Having invested in infrastructure since 2006, Copenhagen-based Industriens Pension now has an allocation to the asset class that is a healthy 12 percent of its DKr235 billion ($33.8 billion; €31.5 billion) of AUM. The LP includes infrastructure in its value-add strategy – alongside private equity, real estate and listed equities – as well as in its defensive or core strategy, which includes gold-plated bonds. The two strategies are used to manage risk as its members’ age.
“It would be nice to see more distributions and better returns, but we are used to ups and downs”
Jan Østergaard
Industriens Pension
“The defensive part of our portfolio is focused on cashflow and includes core-infrastructure investments which replace some bonds and provide better returns and a liquidity premium,” says Industriens’ head of real assets, Jan Østergaard. The core investments are all direct to keep a lid on fees. They are typically managed by a party with operational capabilities. “Lately, we’ve invested in Vantage Towers next to a GIP core fund, which then manages the asset,” says Østergaard.
Most of the allocation to infrastructure is in the value-add bracket and invested or co-invested in funds. Keeping costs down matters here too which makes co-investments an imperative. “Our ambition is for half our investments in the value-add programme to be co-investments with the funds. This was initiated some years ago, so today our value-add portfolio is 65 percent invested in funds and 35 percent in co-investments,” says Østergaard.
Fees are not the be-all, end-all, though, which should be a relief to the long roster of GPs that the LP is invested with. This includes Actis, Antin, Arcus, Asterion, Brookfield, CIP, DIF, EQT, Tiger and others.
“We do not pick managers based on fees, but once we’ve got a preference, we do discuss price and try to get costs down to a reasonable level. Investing through funds is expensive, so we aim for co-investing, or perhaps a first close. Sometimes we invest through a club. Basically, we play all angles.”
As for whether LPs have a comparatively easy time negotiating fees at the moment, he says: “I don’t know if it’s become easier over the past few years. But it definitely hasn’t become harder.”
Industriens’ value-add programme runs in three-year cycles and is about to enter the last six months of the 2022-24 cycle. In a way, says Østergaard, the resulting investment profile resembles an internal fund of funds as investments are diversified across geographies and sectors. In the current cycle, the LP has had DKr15 billion to invest, of which DKr4 billion are still awaiting approval.
For the coming cycle, Østergaard hopes for another near-€2 billion sum. “The final amount depends on how much is yet to be drawn and the speed with which we expect that it will be drawn. Distributions matter too. At the moment, they are a little lower than [they have been] historically, which is also reflected in the short-term returns – a general tendency for the whole market. It would be nice to see more distributions and better returns, but we are used to ups and downs.”
Participation in the energy transition is important to the LP.
“As a large investor, we seek to invest in the green transition, but of course our top priority – by law – is a suitable risk-return. But being the size we are, there is room for plenty of renewables in the portfolio.”
Interest rates and inflation drive up the costs of greenfield projects and put pressure on the risk-free return at the same time as supply chain uncertainties, planning issues, grid constraints and power price volatility add to the risk and demand that the risk-free return be perhaps even higher than before.
To compound the misery, the higher interest rates also bring down the value of the completed asset.
It is difficult to bring costs lower. And it takes time to change the pension fund mandates, which leaves risk as the issue to tackle.
“We cannot, by law, invest in projects with too low risk-adjusted returns. But the risk can be countered. Lower risk will lower the requested return and pave the way [for more investments]. Looking back at the beginnings for offshore wind, there were subsidies, but also certainty [via the contracts for difference scheme],” says Østergaard. “EU-wide, the fixed-price CfD-model could be reintroduced, because this is more about mitigating risks than subsidies. And the risk associated with the price of power is better borne by states than investors.”
No transition investment laggard, renewables account for more than half of Industriens Pension’s direct core infra portfolio. Brownfield wind, solar and biogas, mostly, but investing in the grid and battery storage are of interest when looking ahead, says Østergaard. The grid, however, is not easy to access from an investor’s point of view, in stark contrast to fibre.
“I don’t quite know exactly how to get to invest in the grid. An eventual template may vary considerably from one country to the next, but if a risk-adjusted model that could ensure a reasonable return was agreed, then there would be plenty of takers among pension funds,” Østergaard says.
Emerging markets are a focal point for Industriens on the value-add side.
“There are never-ending opportunities in emerging markets. This goes for energy assets, but for everything else too. That’s why we decided to have an allocation to emerging markets, which has been profitable so far, but we have to allow for the political and currency risk.”
The LP has some allocation outside developed markets through global strategies and managers. As for more emerging markets-focused managers, “it has been difficult to find GPs with a convincing strategy and a sufficient premium compared to the good returns in developed markets. This has left us under-allocated. We’ve invested with a pure emerging market product from I Squared and we’ve invested with Actis for years”, says Østergaard.
Looking to the future, other than emerging markets the LP actively considers emerging technologies such as hydrogen. “There is nothing even close to a core case for hydrogen yet, but Copenhagen Infrastructure Partners [for example] have a fund that is dedicated to those kinds of investments, and we are keeping an eye on it.
“I hope something happens – and soon,” he adds, which is a phrase that neatly sums up so much about the energy transition. If Industriens Pension is to be believed, then it is not for the lack of will that institutional investment in the transition seems to struggle to catch up with demand. It is a question of risk and how to manage it at the very highest level.
