Those Nordic pension funds that are not already investing in infrastructure will have at least discussed it, and may even be in the planning phase. Indeed, according to the results of nrpn’s quarterly investment survey – which polled 14 pension and insurance funds with €125bn of assets under management – 50 per cent of investors intend to increase their exposure to the asset class over the next six months.

Two years ago, it was an entirely different story. While funds in Australia and Canada have embraced infrastructure wholeheartedly for a number of years, the wave of interest has only recently reached Nordic shores.

According to Danish consultancy Kirstein Finans, Danish and Finnish pension funds are more bullish about infrastructure than their Nordic peers.

This year, the firm’s annual Nordic Investors Survey, which will be finalised in July, includes infrastructure for the first time.

Preliminary findings revealed that more than a third of the investors (35 per cent) expect to increase their allocation to infrastructure going forward, while none expect to reduce it.

“So far, the results show that Denmark and Finland have the biggest interest in infrastructure and that Sweden and Norway are lagging a bit behind in their interest,” says Jan Willers, financial analyst at the firm.

Perhaps unsurprisingly, those investors who were most interested in infrastructure were those who revealed a strong interest in other alternatives, such as private equity, hedge funds, and real estate.

The survey found that 65 per cent anticipate increasing their allocation to alternatives in general and 35 per cent expect it to remain unchanged.

“The trend has been for the pension companies to be involved in hedge funds and private equity and now they’re looking to another asset class that has a low correlation with the other assets in the portfolio,” Mr Willers explains.

“Because they are now more familiar with these other alternatives, they are seeking out new asset classes, and infrastructure is one of them.”

There are a number of reasons behind the rise in infrastructure investment by institutional investors, the key attractions being risk diversification, stable predictable returns and a strong link to inflation.

Unlike many businesses which are cyclical in nature, essential services such as roads, railways, power stations and water supply are typically provided under conditions of limited competition and are not subject to the movements of the economic cycle.

In addition, the long-term nature of a pension fund’s liabilities make assets linked to inflation an alluring proposition.

The proponents

Danish life and pension funds are leading the way when it comes to infrastructure investment in the Nordics. Prompted by the low interest rate environment and in search of alpha, consultants claim they are making moves to cut back their significant exposure to bonds in favour of alternatives, with infrastructure just one of the beneficiaries.

“With a very low interest rate level, and with the interest rate guarantees that the Danish pension companies have on their liabilities, they need to look for return somewhere, so alternatives tend to seem more interesting,” says Invensure chief executive Søren Andersen.

Industriens Pension made its first commitment to infrastructure this year, in the form of a DKr200m (€27m) allocation to a fund that invests in the US and Europe.

Jan østergaard, CIO at the fund, says further commitments are planned for the near future with the intention of building up a global portfolio of infrastructure investments. “Going forward a year we will probably have between two and four infrastructure funds,” he says.

“It is not our intention to invest directly; we will follow the strategy we have used for both traditional private equity and real estate, investing indirectly through funds.”

PKA has also thrown its weight behind infrastructure during the last 12 to 18 months, allocating between 2 and 4 per cent of its portfolio to such assets.

The eight PKA funds have invested in both pan-European and US funds in the energy sector, with a focus on environmentally friendly energy, such as bio fuels, windmills and hydropower.

“We have made commitments to funds but it is at a very low level; we are still in the building-up phase,” explains the fund’s CIO Michael Nellemann Pedersen.

In Finland, Varma Mutual Pension Insurance Company’s director of private equity, Risto Autio, says the fund has had “infrastructure-type investments” in its portfolio since 1996, but only began investing in infrastructure funds in 2004.

“We have committed €300m to funds but it’s not fully invested,” he says. “In three years’ time that commitment will be fully invested but we are making new commitments all the time. We can take as much exposure as we find rational so long as we can find good funds with a good investment strategy.”

At Norway’s NoKr1,891bn (€233bn) Government Pension Fund, discussions are continuing over the inclusion of infrastructure and real estate in its portfolio.

Arthur Rakowski, chief executive officer of the €4.6bn Macquarie European Infrastructure Fund II (MEIF II), which recently closed, says the fund has commitments from 19 Nordic investors who together account for about 17 per cent of the total capital raised.

