As the need for investment in infrastructure continues to grow, private sector financing for infrastructure projects has developed around the world. Given the long-term growth and (potentially) low correlation aspects of infrastructure investments, pension funds have also shown interest in increasing their exposure to this area, along with their move into alternative assets. Such investments cover a wide spectrum of projects: economic infrastructure such as transport or energy producing plants, to social projects such as hospitals or schools.

1. WHY
PENSION
FUNDS
SHOULD
INVEST
IN
REAL
ASSETS
/
RENEWABLE
ENERGY
INFRASTRUCTURE?

2. December 2010
IntroducPon
Akuo
Investment
•
Pension
Funds
are
increasingly
moving
into
new
assets
classes
in
research
for
yield:
they
are
looking
for
new
sources
of
return
and
beNer
diversificaPon
of
investment
risk.
•
Infrastructure
is
one
type
of
investment
being
frequently
discussed,
given
its
potenPal
to
match
long-­‐
term
pension
assets
and
provide
diversificaPon.
•
Previously
pension
fund
exposure
to
infrastructure
has
been
via
listed
companies
(such
as
uPliPes),
or
via
real
estate
porYolios.
•
However,
some
larger
funds
globally
are
beginning
to
invest
via
private-­‐equity
funds,
or,
occasionally,
even
directly.
•
In
the
1990s,
strong
stock
markets
were
supporPve
of
the
development
of
funded
pensions,
and
the
allocaPons
to
equiPes
were
increased
by
pension
funds
in
many
countries.
However,
the
burst
of
the
TMT-­‐
bubble
in
the
early
2000s
and
the
subsequent
recession
led
to
substanPal
funding
and
solvency
problems
for
pension
funds.
Both
sides
of
the
balance
sheet
were
affected.
This
led
to
a
major
rethink
of
the
asset
allocaPon
of
pension
funds.
•
Pension
Funds
enlarged
their
investment
universe
to
include
corporate
and
high
yield
bonds,
and
invested
more
money
internaPonally,
including
in
emerging
markets.
In
addiPon,
the
investment
industry
started
to
offer
new
or
alternaPve
asset
classes
for
pension
funds.
They
include
hedge
funds,
commodiPes,
private
equity,
currency
and
tacPcal
asset
allocaPon
overlays,
commercial
loans,
infrastructure
investments,
forestry
products,
microfinance
and
other
niche
areas.
AKUO
INVESTMENT
MANAGEMENT
2

3. December 2010
Infrastructure
Akuo
Investment
•
The
idea
of
invesPng
in
infrastructure
seems
to
strike
a
chord
with
many
pension
plan
directors
and
members.
Infrastructure
feels
more
tangible
and
real
than
a
lot
of
other
complex
products
and
derivaPve
strategies
presented
to
pension
funds
these
days,
where
they
find
it
difficult
to
detect
the
underlying
value.
•
In
addiPon,
infrastructure
is
made
for
the
long
term,
and
there
seems
to
be
a
natural
fit
with
the
long-­‐term
liabiliPes
of
many
pension
plans.
For
some
people
there
is
also
a
connotaPon
to
sustainable
or
socially
responsible
invesPng,
which
is
an
increasingly
popular
route
chosen
in
parPcular
by
public
and
industry-­‐wide
pension
plans.
•
In
a
historic
perspecPve,
private
financing
of
infrastructure
is
not
new.
In
recent
Pmes,
however,
there
have
been
significant
new
developments.
In
post-­‐war
Europe
in
parPcular,
most
of
the
infrastructure
was
owned
and
controlled
by
state
insPtuPons.
Since
the
1980s,
the
trend
has
reversed
as
many
pieces
of
infrastructure
have
been
(partly
or
fully)
privaPzed
in
the
face
of
stretched
public
finances.
•
The
requirement
for
beNer
infrastructure
seems
obvious
everywhere
in
the
world.
Infrastructure
investment
will
need
a
huge
amount
of
capital
in
the
coming
decades,
whether
public
or
private.
EsPmates
made
by
supranaPonal
insPtuPons
for
global
infrastructure
needs
run
into
the
dozens
of
trillions.
AKUO
INVESTMENT
MANAGEMENT
3

