The global demand for investment in infrastructure is very high, from energy to communication. Infrastructure offers attractive prospects for long-term investments with calculable risk and attractive returns. These investments will increase with the expected infrastructure quota in BVV2 – and the selection of suitable projects is key in this regard.
Growing demand for unlisted infrastructure investments
Infrastructure investment helps the public sector finance important intergenerational projects in areas such as energy, transport and water supply. They are also an attractive and increasingly popular form of investment for pension funds. If there is a BVV2 infrastructure quota in future, they will become even more popular.
High global need for investment
There is a great need for investments in existing and new infrastructure in many countries all over the world and in many areas:
- energy production
- electricity, gas and heating networks
- water collection, treatment and supply
- social infrastructure (schools, hospitals etc.)
There are many reasons for the high investment demand: the population is growing and increasingly moving to cities; the growth of digitalisation has rendered certain facilities obsolete; and renewable energies need new infrastructure. Research indicates that there is a global capital requirement of USD 3.7 trillion p.a. for energy and transport alone. As many countries are highly indebted, which is likely to increase further due to the Covid-19 pandemic, private investors are particularly important.
Research indicates that there is a global capital requirement of USD 3.7 trillion p.a. for energy and transport alone.
A good choice for pension funds
Investments in infrastructure usually have certain typical characteristics:
- high initial investments
- long investment terms
- restricted competition
- high barriers to entry
- major economies of scale
- often low liquidity
At the same time, such investments allow investors to achieve attractive long-term returns with calculated risk. Moreover, the investments are protected against rising inflation and offer high, regular distributions. Infrastructure is thus an excellent asset class for pension funds. What's more, as these investments are not correlated to other asset classes, they reduce portfolio risk in line with the Federal Law on Occupational Retirement, Survivors' and Disability Pension Plans (BVG) and improve the return on the portfolio. For this reason, institutional investors can hardly afford not to invest in infrastructure, particularly when interest rates are low.
Project selection is key
Not every infrastructure investment brings the same benefits. The market is not homogeneous enough for that and the differences between projects are too great. Regulated investments and investments involving long-term contracts with fixed prices and volumes promise the most stable dividend income. Other sectors, such as energy producers engaged in wholesale electricity trading or container ports, are more heavily affected by economic and market fluctuations. Even when there is a high level of external debt or a major need for investment, the dividend yield is often lower, though the net capital gain may then turn out higher later on.
The investment platform of Swiss Life Asset Managers
Swiss Life Asset Managers has been investing in global infrastructure for years, both for Swiss Life insurance companies and third-party clients. There are currently 35 experienced infrastructure specialists managing a total of CHF 7 billion in assets. Fontavis, the leading Swiss asset manager specialising in clean energy infrastructure, is also part of this specialist team. A total of eight funds as well as further mandates are managed by Swiss Life Asset Managers, for which 850 infrastructure projects were initially analysed and more than 40 investments made. That includes holdings in Swiss energy and communications companies.
Evergreen funds as the basis for pension funds
The Swiss Life Investment Foundation has launched two new investment groups in the Infrastructure Global area with an evergreen structure, i.e. without a fixed term. It is thus giving investors access to the investment platform as well as to funds in which Swiss Life also invests. In this way it will be possible to invest money in a globally diversified manner, either indirectly via proprietary collective investments or selectively through direct investments. The risk/return ratio is conservative to balanced. In addition, the investment group is regularly opened for new subscriptions and to draw down the invested capital, thus allowing investors more flexibility and self-determination. Periodic redemptions will also be possible after the initial build-up phase. In addition, investors can choose between an investment group in euro or one with Swiss francs as the reference currency, where at least 80% of the foreign currency risk is hedged against the Swiss franc.
ESG (environmental, social and governance) criteria are taken into account as an important part of the investment process. BVG investors thus also contribute to sustainable infrastructure development through their involvement in these investment groups.
Source: First published on investrends.ch
Authors: Christoph Manser, Head Infrastructure Investments, Swiss Life Asset Managers
& Christoph Gisler, CFO, Fontavis AG