The UK’s new Chancellor of the Exchequer, Labour’s Rachel Reeves, recently met with the heads of Canada’s major pension schemes prompting speculation that she might seek to pool the UK’s 86 local government pensions schemes (LGPS) into fewer and larger Canadian-style entities.
For GLIL Infrastructure with £4.1 billion ($5.4 billion; €4.9 billion) in assets under management from six LGPS and the National Employment Savings Trust (NEST), this could be “an opportunity to get a bigger share [of public pension infrastructure investments]”, GLIL’s chief operating officer, Ted Frith, tells Infrastructure Investor.
Such bigger pools would be looking to invest in infrastructure and “only LPPI [Local Pensions Partnership Investments] and the northern LGPS in Liverpool, Manchester and West Yorkshire, who are invested in GLIL, are really doing direct infrastructure allocations. It would be madness if there were two or three new GLIL-like set-ups all competing for the same assets. That would be an absurd situation.”
Being absurd would not necessarily hinder such a development, Frith agrees, and he acknowledges having a vested interest. Still, “the reality is we’ve got an established vehicle. It’s got a nine-year track record. It’s got a bunch of satisfied investors and a diverse portfolio of assets. And it’s the best value for money on the street, in terms of costs.”
Seeking outside investors
The discussion around possible governmental intervention has prompted GLIL to respond. “We’ve not been actively seeking out new investors. Now we will be, and I think we’ve got a very good proposition,” says Frith.
GLIL’s strategy is to take direct stakes, usually minority stakes of around 20-30 percent, in primarily UK businesses offering a core or core-plus return. The focus is on long-term investment to match the liabilities of its members, and the investing fund is open-end.
GLIL is invested in operational assets across all sectors. “There’s an interesting imperative for investing in the UK: a pension fund in the UK often pays index-linked pensions, so the biggest liability is CPI [the UK consumer price index]. Therefore, if you can invest in larger amounts of assets whose returns are also linked to UK CPI, that’s a good thing,” Frith says.
To ensure transparency on costs, GLIL very recently moved away from charging members on an ad-hoc basis and introduced a management fee instead. “The headline management fee is 50 basis points, which we think is pretty low. With the exception of transaction costs, everything else will be paid for out of that 50 basis points,” says Frith. GLIL pays a fixed basis point fee for alternative investment fund manager services provided by LPPI.
There are no performance fees and none are planned. This, however, should not impact recruitment, says Frith. “It’s not all about salary. I believe we pay competitively but we are not aiming to be the top decile salary in the market,” he says. Instead, employees will get more responsibility early on, including close involvement with energy transition projects. “Younger people, they’d almost pay to come and do that.”
The ambition to grow is pursued with the support of GLIL’s current members as “some of our founder members would prefer to be a smaller percentage of a bigger fund”. Such new members may appear not only via potentially larger pools of capital emerging in the UK, but could be existing LPGS as well as other institutions, both domestically and internationally.
“Lots of investors outside of the UK might want to invest in GLIL as a means of gaining exposure to core UK infrastructure. Canadian and Australian pension funds have offices [in the UK], but I don’t think many US public pension schemes have an office in London. If [US pension funds] want to allocate to the UK, GLIL is definitely a credible option.”
International competition
Frith is hoping to get clear objectives and policies on infrastructure from the new government “fairly soon”.
“A challenge that the last government perhaps were a bit slow in recognising is that there is now an international competition for capital. The UK has been a forerunner in attracting private capital into infrastructure, going back to Margaret Thatcher’s privatisation programme and onwards. Why? It was all about stable government, robust legal framework and regulation deemed very predictable in the UK, making it more likely that investors would get their money back.
“[More recently,] the outlook has been a lot less certain in policy and regulation and governance and, at the same time, lots of other jurisdictions are trying to attract capital and working hard on their regulation, jurisdiction, governance, etc. The coming together of those two factors, I think, have pushed the UK down in the relative attractiveness of states in which to invest,” adds Frith.
The UK attracting fewer investors does, however, come with a silver lining for UK-focused GLIL: “If that means GLIL earns an extra return on investments, that’s a good thing. We did a couple of transactions last year in telecom towers and solar, where we achieved commercial terms that were superior to those available a couple of years before that.”
GLIL is mandated to be 75 percent invested in UK infrastructure and is currently at 90 percent, and Frith argues that there is a case to be made for LGPS to invest in domestic infrastructure and not be unduly swayed by overseas opportunities.
“There’s an element of the unfamiliar looking shinier and sexier than what we’ve got at home. And I think investing in infrastructure to a certain extent is a bit like that. Why do you look at overseas solar opportunities when you can achieve excellent returns in the UK?”
What’s next?
After nearly a decade of investing in mainly operational assets, GLIL has teamed up with a UK-listed solar fund managed by Bluefield Partners to expand into UK solar development opportunities and get access to a significant development pipeline.
This exposure to greenfield assets should not only provide a premium but also provide coveted ‘additionality’, and Frith doesn’t rule out further joint ventures in the future.
As a comparatively small outfit, Frith is open about needing external experts on water and rail, but not so much regarding green energy. “Renewables, we think we know quite a lot about those. We’re quite comfortable representing ourselves,” says Frith, though he acknowledges the increasing complexity. “It’s getting more difficult. That’s why I continue to like simple things like wind turbines. We have a panel of external experts that we call on for more specialist roles.”
As for assets of interest, GLIL is considering a number of grid stabilisation projects. They would like to invest in batteries in principle, but “batteries have been very challenging for the last two years. You can’t get the grid connection, you can’t get planning, you can’t get somebody in China to make you a battery. And then, all of a sudden, technology leaps forwards; the half-hour duration batteries that you were building two years ago look like old television sets and few people want them,” says Frith.
Still, “batteries, and other grid stabilisation assets, provide an interesting risk diversification for our portfolio. If you’ve got lots of generation assets and might get curtailed, why not charge your batteries during those down periods?” Other flexibility assets of interest to GLIL are synchronous condensers.
Two asset classes are of less interest: EV charging and data centres. “One of the things that you don’t want in a portfolio like ours is significant obsolescence risk, that’s one reason why we haven’t done any EV charging. The auto manufacturers can’t even agree what the plug looks like. We don’t want to be backing the Betamax video recorder.”
On data centres, GLIL members are still working out whether these are infrastructure or real estate. As some members are already invested through their real estate allocation, there is little interest in doubling down on the asset class from the infrastructure side.
EV and data centres aside, there should still be plenty of opportunities in the UK infrastructure space. And quite possibly room for an ambitious UK-focused fund to grow too.