Investor surveys find private investments such as infrastructure remain popular
Uncertainty is the bane of most investors. For example, if they don’t have a good sense of what tax and regulatory policy will be in the next 12 to 18 months, trying to decide where and how to invest capital becomes a guessing game.
Recent investor surveys from Aviva and DLA Piper shed light on the mood among investors focused on private investments, including infrastructure, in Europe and the United Kingdom, where uncertainty over Brexit and other potential “exits” are driving uncertainty.
Despite the disruption, however, investors remain committed to private investments such as infrastructure, according to Mark Versey, CIO of real assets with Aviva Investors.
“Institutional investors have been lured by the illiquidity premium provided by private assets, as well as other benefits such as diversification and downside protection,” says Versey. “The appeal of the alternative income sector has grown significantly among European pension schemes and insurers over the past decade. The survey highlights that investors are venturing into new sectors and geographies.”
Key findings of Aviva’s asset allocation survey, which surveyed 250 pension plans and insurers in the United Kingdom and Europe include:
- U.K. pension schemes plan to increase their allocation to alternative income assets from 4.3 percent to 6.5 percent.
- U.K. insurers intend to raise allocations from 7.3 percent to 8.3 percent.
- In Continental Europe, insurers plan to allocate 9.2 percent of their portfolio to alternative income assets, up from 6.5 percent, while pension funds plan to raise their allocation from 5.2 percent to 7.3 percent.
- The expected increase in allocations is driven by the downside protection alternative assets can offer (34 percent); diversification benefits (33 percent); and illiquidity premia (30 percent).
- Most investors surveyed believe the best opportunities will be found outside their home markets.
- Despite the trend toward increased allocations, common barriers to investment include: illiquidity (31 percent), the high cost of investing (29 percent), difficulty finding suitable opportunities (27 percent) and regulation (27 percent).
U.K. pension funds are planning the largest increase in allocations to alternative investments, notes Aviva, which when met will more closely align their exposure level with insurers in the United Kingdom, as well as pension funds and insurers in Continental Europe.
Private corporate debt, including infrastructure debt, is the most commonly-held alternative income asset class among insurers and pension funds surveyed, with 57 percent and 55 percent, respectively, invested. Investor appetite also shows no signs slowing — 42 percent of insurers and 26 percent of pension funds plan to increase their private corporate debt allocations within the next 12 months, including 31 percent of insurers that plan to increase the holdings of infrastructure debt within the next three years.
DLA Piper, meanwhile, finds that despite Brexit creating uncertainty, it also brings opportunity and some favorable expectations for government action. The report notes — “The U.K. government has demonstrated its commitment to investing and improving national infrastructure but acknowledges it cannot shoulder the financial burden alone, with Treasury Minister Robert Jenrick recently stating ‘that the case is still strong to use private finance to finance public projects.’”
The survey reached a total of 50 CIOs and portfolio managers in the United Kingdom active in infrastructure investing, including private sector pensions funds, life insurance companies, asset managers, as well as a few hedge and sovereign wealth funds.
DLA Piper considers the strength of support from the investment community will determine whether government action can become reality.
“At a strategic level, the findings reveal overwhelming support for the certainty delivered by the government’s National Infrastructure Delivery Plan, with 88 percent viewing it as a stable, long-term approach on which they can rely,” notes DLA Piper’s report, U.K infrastructure: defining the future. “There was clear consensus among CIOs and portfolio managers on the key areas for development and investment, with more than a quarter [27 percent] putting energy and transport at the top of the agenda, while education [4 percent] and flood defenses [2 percent] languish at the bottom.”
The findings also confirm a “well-documented reticence among investors to back speculative projects” with national projects capturing the strongest investment demand and built — or brownfield — assets being the most attractive.
