A cautionary tale

In the months following last November’s Autumn Statement, it’s been impossible to go to any industry event without seeing at least one person from a pension fund or insurer taking to the podium to talk of their willingness to invest in UK infrastructure.

Just a few weeks ago at our very own Big Question event, entitled ‘Can infrastructure projects attract institutional investors?’, there were a number of representatives on the panel who are closely involved in the discussions with Infrastructure UK over how to get more of their money into the infrastructure arena.

As some have pointed out, the answer to our Big Question is, in one sense, straightforward: they already do. Plenty of pension funds, insurers and other investors are happy to put their money into infrastructure because they see it as a safe investment.

In the majority of cases, they only ever invest in the secondary market, where they can get nice, safe returns with little risk of the building falling down.

The fear with which investors eye the much riskier construction phase is demonstrated by the reaction of investors in the Henderson PFI Secondary Fund. Fund manager Henderson Equity Partners is facing legal action from investors, over its decision to buy John Laing – a company that develops new projects, rather than simply managing existing buildings.

And these investors are not small organisations: they are believed to include the likes of supermarket giant Tesco and private health firm Bupa’s retirement schemes. They would not be taking legal action if they weren’t seriously concerned over the exposure to construction risk that the acquisition of John Laing poses.

It seems likely, therefore, that whatever solution is developed to bring investors into greenfield projects, it will have to include at least some involvement from banks to put up the most vulnerable chunk of debt. Legal and General’s Georg Grodzki, at our event, said his firm is working with banks to develop a solution, but it will take time. Just ask anyone at Hadrian’s Wall Capital, which has been working towards the idea of mezzanine debt taking the riskiest portion of the project cost with pension funds investing in the safer debt not for months like the government, but years.

If the Treasury really sees institutional investors as the saviours of infrastructure investment, there will be a long wait before any money starts to flow.

To read the full Big Question write-up, see the April issue of the magazine.