The Economist Intelligence Unit: What makes infrastructure an attractive asset class for institutional investors?
William Nicoll, M&G Investments: In general the attraction of infrastructure is how safe it is. You tend to have established companies or projects that will mature over a very long time. This translates into stable long-term cash flows. Also, if something does go wrong with a piece of infrastructure that is fundamental to how a country works, then you have a great chance of recovering those assets. From a long-term perspective, infrastructure plays an important role in an investment portfolio, be it through debt or equity, as it offers a great deal of security and usually provides regular cash flow.
What are the risks associated with infrastructure investments?
You have the same risks as with any other investment. If you are giving your money to anyone on a long-term basis, you want to know that you will be able to get it back. With certain infrastructure projects, you may need to trust that the government will be able to pay you; you might also discuss whether contracts have been set up properly. In many ways it is no different to lending to a company over a 25-year period: you want to be convinced that the company will be around in 25 years and that you will be paid regularly.
What are the challenges that companies face in identifying infrastructure projects in which to invest?
There is more money available than there are projects to invest in: we have seen a number of funds being raised for the purpose of investment, but not all of them have been deployed. It is not an efficient market.
The main reason for the lack of projects is that banks used to finance the whole venture, package it up and sell it on to institutional investors. Since 2008, however, we have gone from a position where banks had control over long-term investment opportunities to one where it is difficult and costly—and therefore less attractive—for them to hold long-term debt on their balance sheets.
Governments and other participants can attempt to rebuild the system, but that will take time. It has worked in some sectors where banks have withdrawn from the long-term lending markets. A good example is the social housing market in the UK, which has gone from being 100% bank-funded to almost 100% institution-funded. That type of investment is relatively straightforward, since the debt is being secured against residential assets. The difficulty lies with the larger, more complex types of financing, which will take longer to come back to the market. The reasons why we have not seen many of those vary from the complexity of the planning process to simply the time it takes to put an infrastructure project together.
So, if you have a small project to finance and it is structured appropriately, you will probably be able to find the money. That is a great position to be in, and the money will be long-term institutional money. The issue is that there have not been enough large national projects to allow the system to be successfully rebuilt.
This interview is part of a series managed by The Economist Intelligence Unit for HSBC Commercial Banking.