Conversely, one of Macquarie’s more established infrastructure funds, which closed a few years ago, only had two Nordic investors at the time.

“It is equally spread between Denmark, Finland and Norway, from industry and municipal pension funds as well as asset managers and insurance companies,” Mr Rakowski says.

MEIF II will invest in a diversified portfolio of eight to 15 infrastructure assets across the European Union, while the €2.9bn Macquarie Infrastructure Partners, which is also closed, will invest in infrastructure and infrastructure-like assets in North America.

Sweden’s limitations

In Sweden, on the other hand, the situation is much more subdued. While there is evidence of interest in infrastructure, few have made commitments.

The AP funds are bound by a legal restriction which limits them to a maximum of 5 per cent in unlisted assets, meaning they have little opportunity to make any significant allocation to infrastructure, even if they want to.

Christina Kusoffsky Hillesöy, spokesperson for AP3, explains: “The Swedish legislation classifies infrastructure as unlisted investments which imposes limitations since we may not hold more than 5 per cent of our total portfolio assets in unlisted assets. Due to this legal restriction we can’t be as active as we would like to be. Our hope is that the Swedish parliament reviews this restriction in the near future.”

AP3 has allocated SKr1.3bn to infrastructure since its first commitment in 2005, SKr700m of which has been invested.

The capital is spread between four infrastructure funds which invest in Western Europe, primarily the UK; however, one has a mandate that includes North America.

Some of the other AP funds are also investigating a move into infrastructure, with a spokesperson for AP2 confirming the fund was “following it closely”.

However, occupational pensions company Alecta, one of Sweden’s biggest institutional investors, has not even considered the asset class.

It is not entirely clear why Denmark has thrown itself into infrastructure so unequivocally while Sweden takes a backseat. However Mr Willers suggests the difference could be cultural.

“In Sweden there is a big tradition for hedge fund investment and perhaps they are more into that and are not seeking out infrastructure as much as in Denmark,” he says.

Mr Nellemann Pedersen, on the other hand, puts it down to a difference in pension obligations.

“Infrastructure investment has come about in Denmark because we have some asset liability matching issues and very long duration on our liability side, so the infrastructure hedges our liabilities perfectly,” he explains. “I don’t think they have the same duration on the liability side in Sweden.”

Risk and reward

Unlike most investments, where the major risk relates to financial market volatility, the biggest risks within infrastructure investment are political and regulatory.

As a result, most Nordic institutional investors have picked funds that invest in developed markets with which they are familiar.

In most cases though, infrastructure appears to provide a relatively reasonable trade-off between risk and reward.

“Our view is that the biggest risk is mainly political, but in developed markets we view this risk as very limited,” Ms Kusoffsky Hillesöy says.

“Besides this, there are of course risks like a lack of liquidity, but we don’t view such risks as important due to our long term investment horizon.”

By investing through funds, which is the route most commonly adopted by institutional investors with exposure to infrastructure, these risks shrink even further than if the pension fund was to invest directly as a result of the portfolio diversification.

Mr Willers says: “Many of the pension companies are looking into the fund of fund structure for alternative investment for diversification. If you want to make direct investments and you’re not one of the biggest companies, it’s labour-intensive to pick out the best assets. Therefore most of the new investments in infrastructure would probably also be in the fund of fund structure.”

Commercial risk also has to be taken into account. However, as Macquarie’s Mr Rakowski explains, this varies depending on the investment.

“Some infrastructure investments have limited commercial risk, for example a regulated water monopoly,” he says. “It’s a monopoly so it has regulatory risk but no commercial risk. At the other end of the spectrum, an airport has commercial activity which introduces more potential commercial risk. Typically infrastructure assets don’t have risks associated with competition, so they avoid some of the biggest risks that companies in the commercial world face.”

Strong economy means Nordic governments holding on

Unlike many countries, whose governments are seeking to shift the financing for public infrastructure from their balance sheets, privatisation in the Nordics has been almost non-existent.

Anecdotal evidence suggests both the Swedish and Danish governments are coming around to the idea of privatisation, but with such limited infrastructure assets available to a steadily growing pool of investors, what does this mean for pension funds who want exposure?

