On 13 May, 17 asset managers signed the updated Mansion House Accord, pledging to commit at least 10% of their default DC pension funds to private markets by 2030. Offering a £25bn boost to the UK economy, 5% of funds will be dedicated to UK-based infrastructure and clean energy.
Unlisted infrastructure offers investors the ability to invest ‘locally’ in projects that can bring tangible benefits to communities. Several fund groups have recently come out to explain how they are prioritising investing with a local mindset through infrastructure funds that hold both listed and unlisted assets.
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“Infrastructure is very local,” said Michael Steingold, global unlisted infrastructure portfolio manager and director, private markets at Russell Investments. “Even when it’s a big transaction, say a big utility company, ultimately it’s a very local business, it impacts individuals.”
He added infrastructure assets tend to be very “politically conspicuous”, and when things go wrong, everyone has an opinion. “We tend to invest in businesses or individual assets that are essential to economies and to communities. When something goes wrong in delivering that service or that good, it very quickly becomes a political problem.”
As an example, he noted the UK is currently experiencing challenges in the regulated water space. Water companies released raw sewage into England’s rivers and seas for a record 3.61 million hours last year, according to the latest figures.
This is a good example of where something has gone awry at a local level with a big company and it has been attracting political scrutiny, Steingold said. Russell Investments’ global research team is tasked with analysing any potential investment with a local mindset, and Steingold says it’s rare for assets to fund holds to encounter such problems.
Complex and hard-to-regulate businesses
Utility companies such as these are large, complex businesses with a lot of moving parts. This makes them difficult to regulate. “I feel for regulators because it’s really hard to manage the performance of these businesses,” said Steingold. For an investor then, how is it possible to make money by supplying private capital to these businesses which are often badly managed, heavily regulated or even on the verge of nationalisation?
“There are times when it’s a really attractive investment to be in the regulated utilities space,” he said. “Right now, for example, we own some US and Australian regulated electricity utilities. When there’s growth happening, these businesses need a lot of capital – it’s very expensive to expand an electricity network. When you bring private capital into that, it’s very efficient for them to deploy and grow the business to serve more people. That’s really attractive for private capital.”
In contrast, a more difficult environment for investor is where a business is not growing, but instead offering a bond-like fixed income, such as UK regulated water. “It’s really important in infrastructure that you match your return expectations with the business.”
Infrastructure-adjacent opportunities
Institutional asset manager IFM Investors, which invests on behalf of Australian pension funds, recently published a report which highlighted ‘building our your neighbourhood’ through a localised approach to infrastructure in urban areas.
Chief strategy officer Luba Nikulina said: “We are seeing the emergence of opportunities within the ‘neighbourhood’ of infrastructure. These infrastructure-adjacent opportunities often benefit from the same economic protections as the core assets they supply – albeit without the regulatory framework directly underpinning their day-to-day operations – with the potential for higher returns and the opportunity to add value.”
She gave the example of water treatment plants that service growing catchments of metropolitan areas and offer drought protection in regions where water stress is common. Another example might be facilities adjacent to sea ports that shift freight to trains rather than trucks, helping reduce the carbon emissions associated with goods transport.
“Some infrastructure-adjacent opportunities resemble private equity in their risk and return potential. They can be compelling due to their increasingly important role in securing and enhancing a core asset’s performance – by delivering cost efficiencies, power bill reductions, improving safety standards or other aspects of performance,” she added.
Accessing local themes through listed companies
While it’s arguably easier to have a tangible local impact with private capital rather than by investing in listed equities, there are some other ways to align with this theme through equity funds. Norwegian asset manager Storebrand invests in a ‘smart cities’ theme in its €1.7bn Luxembourg-domiciled Global Solutions fund.
Portfolio manager Sunniva Bratt Slette explained this includes three themes: urban planning, with stocks focused on smart energy management systems, insulation, heating, lighting and ventilation; water management including infrastructure and purification; and mobility, including zero-emission transport, electrification and micro mobility.
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Municipal authorities in Europe and China are funding projects like these, in part to stave off “the social unrest that comes with high levels of pollution to both air and water.” “This has really been a driver for a smarter cities approach,” said Slette.
In Germany, the government recently approved a huge €500bn spending package which will include investment in infrastructure. The country has been a pioneer in driving the renewable energy transition, said Slette. “The infrastructure package has really benefited the companies in our portfolio with exposure to the German market in real estate, energy efficiency, and water.”
In the US, former president Joe Biden’s Inflation Reduction Act has also seen huge spending on infrastructure projects, although president Trump would like to reverse some of the measures. “We tend to like regulatory tailwinds but we don’t want to rely too much on that because it could always be rolled back,” added Slette.
Data centres, IoT and AI vs low-tech businesses
Elsewhere in infrastructure, connectivity and the internet of things are increasingly important themes. Slatte holds software companies such as Nvidia and Cadence but also AI building tools and management systems, which can be used to structure and organise cities. “Autodesk is a good example of how you can use AI to, for instance, design prototypes and then run millions of different ideas or designs in a couple of seconds,” she said.
There also some providers offering interesting low-tech solutions. Japanese housebuilder Sekisui House constructs buildings with a focus on natural materials, light and ventilation to improve quality of life and reduce energy use without reliance on tech.
At Russell Investments, Steingold is focusing on data centres as a technological theme. AI is an important use case, but it’s not the only one. “Data centres are leading to growth in electricity demand in a way that the developed world has not seen for 20 years,” he said. He also predicts increased energy demand from electric vehicles, led by large commercial fleets moving to electric.
“You’re going to see more and more demand, not just from data centres but from transportation and all sorts of other electrification that will happen in these economies. We’re big believers in that as a multi-decade demand story that has implications for a lot of different types of investments, be it utilities, renewable energy or other types of power generation.”
This story was written by our sister title, Portfolio Adviser
