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stabilise over time as the project goes into production. Infrastructure projects
tend to have stable cash flows and more limited exposure to competitive forces
due to regulated revenue models which help to support the credit over time.
Obstacles and challenges to infrastructure investing
From the investor’s perspective, the features that characterise infrastructure
– its long-term nature, illiquidity, complexity uniqueness – tend to make
it challenging to analyse. A variety of efforts could be made to make
infrastructure assets more attractive to investors, including standardisation
of documentation, improved access to information and analytics about
investment performance, and creating structures in which investors
of varying risk appetites can find suitable investments across the risk
spectrum.
Perhaps more importantly, investors often cite the lack of investment
opportunities as a reason for not being more invested in infrastructure.
Greater assurance of a “pipeline” of opportunities from project sponsors
would also attract investors to the asset class. The further development of
Public/Private Partnerships globally may prove to be a powerful vehicle for
creating that pipeline. The ability to extract value from existing infrastructure
assets to be redeployed towards seeding new projects has the potential
to be a powerful catalyst for growth. It enables us to recycle the value of
existing societal assets into new productive assets.
Finally, regulatory frameworks around the world must acknowledge
the long-term investment needs of their regulated entities and the
appropriateness of good quality infrastructure investments to meet those
needs. Efforts to define a global insurance capital regime must consider
the long-term nature of the life insurance business. Reflecting appropriate
economics of life insurance in a global capital framework is crucial to
ensure that private funding is available and stable over time. Solvency II and
other frameworks must incentivize investment in long-term assets to allow
insurers to match their long-term liabilities. To date, emerging regulatory
frameworks for banks and insurers are creating disincentives to long-term
investing favoring shorter-duration, more liquid assets and penalising the
very types of assets that could improve portfolio diversification, better
hedge liability exposures and offer a lower risk profile relative to corporate
credit over the long-term.
In summary
We believe that infrastructure investment is not only important to society,
but also strategically important for long-term investors. Pramerica has had
a long-standing commitment to infrastructure as a result of this dynamic.
Indeed, we welcome the opportunity to help develop infrastructure into
a recognised asset class among long term investors through better
access to information, a more assured supply of infrastructure investment
opportunities, and greater understanding among regulators of its
importance in long term investors’ portfolios. Q
1Standard & Poors
2 Moody’s Investor Service
Scott Sleyster is the global chief investment officer of Prudential Financial Inc. (NYSE: PRU), a financial
services company headquartered in the U.S. The company is not affiliated in any manner with Prudential
Plc. of the U.K. This article represents Sleyster’s opinion as of October, 2015.
Pricoa Capital Group actively invests
in infrastructure projects, focusing
on investment grade debt in energy,
transport, social and water sectors.
Shown above is a recent solar farm
project financed by Pricoa Capital
Group in 2014, which is planned to
provide 80 megawatts of clean energy
to the local utility as an alternative
source of power to consumers.