Pension fund investment in infrastructure: What have we learnt?

INTRODUCTION: THE ASSET ALLOCATION BACKGROUND

Investing in infrastructure has become increasingly popular with pension funds in recent years. Infrastructure is presented as one of the new alternative asset classes ('alternative' to mainstream equities and government bonds), expected to provide new sources of return and better diversification of risk.

The key driver in this process is a new approach to asset allocation after the previous financial crisis of the early 2000s (when the tech bubble burst), which led to substantial pension funding deficits.

The idea of investing in infrastructure strikes a chord with many pension plan trustees and members. Infrastructure feels more 'solid and real' than many other complex products and strategies presented, in which they find it difficult to detect the underlying value. It also seems to provide a natural fit with long-lasting, often inflation-linked pension liabilities.

The connotation to sustainable and socially responsible investing is also being made an increasingly important theme, especially for public pension plans (but not only). The political pendulum, too, has swung back in favor of infrastructure - in difficult economic times, infrastructure investment is made a 'saviour of the world economy' from America to China. ¹

Can infrastructure investments keep up to the promise? This article investigates the early experience with infrastructure as an asset class. Unfortunately, we still know very little, both in theory and in practice .

Pension funds' experience with infrastructure funds is rarely longer than 3-4 years, and is shaped by the boom-bust-environment of the mid/late noughties. Nonetheless, some hard and useful lessons have already been learnt in practice.

Academic research on the subject is still in its infancy. Data are very limited in quantity and quality, making empirical work difficult. More surprisingly, there is hardly any theoretical work performed in this field. There are a number of issues that confuse investors and researchers alike.

THE VALUE PROPOSITION

Already the definition of 'infrastructure' is controversial. Widely defined, it covers 'services essential to society'. In the investment context, it typically includes economic infrastructure such as transport (for example, ports, airports, roads and tunnels), utilities (for example, energy distributions networks, water, waste), communication (for example, cable networks, towers) as well as social infrastructure (for example, schools and hospitals).

What do these sectors have in common? The...