrastructure joint venture between Greater Manchester Pension Fund and the London Pensions Fund Authority.
The PIP platform has 100% of its investments in UK infrastructure, while GLIL has around 80% invested domestically, according to an analysis by the London CIV.
However, the CIV has decided to go down a global route after deciding it would be “imprudent” to overexpose itself to UK infrastructure.
Ryan Smart, investment analyst at the London CIV, told Room151: “Investing in UK infrastructure offers many benefits. Taking advantage of local knowledge and networks may lead to superior investment outcomes.
“Moreover, when compared to investing overseas, one can save on costs such as currency hedging.
“Collaborating with other infrastructure vehicles such as PIP or GLIL can also reduce the fee burden in an asset class where fees remain elevated.
“However, we feel it prudent to offer more geographic diversification to the London’s local authorities for the first fund in our product suite given perceptions of growing political, economic and regulatory risk in the UK, as well as superior risk-adjusted returns overseas for ‘core’ assets.”
Documents outlining the London CIV’s approach, seen by Room151, reveal concerns about the impact of the Brexit vote and a future Labour government.
The document said: “UK political risk is heightened in the aftermath of the Brexit vote, and relatedly, a potential future change of government could lead to a sharp repricing of core infrastructure assets due to concerns over renationalisation and regulatory changes to existing contracts.”
The document also noted that returns for core UK assets are in low single digit figures, “failing to provide adequate compensation for [political risk], particularly when compared to the (net) returns on similar assets overseas”.
Such worries could provide a blow to those in the Treasury who encouraged the pooling of Local Government Pension Fund Schemes in order to boost investment in UK infrastructure.
Speaking at the Conservative Party conference in 2015, then chancellor George Osborne said: “At the moment, we have 89 different local government pension funds with 89 sets of fees and costs.
“It’s expensive and they invest little or nothing in our infrastructure. So, I can tell you today we’re going to work with councils to create instead half a dozen British Wealth Funds spread across the country.”
However, evidence of a drop in the attractiveness of UK infrastructure as an investment class was also born out in a survey by law firm CMS.
The UK dropped from top spot to fourth in an annual league table of nations most attractive to investors.
The report said: “Brexit and political uncertainty are having a considerable impact on the pipeline of projects.
“The National Infrastructure Commission (NIC) is warning of significant challenges unless there is stronger, strategic planning around infrastructure. Despite this, investors still consider the UK to be a strong market.”
And William Bourne, principal at financial adviser Linchpin, said: “I don’t share the view of the London CIV paper that there is significant political risk in the UK.
“There is some risk, I agree, and it may be that the price premium over global infrastructure is less justified going forward.
“On the other hand, overseas investing involves additional currency risk – i.e. is a less good match for a fund’s liabilities.
“I would suggest some diversification overseas is justified, but that the UK should still, if suitable opportunities can be found, form a decent chunk of any portfolio. A bit like equities or bonds in this respect.”
Bourne also played down any risks posed by any future renationalisation, saying: “Could the state renationalise?
Photo (cropped): Pexels/Pixabay, CCO
“Yes, but it would require a Corbyn government with power, considerable legal battles and a lot of money — shareholders got quite a lot back even after Railtrack was put into administration.”
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