Please cite this paper as: Della Croce, R., Yermo, J., (2013), “Institutional investors and infrastructure financing”, OECD Working Papers on Finance, Insurance and Private Pensions, No.36, OECD Publishing. OECD WORKING PAPERS ON FINANCE, INSURANCE AND PRIVATE PENSIONS, NO. 36 Institutional investors and infrastructure financing By Raffaele Della Croce and Juan Yermo October 2013 OECD WORKING PAPERS ON FINANCE, INSURANCE AND PRIVATE PENSIONS OECD Working Papers on Finance, Insurance and Private Pensions provide timely analysis and background on industry developments, structural issues, and public policy in the financial sector, including insurance and private pensions. Topics include risk management, governance, investments, benefit protection, and financial education. These studies are prepared for dissemination in order to stimulate wider discussion and further analysis and obtain feedback from interested audiences. 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ABSTRACT INSTITUTIONAL INVESTORS AND INFRASTRUCTURE FINANCING The economic downturn is likely to have a lasting impact on the fund management industry and on long term asset allocation strategies of institutional investors. On one hand, in promoting more cautious investment strategies and a greater focus on portfolio risk management in the coming years. On the other hand, the prolonged low-yield environment has heightened the need for return-enhancing strategies, pushing some investors to invest in alternative assets. More fundamentally, the role of institutional investors in long term financing is constrained by the short-termism increasingly pervasive in capital markets as well as structural and policy barriers such as regulatory disincentives, lack of appropriate financing vehicles, limited investment and risk management expertise, transparency, viability issues and a lack of appropriate data and investment benchmarks for illiquid assets such as infrastructure. JEL codes: G15, G18, G23, G28, H54, J26 Keywords: pension funds, institutional investors, asset allocation, pension regulation, infrastructure, infrastructure investment, infrastructure policy, private finance 3 ACKNOWLEDGEMENTS This OECD Working Paper was prepared by Raffaele Della Croce and Juan Yermo, with statistical support from Jean-Marc Salou and Romain Despalins from the OECD Directorate for Financial and Enterprise Affairs. The authors would like to thank the following expert reviewers for their input and comments on Section 3 of this report: Andreas Kappeler (OECD Economics Department) and Chris Kaminker (OECD Environment Directorate), Stephen Perkins (International Transport Forum), Anthony Sykes (SMBC), Julien Touati (Meridiam), Georg Grodzky (Legal & General), Felicita Gimenez (Dealogic), Eva Romer (European Commission), Elliot Bradbrook (Preqin), Claudia Kapp (InRev), John Kjorstad and Yoann Rey (Infrastructure Journal). The authors would also like to thank partners of the OECD Project on Institutional Investors and Long-Term Investment for their support: the Canadian pension fund CPPIB, the Club of Long Term Investors, the Dutch pension fund APG, Guggenheim Partners and Oliver Wyman (www.oecd.org/finance/lti). This working paper is part of the OECD report “The Role of Banks, Equity Markets and Institutional Investors in Long Term Financing for Growth and Development” presented at the Meeting of the G20 Finance Ministers and Central Banks Governors on 15-16 February 2013 in Moscow. At this meeting G20 leaders agreed to establish a Study Group on Financing for Investment with the co-operation of international organizations. The findings of this paper contributed to the work of the Study Group. 4 TABLE OF CONTENTS ABSTRACT / RÉSUMÉ ................................................................................................................................. 3 ACKNOWLEDGEMENTS ............................................................................................................................ 4 1. INTRODUCTION ....................................................................................................................................... 6 2. THE ROLE OF INSTITUTIONAL INVESTORS IN LONG-TERM FINANCING ................................. 8 3. INFRASTRUCTURE INVESTMENT ..................................................................................................... 17 4. CONCLUSIONS ....................................................................................................................................... 30 APPENDIX 1. PENSION FUNDS AND INSURERS TO GDP RATIOS ................................................... 31 APPENDIX 2. CLEAN ENERGY ASSET FINANCING ............................................................................ 33 WORKING PAPERS PUBLISHED TO DATE ........................................................................................... 34 Tables Table 1. Largest SWFs and PPRFs 2012 ........................................................................................... 12 Table 2. Large Pension Funds Infrastructure Investments ................................................................. 25 Table 3. Selected SWF Real Estate Investments ............................................................................... 26 Figures Figure 1. Total assets by type of institutional investors in the OECD, 1995-2011 ............................... 8 Figure 2. Pension fund assets by selected regions................................................................................. 9 Figure 3. Asset Allocation of Pension funds and Insurers in selected OECD countries, 2011 ........... 10 Figure 4. Asset allocation of selected PPRFs (2010) .......................................................................... 13 Figure 5. Asset Allocation changes 2000-2012 .................................................................................. 14 Figure 6. Infrastructure PFI/PPP Subsector Breakdown ..................................................................... 18 Figure 7. Transport Sector PPPs 1990-2011 ....................................................................................... 18 Figure 8. Project Finance Global Volume by Region, 2005-2012 ...................................................... 20 Figure 9. Global Project Finance Volume $Bn ................................................................................... 20 Figure 10. Infrastructure fundraising (amounts and number of funds) ................................................. 21 Figure 11. Unlisted real estate market size and fund numbers .............................................................. 21 Figure 12. Top 100 TNCs: cash holdings, 2005-2011 .......................................................................... 23 Figure 13. Countries with highest pension fund to GDP ratios among the reporting OECD and non- OECD countries, 2011 ......................................................................................................... 31 Figure 14. Countries with highest insurers to GDP ratios among the reporting OECD and non-OECD countries, 2011 ..................................................................................................................... 31 Figure 15. Foreign investment of pension funds in selected OECD countries, 2011 ........................... 32 Figure 16. Clean energy asset financing where pension funds (left) and insurance companies (right) 33 Boxes Box 1. PPPs and Regulatory Asset Based Models for Investment in Transport Infrastructure ................. 18 Box 2. Infrastructure financing gap ........................................................................................................... 19 Box 3. Cash holdings of infrastructure TNCs ............................................................................................ 23 Box 4. Examples of Insurance Companies’ Investments in Clean Energy Projects .................................. 27 5 INSTITUTIONAL INVESTORS AND INFRASTRUCTURE FINANCING By Raffaele Della Croce and Juan Yermo* 1. INTRODUCTION This working paper is part of the OECD report “The Role of Banks, Equity Markets and Institutional Investors in Long Term Financing for Growth and Development” presented at the Meeting of the G20 Finance Ministers and Central Banks Governors on 15-16 February 2013 in Moscow. At this meeting G20 leaders agreed to establish a Study Group on Financing for Investment with the co-operation of international organizations. The findings of this paper contributed to the work of the Study Group. OECD Report to G20 Leaders The financial sector plays an essential role in providing and channeling financing for investment. Beyond providing short-term finance for businesses'