4. December 2010
Infrastructure
Akuo
Investment
Infrastructure
assets
are
tradiPonally
defined
by
their
physical
characterisPcs.
One
can
split
them
into
two
main
categories,
and
a
range
of
sectors
within
those:
Economic
infrastructure
•
Transport
(e.g.
toll
roads,
airports,
seaport,
tunnels,
bridges,
metro,
rail
systems)
•
UPliPes
(e.g.
water
supply,
sewage
system,
energy
distribuPon
networks,
power
plants,
pipelines,
gas
storage)
•
CommunicaPon
(e.g.
TV/
telephone
transmiNers,
towers,
satellites,
cable
networks)
•
Renewable
energy
Social
infrastructure
•
EducaPon
faciliPes
•
Health
(hospitals
and
health
care
centers)
•
Security
(e.g.
prisons,
police,
military
staPons)
•
Others
(e.g.
parks).
AKUO
INVESTMENT
MANAGEMENT
4

5. December 2010
Infrastructure
with
a
financial
twist
Akuo
Investment
Financial
industry
analysts
emphasize
the
existence
of
limited
compePPon,
resulPng
from
different
sources.
•
Economic:
natural
monopolies
(e.g.
energy
distribuPon
networks),
public
goods
(e.g.
broadcasPng
•
RegulaPon:
controlled
charges
and
fee
increases
(e.g.
toll
roads),
regulated
uPliPes
•
Concessions
from
public
authoriPes:
long-­‐daPng
contracts
(e.g.
hospitals).
Infrastructure
assets
typically
show
one
or
more
of
the
following
stylized
economic
characterisPcs:
•
High
barriers
to
entry
•
Economies
of
scale
(e.g.
high
fixed,
low
variable
costs)
•
InelasPc
demand
for
services
(giving
pricing
power)
•
Low
operaPng
cost
and
high
target
operaPng
margins
•
Long
duraPon
(e.g.
concessions
of
25
years,
leases
up
to
99
years).
AKUO
INVESTMENT
MANAGEMENT
5

6. December 2010
Infrastructure
with
a
financial
twist
Akuo
Investment
From
this,
the
investment
industry
deduces
a
number
of
favorable
investment
characterisPcs
of
infrastructure
assets:
•
Stable
and
predictable
cash
flows
•
Long
term
income
streams
•
Oien
inflaPon-­‐linked
(helping
with
liability-­‐matching)
•
In
some
countries,
tax-­‐effecPve
•
Returns
insensiPve
to
the
fluctuaPons
in
business,
interest
rates,
stock
markets
•
RelaPvely
low
default
rates
•
Low
correlaPons
with
other
assets
classes
(offering
diversificaPon
potenPal)
•
Socially
responsible
invesPng
(SRI)
(providing
public
goods
essenPal
to
society)
AKUO
INVESTMENT
MANAGEMENT
6

7. December 2010
Risks
Akuo
Investment
It
is
an
essenPal
part
of
the
fiduciary
duty
of
those
involved
in
pension
fund
invesPng
to
understand
the
specific
risks
of
infrastructure
assets.
Risks
go
much
further
than
the
usual
volaPlity
staPsPcs,
and
certain
factors
are
just
genuinely
uncertain.
.At
the
level
of
infrastructure
projects
and
companies,
key
risks
include:
•
ConstrucPon
risk
(e.g.
the
project
is
not
completed
on
Pme;
costs
are
higher
than
budgeted…)
•
OperaPonal
risk
(e.g.
poor
management,
systems)
•
Business
risk
(e.g.
more
compePtors
entering;
change
in
consumer
preferences
and
demand;
technological
advances)
•
Gearing
risk
(typical
leverage
of
30-­‐90%,
resulPng
in
a
high
exposure
to
interest
rate
risk;
refinancing
risk
with
higher
inflaPon
and
interest
rates;
downgrade
risk)
•
Legal
and
ownership
risk
(unknown
future
liPgaPon,
planning
consents
not
granted;
lease
running
out…)
•
Regulatory
risk
(e.g.
fee
rises
fall
behind
schedule)
•
Environmental
risk
(unforeseen
environmental
hazards;
acPon
groups)
•
PoliPcal
and
social
risk
(opposiPon
from
pressure
groups;
poliPcians
may
change
their
mind;
corrupPon)
AKUO
INVESTMENT
MANAGEMENT
7

