Not Dreaming: Pension Fund Finances Infrastructure Development

APG is working creatively with banks to fund some much-needed infrastructure. Perhaps this Dutch pension offers a useful case study on how we can attract other pensions into this important asset class? Let’s investigate...

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My Center in Stanford’s Engineering School is intently focused on researching ways to unlock institutional capital for investment in long-term projects and assets. More to the point, we are interested in any innovative institutions or processes that investors are using in order to invest in illiquid assets, such as infrastructure.

In this respect, we’ve done big research projects on in-house asset management ( see my post from yesterday to explain why ) and are in the process of working on a variety of new projects that could be categorized as “getting the best from your external managers through a more aligned investment management agreement”. All of this research is designed to help institutional investors play a bigger role in the financing of infrastructure assets.

So, you can imagine my intrigue upon receiving the following story from PEI’s Infrastructure Investor from a kind reader:

“The Netherlands has this week successfully closed a road project using a much-coveted, first-of-its-kind, ‘bank-to-pension’ funding solution. The N33 design, build, finance and maintain (DBFM) contract will require €125 million of financing to pay for the widening of a 38-kilometre portion of the road. The novelty is that Dutch pension provider APG will finance 70 percent of the debt used for the project, or € 77.8 million the first time a Dutch pension is providing a loan for a Dutch infrastructure project...”

“The loan will be inflation-linked and will kick in once construction on the project finishes, refinancing a substantial portion of the commercial debt supplied by Bank of Tokyo-Mitsubishi, KfW-Ipex and Rabobank. An APG spokesman explained the loan will “pay a fixed coupon at face value lower than the interest charged by banks,” although he admitted that, once you add the inflation-protection element, then the loan cost becomes similar to bank debt. However, there is still an important difference, the spokesman pointed out: “Bank loans offer a floating rate, requiring an interest swap to fix interest on the loan. That would cost the borrower around 25 basis points to 30 basis points a year – which the APG loan saves.”

I’m told by smart people that the big innovation here is in the inflation linkage, as it saves considerably on the costs of hedging for the project developers. And I think that’s great. But, from my perspective, the fascinating piece of news is that a bank and an institutional investor have collaborated to put together a compelling financing package that meets the interests of all parties... right from the development phase of the project!

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In short, this is a case where a pension fund has played an active role in the development of infrastructure, which is precisely what many governments and multilateral organizations around the world are trying to achieve with their own pensions. Thus, APG may offer a useful case study in how to get one these deals done ... (though it remains to be see how successful it will be in the long run). I for one will be investigating this further...

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