Nicolai Berg, Nordic head of Mercer Investment Consulting, says: “My impression is that it’s natural when you start investing in a new asset class to invest in your domestic market. A lot of investors have been invested in domestic real estate for a long time, and we are now seeing increasing interest in exposure to non-domestic real estate based on an understanding of how the asset class works. Once you have invested domestically, it’s easier to move to foreign markets.”

Jan Willers, financial analyst at Kirstein Finans, believes it could present a barrier to new investors: “You might have the tendency to have a homeland or regional bias when investing in a new asset class, so it could be a barrier.”

The lack of available assets, according to Risto Autio, director of private equity at Varma Mutual Pension Insurance Company in Finland, comes down to the strength of the Nordic economies.

“I guess the Nordic economies are simply too strong to create a need for governments to sell or privatise infrastructure,” he says. “In our case we have been trying to find infrastructure funds investing in different parts of Europe and taking advantage of the different economic environment. That’s the only way we can get decent infrastructure assets; in the Nordic countries it’s not really practical or possible.”

Arthur Rakowski, CEO of the Macquarie European Infrastructure Fund II, agrees that the attitude towards privatisation of essential services across the Nordic region has been reserved compared with other parts of Europe. However, he doesn’t see this as a problem.

“I think that view is changing. The Swedish government has been making positive noises in the market about their interests in privatisation generally, and the government in Norway has in the past used private financing to build toll roads. The opportunities in Finland are only limited by the size of the economy and the country itself.”

He adds: “The opportunities are limited for various reasons, and maybe that’s why local institutions are attracted to investing outside the region, but it seems like a sensible strategy in any case, regardless of domestic opportunities.”

Both ATP and PKA are keen to capitalise on any sell off of public assets in Denmark.

Michael Nellemann Pedersen, CIO at Danish fund PKA, says: “We are weighing up the political situation in Denmark and if a situation is created where it would be possible for PKA and other pension funds in Denmark to buy some of the assets owned by public authorities, such as bridges, then we would be interested in looking at this.”

However Søren Andersen, CEO of Invensure, says he does not believe a lack of privatisation in Denmark would have any adverse impact on the potential for infrastructure investment.

“If you look at the Danish equity portfolios, they tend to be diversified globally nowadays, much more than Sweden, Finland or Norway,” he says. “We’re not as local as we used to be.”

ATP taking its time with €58bn allocation to infrastructure

The DKr431bn (€58bn) pension fund ATP has taken a pragmatic approach to infrastructure investment since making its foray into the asset class last year.

The fund has earmarked 3 per cent, or approximately e1.5bn, of its total assets to an infrastructure portfolio, but is not in any hurry to get these funds invested.

Henrik Jepsen, CIO for beta at ATP, says so far about 40 per cent of the 3 per cent allocation has been deployed in the market.

“We’re not saying we want to be fully invested in six months or one year’s time. We want to invest as we find the right opportunities,” he says.

Like most pension funds investing in infrastructure, ATP has opted for the indirect route, investing in the Goldman Sachs Infrastructure Partners fund and the RREEF Pan-European Infrastructure fund.

Both funds target the developed markets; while the Goldman’s fund has a global remit, the focus is on larger investment opportunities in markets with established legal, political and regulatory frameworks, particularly Europe and North America.

“One of the issues you have to deal with is how much political and regulatory risk you want to encounter in your infrastructure investments,” says Mr Jepsen.

“So far we are sticking with those regions where we know there is rule of law and we know the regulatory framework fairly well. It’s such a long-term investment that even if something goes wrong 10 years from now it would still be a problem.”

But macro risks aside, there is also the issue of market valuation. As demand catches up with supply, there is a risk that if they are not careful, investors will pay too much for the assets.

“When you invest in assets like this it is so important that you do the right due diligence and pay the right price,” Mr Jepsen says.

From ATP’s point of view, infrastructure is a natural choice of investment for a pension fund, given the long-term nature of the asset class.

What is more, Mr Jepsen notes that the return from infrastructure is linked to inflation, providing a good hedge.

“We like assets that give us inflation protection and stable returns that are long-term in nature,” he says. “Our aim is to increase our pensions that we pay out at least in line with the rate of inflation, so in that sense, it matches our target very well.”

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