Irish Infrastructure Fund
Written by Richard Shields
Richard Shields provides details of the Irish Infrastructure Fund, a three way partnership between NPRF, AMP Capital, and Irish Life Investment Managers
Background - Global interest in Infrastructure
Over the last 10 years or so European investors have been increasingly turning their attention to the attractions of investing in infrastructure. Many investors in countries such as Canada and Australia allocate five per cent to 10 per cent of their portfolios to the asset class, and in some cases substantially more. For long term investors such as pension funds, life insurers and sovereign wealth funds, infrastructure can offer a compelling mix of long duration, often monopolistic assets, with more secure, inflation linked cash flows and steady, long term capital appreciation.
Irish involvement in infrastructure investment
In Ireland, the sovereign wealth fund, the National Pensions Reserve Fund (NPRF), had also been considering an allocation to infrastructure, and in 2007 made an ‘in principle’ decision to invest in the asset class. Given the heady investment climate at that time, implementing the decision was deferred until more ‘normal’ conditions prevailed.
As events unfolded, the global finance crisis (GFC) dramatically changed the NPRF’s plans.
Amongst other global consequences, the GFC abruptly halted the Irish property and construction boom which had been fuelled by aggressive lending to these sectors and caused the collapse of the Irish banking system. This also saw the Irish tax base collapse as it had become overly dependent on the property sector.
Consequently the Irish government negotiated an €85 billion support programme from the EU, the IMF and the ECB (the Troika) in 2010. An integral part of this €85 billion deal was the involvement of the NPRF which was directed by the Irish government to invest in recapitalising the two main Irish banks. The NPRF Discretionary Portfolio fell from €24 billion to its current level of €5.5 billion as a result.
In the context of Irish infrastructure, another pivotal decision by the Irish government as a condition of the Troika’s financial support programme was to commit to a sale of at least €2 billion (recently increased to €3 billion) of public assets during the period of the programme, which ends in December 2013. To achieve net proceeds of this amount, it is clear that substantial infrastructure assets will be sold by the Irish government.
In Ireland the bulk of the core infrastructure assets are publicly owned. This includes all the utilities and most of the economic infra-structure, the airports, sea ports and many of the toll roads. Despite, or perhaps because of, the difficult economic conditions in Ireland, the NPRF’s interest in infrastructure remained strong, albeit now with a pure Irish focus. It became clear that economic conditions and the looming availability of high quality core Irish infrastructure presented an opportunity for the NPRF to achieve its investment objectives and at the same time contribute to Ireland’s recovery program and help attract foreign capital back into the country. The key to achieving these objectives was to ensure that any investments into Irish infrastructure were made independently by an arms length, external party.
The result of this was the establishment of the Irish Infrastructure Fund, a three way partnership between NPRF, AMP Capital, and Irish Life Investment Managers.
The Irish Infrastructure Fund
Each of the three partners brings key core competencies to the fund.
• NPRF; as the cornerstone minority investor, has committed €250 million to the fund.
• AMP Capital; an Australian infrastructure manager and one of the pioneers of infrastructure investment globally, will have full discretion over all investment decisions as well as responsibility for global fund raising.
• Irish Life Investment Managers; the dominant investment manager in the Irish market, is the manager of the fund and will be providing governance, compliance and administration services, as well as taking responsibility for raising funds from Irish institutional investors
• Given the key market dimensions - the size of the Irish market, the scale of the Irish government sale program and the availability of infrastructure assets that are already in private ownership - it was decided that the appropriate size for the fund was €1 billion.
• The expectation is that around half of this amount will come from Irish investors, underpinned by the €250 million commitment from the NPRF.
Fund raising timing and strategy
Although the government sale program is unlikely to get into full swing until 2013, a number of more immediate opportunities have been identified, including assets already in private ownership, as well as publicly owned entities looking to free up capital on their own balance sheets. The fund wants to be able to take advantage of all such opportunities as they arise, so fund raising is a priority. It is expected that the first round of investors will mainly be Irish pension funds. Indications are that the aggregate commitments from the Irish pension fund community will be around €200 million to €300 million. Together with the commitment from NPRF, around half the total fund is expected to comprise Irish investors.
Outside of Ireland the fund-raising strategy is focused on large global investors who are familiar with infrastructure and who are willing and able to take advantage of the opportunity that circumstances have delivered in Ireland. Many of these target investors are sovereign wealth funds themselves. Given the typical minimum investment amount from such investors is in the €100 million to €250 million range, the ideal number of investors from outside Ireland is very small and may be as few as two or three. An important benefit for these large investors is the opportunity to co-invest alongside the fund in the larger assets that will inevitably come up that will be too big for the fund to acquire on its own.
A key part of the strategy for these investors is that they will be in effect joining a small club of like minded investors alongside the NPRF.
The strategy for acquiring assets has three components.
1. The first assets to be targeted are infrastructure assets already in private ownership. Potential acquisitions include interests in major toll roads, renewable energy assets and social infrastructure.
2. Through 2012 the fund will also be looking to work with publicly owned infrastructure enterprises with a view to investing in stand alone businesses/divisions that fit the fund’s investment mandate. Several such opportunities have already been identified.
3. Finally, in 2013 the fund will be looking to acquire some or all of the circa €3 billion of publicly owned assets that the government decides to sell down as part of its commitment to the Troika.
Investment case for Irish infrastructure
Existing core infrastructure assets in developed economies worldwide have a set of characteristics that make investment in such assets very appealing for many long term investors. Typically, diversified portfolios of such assets should deliver total returns of around 10 per cent to 12 per cent with a cash yield contributing about half of this. In normal times Irish infrastructure should be no exception.
However with the Irish economy contracting sharply over 2008, 2009 and 2010, (GDP fell by 20 per cent over this period) economic conditions in Ireland are far from normal. For some investors this will present a unique opportunity to invest in good quality infrastructure assets that would otherwise have remained in public ownership, and to do so at reasonable prices from a committed seller.
Richard Shields is the London-based Managing Director of AMP Capital
UK and Europe