8. December 2010
Risk
/
return
profiles
Akuo
Investment
Pension
funds
are
presented
all
sorts
of
graphics
with
stylized
risk-­‐return
profiles:
somePmes
showing
infrastructure
with
risk
and
return
both
higher
than
equiPes,
somePmes
both
lower,
and
somePmes
at
higher
returns
and
lower
risk…
When
the
global
infrastructure
boom
started,
return
expectaPons
were
oien
given
as
15%
plus
pa
by
some
providers.
In
their
2005
analysis
of
the
Australian
market,
Mercer
say
that
―most
managers‘
products
fall
into
the
category
of
diversified
infrastructure
funds
that
have
an
objecPve
to
deliver
returns
of
9
–
12%
net
of
fees.
RREEF
makes
the
disPncPon
between
the
total
return
expectaPons
of
mature
(10
%
–
14%
pa)
and
early-­‐stage
assets
(18%
plus).
It
should
be
noted,
however,
that
such
expectaPons
are
fuelled
by
leveraging
the
returns
of
the
underlying
porYolio.
RREEF
put
a
typical
leverage
rate
of
40–80%
for
mature
and
30–75%
for
early-­‐stage
assets.
The
analysts‘
projecPons
also
vary
across
infrastructure
sectors.
JP
Morgan
Asset
Management,
e.g.,
expects
the
lowest
expected
internal
rates
of
returns
for
toll
roads
(8-­‐2%)
and
PFI/PPP
(9–14%),
and
the
highest
for
airports
(15-­‐18%)
and
broadcast
network
(15-­‐20%),
this
against
an
infrastructure
average
of
10-­‐
15%.
(All
references
available
on
demand)
AKUO
INVESTMENT
MANAGEMENT
8

9. December 2010
Risk
/
return
profiles
Akuo
Investment
How
do
these
return
expectaPons
compare
to
other
asset
classes?
According
to
a
survey
of
2007,
return
expectaPons
for
the
asset
class
infrastructure
over
10
years
are
an
annualized
9.5%,
pusng
it
in
second
place
behind
private
equity
(11.3%).
In
comparison,
stocks
are
expected
to
return
9.0%,
bonds
5.1%
and
cash
3.7%.
Nowadays,
the
returns
for
cash
namely
would
be
much
lower.
What
is
the
expected
risk
profile
of
infrastructure?
ExpectaPons
for
volaPlity
are
typically
set
somewhere
between
equiPes
and
bonds.
The
asset-­‐liability
model
used
by
Morgan
Stanley
Investment
Management,
e.g.,
compares
five
main
asset
classes.
It
puts
infrastructure
(volaPlity
7.9%,
return
9.3%)
second
only
to
bonds
(4.4%)
in
terms
of
expected
volaPlity
and
second
only
to
private
equity
(10.0%)
in
terms
of
expected
return.
As
an
example
for
pension
funds,
the
Dutch
APG,
expects
a
10%
return
from
infrastructure
with
a
7%
risk.
In
comparison,
the
corresponding
figures
are
6%
/
9%
for
property
and
15%
/
25%
for
private
equity.
CalPERS
are
looking
for
an
annual
return
of
inflaPon
(CPI)
plus
5%
-­‐
7%.
(All
references
available
on
demand)
AKUO
INVESTMENT
MANAGEMENT
9

10. December 2010
Akuo
Investment
AKUO
INVESTMENT
MANAGEMENT
10

11. December 2010
Renewable
Energy
Akuo
Investment
Since
the
first
wind
turbines
were
built
at
the
late
1980s,
power
generaPon
from
wind
energy
has
seen
dynamic
growth.
The
reasons
for
this
unprecedented
boom
in
the
last
15
years
lie
in
the
support
programs
from
naPonal
and
state
governments.
Recent
market
trends
are
in
large-­‐scale
building
operaPons
ranging
from
50
to
several
hundred
MW
of
power
generaPng
capacity.
Sun
energy
is
harvested
through
thermal
solar
plants,
or
photovoltaic
solar
plants
on
rooiops
or
ground-­‐mounts.
Although
development
costs
are
sPll
on
the
high-­‐end,
tariff
policies
have
made
this
area
very
aNracPve.
We
intend
to
focus
on
plants
with
greater
than
1
MWp
of
installed
capacity.
AKUO
INVESTMENT
MANAGEMENT
11

