Q&A: Pension-controlled capital: the perfect partner for infrastructure projects

Pension-controlled capital is increasingly a major player in global infrastructure investment. But what makes it different to other types of finance? David Cooper, regional head of EMEA, debt investments, and Irini Kalamakis, global head of investor relations, at IFM Investors, an Australian investment manager owned by 27 pension funds, with £65 billion assets under management as at December 31, 2018, explain the advantages


How do pension funds differ from other private-sector infrastructure investors?

David Cooper: Major infrastructure projects are, by their very nature, long-term assets which need to be matched with access to funding over the long term. The modern-day responsible infrastructure investor should not expect their managers to realise a core infrastructure asset every seven years to crystallise returns; in fact, some investors have even shorter tenures. Instead, pension-controlled capital brings an opportunity to take a long-term approach, often a decades-long horizon, and importantly allows investors to be a more attractive, trusted partner to the public sector, whether governments or local authorities. We take care to remember that any of the 15 million members we serve may be the ones using the infrastructure on which we invest in on their behalf. Responsible infrastructure investing is here to stay, and partnerships between the private sector, regulators and end-users can ensure it works for everyone.

Do pension funds take into account the views of the individuals they invest for?

Mr Cooper: Absolutely. It is not unusual for me to hear from a client at a pension fund passing on feedback from end-members. In fact, we often hear constructive commentary from pensioners concerned about the dangers of fracking, for example, or those who don’t want any exposure to coal investments. We invite robust discussion and it is important to note that IFM Investors invests through open-ended vehicles, which we believe gives our institutional investors the option to hold us to account in relation to our investment decisions. In addition, our infrastructure equity products all have investor advisory committees, which meet quarterly. Investors are not shy at expressing their views, and those of the people they represent, all of which helps shape our ethical principles.

What are your ethical principles?

Irini Kalamakis: We are signatories to the United Nations-supported Principles for Responsible Investment and our investment decisions are guided by three core beliefs. We demand our investments contribute to a healthy environment, a stronger and more inclusive society, and be regulated by strong governance. We also publish a detailed report on our infrastructure carbon footprint each year, with pathways to improving emissions and energy consumption.

Can you give an example of infrastructure investing that reflects this ethical approach?

Mr Cooper: We are a major investor in Manchester Airports Group (MAG), which is the largest UK-owned airport operator. It comprises Manchester, East Midlands and London Stansted airports, serving 58 million passengers a year. We co-own MAG with the ten metropolitan borough councils of the Greater Manchester area. Manchester Airport became one of the first in the UK to become carbon neutral following a £7.5-million investment in energy efficiency by purchasing clean electricity and offsetting emissions. It installed 25,000 low-energy LED lights, including the first on any UK runway. Overall, we are investing £1 billion in MAG to ensure it is fit for the 21st century, and our long-term commitment has helped to create 22,500 jobs for the local economy and increase apprenticeships and educational opportunities. MAG is a strong example of a well-aligned partnership, demonstrating how pension-controlled capital can contribute to essential infrastructure with really great outcomes.

There is talk of an “infrastructure gap” globally, so can pension funds help bridge that gap over the next 20 years?

Ms Kalamakis: We believe so and there are many studies to support this, such as the World Bank and McKinsey pointing to a big deficit in the amount of money economies are spending on infrastructure. In more developed economies, such as the UK and United States, there is a mismatch between what the economy needs and what politicians want to do to win elections. Often minor upgrades to roads can deliver economic benefits, but aren’t vote winners. Where pension funds can really contribute is where there is a partnership and alignment between government and investor. Pension funds think long term and in the UK we’ve seen partnerships result in projects, which create jobs, apprenticeships and opportunities in education.

There is a reputational issue in the UK around private sector investment in public projects. How can pension-controlled capital improve the situation?

Mr Cooper: Private sector participation in public infrastructure projects has become highly politicised in the UK. However, there is no doubt the industry has been slow to respond, partly because it is fragmented, but also because no one has stood up and really made the case for the advantages. I would point to the success of projects in Europe, where private finance routinely invests in infrastructure alongside the state to deliver significant benefits to the public sector, the economy and, of course, the end-users. The fundamental difference is that in Europe there is normally cross-party support for private capital investment. As an industry, we need to be better at pointing to the track record of pension-controlled capital investing in a long-term, ethical way, structured around regulation and strong governance, and why and how it benefits millions of end-users and members, driving global economic growth. Examples of this are IFM Investors’ collaboration with MAG, but also our ownership of Indiana Toll Road in America, where we have committed $200 million to improve the quality of a 156-mile road and completed this major construction project in a boost to local employment, while seeing a reduction in accidents across the workforce.

What difference can pension-controlled capital make to infrastructure in the UK?

Ms Kalamakis: The UK is well placed to take advantage of pension-public partnerships by long-term, responsible owners and the benefits of asset recycling. Unlike many traditional suppliers of infrastructure capital, pension funds are uniquely placed to sustain relatively illiquid investments such as infrastructure. Their members’ long-term investment time horizon aligns with the long-term life cycle of such investments, and are therefore much better aligned with both community and government expectations. In the end, it is the pensioners we represent who are going to be using the assets we build, from airports to roads and telecoms to ports. Our interests are all genuinely aligned for the long term and that is what makes a real difference.

For more information please visit ifminvestors.com/Infrastructure