Centrica commits £300m to unleveraged infrastructure equity

As prices have moved up in the infrastructure debt space, some schemes have started looking to unleveraged infrastructure equity for contractual cash flows, a concept that is relatively new.

The energy company’s £6.8bn pension scheme has committed about £300m (roughly 4 per cent of its total value) to unleveraged infrastructure equity as part of an 11 per cent allocation to what it terms ‘government bond substitutes’, chief investment officer Chetan Ghosh said during a Pensions Expert event last week.

“What we wanted to do was find ways to match off that future cash flow need without using government bonds, because of the pricing,” said Ghosh. “And if it can be linked to UK inflation as well that’s an additional benefit.”

The scheme started to build up its infrastructure exposure in 2011, with a 5 per cent allocation, following investments in ground rents, social housing and commercial leases.

Ghosh said that the scheme had not wanted to touch infrastructure for many years, as it regarded the application of leverage within funds themselves as financial engineering.

“What we wanted was to have a solar panel that generates income, and we just take the income,” he said, adding that the scheme is happy with a return of 5 per cent to 6 per cent.

“I struggle to understand why a whole lot of pension schemes went wholesale, pre-credit crisis, into these levered infrastructure funds that weren’t only levered in the deal, they were levered within the funds themselves. That was just a recipe for disaster.”

Regulatory risk

Ian Berry, head of infrastructure fund management at Aviva Investors – one of the two managers the Centrica scheme employs for unleveraged infrastructure – said one advantage of the unleveraged approach was that it puts all of the investor’s money to work.

And while the supply of what fuels income generation – sunshine in this case – can be uncertain, the fact that infrastructure is regulated makes it comparatively secure according to Berry. “We buy assets that have, in the UK, a guaranteed arrangement set in stone by the government… in the UK that’s pretty secure,” he said.

However, Hans Holmen, principal consultant for infrastructure and private equity at Aon Hewitt, said regulation is one of the risks the asset class faces. He said that when infrastructure first came out as an asset class it was regarded as low risk with very safe returns, due to its regulation, “but that hasn’t really proved to have to be true”.

“A lot of these funds are investing in assets with five-year regulatory cycles – and what if you come to the end of these funds’ cycles and you get an adverse regulatory ruling right at the time when you have to sell,” he said, citing the Spanish and Italian solar industries as examples.

“That scares investors with respect to infrastructure, so I think you have to be a little bit careful in terms of what you’re getting into.”