12. December 2010
Renewable
Energy
Akuo
Investment
Biogas
plants
produce
a
gas
similar
to
natural
gas
and
use
anaerobic
digesPon
processes.
The
adopPon
of
this
waste
processing
technology
is
revoluPonizing
the
agriculture
sector
in
many
countries
and
is
being
used
to
now
produce
both
energy
and
food.
It
is
likely
that
in
the
future,
electricity
generaPon
capacity
will
increase
substanPally.
Biomass
is
mankind's
oldest
source
of
energy.
Market
trends
are
focusing
on
co-­‐generaPon
plants
using
mixed
fuels:
wood,
bagasse,
and
straw
with
up
to
40
MW
of
capacity.
AKUO
INVESTMENT
MANAGEMENT
12

13. December 2010
Renewable
Energy
Akuo
Investment
We
focus
mainly
on
mini-­‐hydro
projects
with
up
to
50
MW
of
capacity.
Larger
hydro
projects
had
been
the
trend,
but
the
market
is
now
shiiing
to
smaller
units
creaPng
an
aNracPve
niche
market.
Technologies
in
which
Akuo
Investment
does
not
invest
are
omi=ed
here:
ocean
wave
energy,
large
hydro,
CSP…
AKUO
INVESTMENT
MANAGEMENT
13

14. December 2010
What
is
special
about
renewable
energy?
Akuo
Investment
The
specificiPes
of
renewable
energy
infrastructure
are:
•
Absolutely
No
(or
minimal
for
biomass)
commodity
price
correlaPon:
resources
are
“free”
•
Growing
and
poliPcally
supported
market
•
Socially
welcome
as
sustainable
investments
•
Moderate
size
of
the
projects/investments
per
project
compared
to
other
infrastructure
asset
classes
(airports,
toll
roads…)
•
Asset
class
growing
in
developed
countries
where
tradiPonal
infrastructure
projects
are
less
frequent
•
Electricity
generaPng
assets
are
about
the
future
of
energy
and
the
energy
of
the
future
•
Electricity
cannot
be
stored
on
an
industrial
scale,
has
to
be
consumed
•
Very
liNle
correlaPon
to
business
cycles
•
Feed
in
tariffs
or
PPA’s
(very
long
term
commitments)
•
No
bad
client
risk
(UPliPes
buy
the
energy)
•
Quality
of
the
cash
flows
(banks
accept
generally
much
lower
DSCR’s
then
for
tradiPonally
gas
or
coal
powered
staPons:
1.1-­‐1.2
vs
2.0)
due
to
nature
of
the
availability
of
the
resources
•
Excellent
Pming
due
to
the
pressure
regarding
climate
change
policies
AKUO
INVESTMENT
MANAGEMENT
14

15. December 2010
Five
essenPal
driving
forces
to
successful
development
Akuo
Investment
AKUO
INVESTMENT
MANAGEMENT
15

16. December 2010
There
are
misconcepPons
about
renewable
energy
Akuo
Investment
which
need
to
be
cleared
away
As
in
any
new
sector,
several
misconcepPons
circulate
in
the
common
press:
•
Renewable
Energy
is
intrinsically
not
profitable,
and
it
would
never
exist
without
subsidies
(see
the
next
2
slides
in
addendum)
•
Renewable
energy
cannot
replace
any
fossil
fuelled
power
plants,
and
is
just
another
gimmick
•
Renewable
energy
is
for
rich
naPons
only
which
can
afford
subsidies
(Renewable
Energy
has
some
its
greatest
developments
in
emerging
countries
where
the
energy
demand
increase
is
the
highest)
•
Renewable
energy
infrastructure
is
like
cleantech
(Renewable
Energy
Infrastructure
is
to
cleantech
what
programming
languages
are
to
new
web
ventures)
…
AKUO
INVESTMENT
MANAGEMENT
16

17. December 2010
Akuo
Investment
For
more
details,
or
a
complete
bibliography
on
this
topic
please
contact
us:
Akuo
Investment
Management
contact@akuoinvestment.com
AKUO
INVESTMENT
MANAGEMENT
17

18. December 2010
Wind
energy
is
compePPve
to
most
other
sources
Akuo
Investment
(All
references
available
on
demand)
AKUO
INVESTMENT
MANAGEMENT
18

19. December 2010
Solar
energy
is
soon
to
be
compePPve
relaPve
to
Akuo
Investment
nuclear
energy
(US
stats)
(All
references
available
on
demand)
AKUO
INVESTMENT
MANAGEMENT
19