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UK insurers seek returns in infrastructure – jp

Two of the UK’s biggest life insurers have sealed infrastructure investment deals in the latest sign of the sector’s growing thirst for physical assets.

Legal & General is to put £65m into Newcastle Science Central, a £350m science and technology park to be built on a 24-acre city centre site. Pension Insurance Corporation, meanwhile, is to put £100m into debt secured on the new “super sewer”, or Thames Tideway Tunnel, a £4.2bn project due for completion in 2023.

Insurers are increasingly chasing investments in bricks and mortar assets. Although infrastructure is still a small part of their portfolios, it is a rapidly growing one. The assets offer long term cash flows to match the insurers’ extended liabilities. This is critical for companies such as Legal & General and PIC, which specialise in annuity and pension products that can last for decades.

And because it is often illiquid, infrastructure can sometimes offer better returns than are available on other long term assets such as government or corporate bonds.

“Infrastructure debt ticks all the boxes — it provides long dated, investment grade paper that allows the insurers to match their assets and liabilities. They are using it to replace some of the more traditional paper that they would have held,” said Patrick Liedtke, a managing director in BlackRock’s insurance asset management team. “The added advantage is that, unlike corporate debt, infrastructure loans tend to improve in credit quality the longer you hold them, as the projects become more certain.”

A survey by Goldman Sachs Asset Management earlier this year found that infrastructure debt and infrastructure equity were among the most popular asset classes for insurers, with far more planning to put money into the assets than take money out. The result is that many insurers complain of a shortage of attractive homes for their money.

“There are not many assets that go out beyond 30 years,” said Allen Twyning, head of debt origination at PIC. “There are not an awful lot of options for pension funds and insurance companies. Infrastructure credit is the ideal asset to back long term liabilities”.

PIC’s investments in the super sewer stretch out as far as 2054 and offer yields of 1 per cent over inflation — far more than is available on government bonds with a similar duration. There is also a long deferral period, with money going in over a five-year period so that the sewer builders receive the cash only when they need it.

PIC, which specialises in taking large pension liabilities off corporate schemes, is not the first insurer to back the project. German group Allianz is one of the shareholders in Bazalgette Tunnel, the company created to build and run the 25km super sewer. PIC has also invested heavily in social housing, with £500m committed.

Legal & General has made a series of investments in urban regeneration projects. The Newcastle scheme, where it is working with the city council and the university, follows others in Manchester, Leeds and Liverpool. The project, to be built on the former site of the Newcastle Brown Ale brewery, is intended to create 4,000 jobs, 500,000 square foot of office space and 450 new homes.

Nigel Wilson, Legal & General’s chief executive, said the investment was a sign of the power of what he calls “bulldozer money” (or money earmarked for regeneration) to create jobs in the north of England.

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BDC 314 : Mar 2024