Risk-assessment and scale will play a pivotal role in institutional investment in real assets, delegates heard at the joint in London.
Risk management 鈥渘eeds to start at the very beginning鈥� of the investment process, Tobias Reichmuth, chief executive of SUSI Partners in Switzerland, said on a panel discussing the evolving role of real assets in institutional portfolios.
Fellow panellist Barbara Weber, investment committee member at Switzerland鈥檚 IST3 Infrastructure Global Fund, said market risk 鈥渃annot be underestimated鈥�.
鈥淩isk at asset level needs to monitored,鈥� Weber said. 鈥淯nless you understand a sector well, it鈥檚 worth taking your time to study an asset before making a decision.鈥�
IST3 is, Weber said, now backed by 鈧�700m of capital from 17 Swiss pension funds.
Speaking on the same panel, Chris Rule, CIO at the UK鈥檚 London Pension Fund Authority (LPFA), said it focuses more on familiar domestic investment rather than foreign investment.
鈥淲e have a UK bias where we have connections,鈥� Rule said. 鈥淎n international investment would need more time.鈥�
The LPFA is looking for a 鈥�50/50鈥� mix of capital growth and income, Rule said.
鈥淲e are looking for a diversification benefit and for a degree of inflation linkage,鈥� he added.
In a presentation on increasing allocations to real estate, Macquarie Infrastructure & Real Assets head of research Daniel McCormack said there were 鈥渄iversification benefits鈥� in adding real assets to a portfolio.
鈥淩eal assets give you better performance,鈥� he said. 鈥淭he case for real assets is pretty compelling.鈥�
TIAA-CREF鈥檚 head of global private markets asset management Jose Minaya said investing in real assets was 鈥渁 challenge鈥� and required 鈥渟cale鈥�.
鈥淥ur goal is to find the right platform 鈥� that鈥檚 the challenge today,鈥� Minaya said. 鈥�To really play this in a direct way, you need scale, and that鈥檚 a big barrier to entry.鈥�
Infrastructure is, he added, expensive and illiquid.
鈥淏ut if you鈥檙e willing to take on that illiquidity, then the returns are there,鈥� Minaya said.
Returns, on an absolute and risk-adjusted sense, are better, McCormack said.
鈥淐apital will continue to flow in a low inflation, low-interest-rate environment.鈥�
John Campbell, chairman of Campbell Lutyens, however, said it would be a brave investor who completely bet against inflation.
鈥淵ou do not get inflation protection against all infrastructure classes,鈥� he said in a keynote speech. 鈥淚nvestors need to get on the curve, not behind the curve, and need to be early movers.鈥�
As institutional investors increase their allocation and knowledge of real assets, the dilemma of investing directly or through funds was also raised at the event.
Campbell said investors were 鈥渦nlikely鈥� to move to a direct approach, given the number of 鈥渂outiques鈥� now set up.
鈥淭he talk of going direct devalues the commingled approach,鈥� he said.
Rule said, with deals not 鈥渇alling into your lap鈥�, investors needed to build relationships.
鈥淏eing in a fund with a 10-year life isn鈥檛 necessarily wrong,鈥� Rule said. 鈥淐ritically, it鈥檚 about alignment.鈥�
The LFPA is deploying 拢500m in the next few years in partnership with the Greater Manchester Pension Fund.
Mike Weston, chief executive of the UK鈥檚 Pensions Infrastructure Platform, said there was a move away from co-investment towards consortium investment.
However, Weston, speaking on a co-investment strategies panel, said it was preferable if investors decided 鈥渆arly on鈥� if an investment was not for them.
Co-panellist Duncan Hale, head of infrastructure research at Towers Watson, said a 鈥渜uick 鈥榥o鈥� builds credibility and is preferred鈥�.
Hale said most institutional investors were looking at co-investments as a way of lowering fees and gaining control.
Investing directly, said Oldrik Verloop, Aquila Capital co-head of renewable infrastructure, requires 鈥渜uite a commitment, and there are many ways of gaining control鈥�.
鈥淲hether it鈥檚 a commingled fund or a consortium, alignment is needed early on, and getting the right consortium is really important,鈥� he said.
In the UK, public/private partnerships (PPPs) could be making a return, triggered by increased investor demand, delegates heard.
Legal & General Investment Management managing director of real assets Bill Hughes said there was 鈥減olitical will鈥� behind infrastructure in the UK, with government 鈥渟howing commitment and support鈥�.
Campbell said it was 鈥渁 national disgrace鈥� that the UK鈥檚 spending on infrastructure was so low.
鈥淐apital is needed 鈥� infrastructure cannot be developed any other way,鈥� he said.
The government is helping, Hughes said, with the real assets sector needing 鈥減atient capital鈥�.
Wim Vermeir, CIO at Belgium鈥檚 AG Insurance, raised the issue of how investors were working with governments.
鈥淥n one side, you have politicians saying we need more long-term investment in infrastructure,鈥� he said. 鈥淭hen you have regulators who say you need to be prudent.鈥�
With countries such as Spain moving away from a 鈥渃ulture of subsidies鈥�, lobbying, said Reichmuth, is crucial.
鈥淚t鈥檚 very important to talk to energy ministers,鈥� he said.
Weber said talking to regulators directly and lobbying at a higher level was key.
鈥淚鈥檇 be very surprised if that doesn鈥檛 succeed,鈥� Weber said.
