This document discusses the benefits and challenges of pension funds investing in infrastructure debt. It provides examples of several UK pension funds that have recently made infrastructure debt investments. While infrastructure debt offers benefits like liability matching and higher yields than corporate bonds, there are also challenges to allocating capital like limited availability of assets, strong competition from other investors, and regulatory and political uncertainties. The document concludes that infrastructure debt can still make sense for pension investors but that allocations require a specialist manager familiar with the asset class.

1. Private & Confidential Investing in Infrastructure 24 June 2014 1
REVISITING INFRASTRUCTURE –
DOES IT STILL MAKE SENSE FOR
PENSION SCHEME INVESTMENT ?

2. Private & Confidential Investing in Infrastructure 24 June 2014
Investing in Infrastructure – everyone’s doing it!
2
Friends Life
• £500mn mandate with Met Life
• To invest in UK-based senior secured bilateral loans
• To back UK annuities
• Met Life also backed by other UK mid-sized insurers
Lancashire County Pension Fund
• £12m bond in community-owned solar power
station in Oxfordshire
• Part of debt financing for project
• Index linked debt with a 23-year repayment period
Universities Superannuation Scheme
• £5bn bid for Severn Trent
• Also involved Kuwait Investment Office and Borealis
Infrastructure
• Largest direct investment by British pension fund in
UK infrastructure
Devon Council Pension Fund
• £40m in Aviva Investors’ Returns Enhancing and
Liability Matching funds
• 50/50 investment in REaLM Infrastructure Fund
and REaLM Ground Rents Fund
• Long-dated investments with inflation protection
BT Pension Scheme
• Minority equity stake in Thames Water
• Shareholding in Kemble Water Holdings Limited
• Illiquid investment with a natural link to UK
inflation
Stanhope Pension Trust
• Large mandate with Allianz Global Investors
• Investing alongside Allianz and EIB
• Part-funded M8 motorways improvement project
in Scotland via new PFI debt
• First investment of this kind by a UK pension fund

3. Private & Confidential Investing in Infrastructure 24 June 2014
Benefits of allocating to infrastructure debt – higher spreads (but falling)
3
0
50
100
150
200
250
300
350
400
AssetSwapSpread
BAML £ Corp & Collateralised
Liquid corporate bond spread as
of 9 May 2014 = 118bps
Approximate premium over liquid
bonds = 75bps
Approximate return on core
infrastructure = 193bps
Approximate return on opportunistic
investments = up to c. 240bps,
case by case
Comparison of Pricing on Private Infrastructure Loans vs. BAML £ Corp & Collateralised

4. Private & Confidential Investing in Infrastructure 24 June 2014
Benefits of allocating to infrastructure debt – lower default experience
4
Default Rates on BBB-rated infrastructure debt are consistent with those experienced in A-rated corporates
Furthermore, ultimate recoveries on defaulted debt average 80%, and in 65.3% of cases defaults were
restructured without loss. The takeaway is lower default losses than the BBB-rating would suggest.
Source: AllianzGI and Moody’s

5. Private & Confidential Investing in Infrastructure 24 June 2014
Benefits of allocating to infrastructure debt – role in a terminal portfolio
5
Corporate
Bonds
Direct
Lending
Corporate
Linkers
Infrastructure
Debt
Long Leases /
Ground Rents
Gilts
Cash

6. Private & Confidential Investing in Infrastructure 24 June 2014
Challenges of allocating to infrastructure debt – availability
6
“Despite having dramatically improved capital
ratios in the past four years, European banks
are not done yet, with many ratios below their
long-term target or requiring improvement
because of transitional rules.
As shown, the average Basel 3 Common
Equity Tier 1 (CET1) Ratio* is now within
50bp of the average target, although these
targets continue to go up…
…From a creditor perspective, the continued
bolstering of European bank capital is the
primary positive fundamental force affecting
bank fundamentals.”
Source: Barclays Research, ‘European Banks
– Three Dimensional Capital’, 25 November
2013
* The CET1 Ratio is the ratio of the most junior form of capital
available to absorb losses (typically common equity and
retained earnings) versus risk-weighted assets.
0% 5% 10% 15%
RBS
HSBC
Lloyds
UBS
Credit Suisse
DB
Commerzbank
BNP
SocGen
Credit Agricole
Santander
BBVA
Unicredit
Intesa SP
Goal CET Ratio
European Banks’ CET1 Ratios: Progress vs. Goals**
** Goal is stated company target or Barclays expectation.

7. Private & Confidential Investing in Infrastructure 24 June 2014
Challenges of allocating to infrastructure debt – competition for assets
7
“AXA's plan to invest EUR10bn over the next five years is the most significant
so far from a European insurer. Other insurers that have recently announced
investment plans include Ageas and CNP Assurances, which have both signed
deals with Natixis to co-invest in infrastructure debt, and Allianz Global
Investors who set up an infrastructure debt platform.”
Source: FitchRatings, 19 June 2013
“The RBS Group Pension Fund has allocated an
initial 750 million British pounds (US$1.2 billion) to
Hastings Funds Management to manage and
develop private market infrastructure assets”
Source: Wall Street Journal, 17 July 2012
“Aviva and Legal and General are among the six
insurers that have agreed to collectively invest
£25bn in UK infrastructure over the next five
years”
Source: Professional Pensions, 5 December 2013

8. Private & Confidential Investing in Infrastructure 24 June 2014
Challenges of allocating to infrastructure debt – political uncertainty
8
Budget 2014 widely seen as offering
limited visibility of future pipeline:
• £140m for flood defences
• £200m for potholes
• Guarantee of £270m for Mersey
bridge
• Up to £200m for Ebbsfleet Garden
City
• £100m for Greater Cambridge
• £20m for Cathedrals

9. Private & Confidential Investing in Infrastructure 24 June 2014
Challenges of allocating to infrastructure debt – regulatory uncertainty
9
The FTSE 100 company said sales of
annuities, which allow pensioners to
convert retirement pot into income, had
fallen by half since the chancellor unveiled
the shake-up in the budget six weeks ago.
Source: Financial Times, 30 April 2014
Greater Flexibility at Retirement for DC Pensioners
Decrease in Demand
for Annuities
Decrease in Demand
for Long-Dated Assets
by Annuity Providers
More DB Members
Shift Retirement
Savings to DC
Schemes
Liquidity Issues for DB
Schemes &
Decreasing Demand
for Long-Dated Assets
Mitigating factors for infrastructure debt:
• Active secondary market.
• Many deals in <20yr maturity bracket,
hence not always ultra long-dated.
• Loans are often amortising.
• Bulk annuity market remains robust.
Potential Implications of the End of Compulsory Annuitisation

10. Private & Confidential Investing in Infrastructure 24 June 2014
Challenges of allocating to infrastructure debt – time to invest
10
Factors Decreasing Deployment Time:
• Wide coverage of borrower universe
• Direct origination capability
• Global mandate
• Few concentration limits
• Manager has full discretion
Factors Increasing Deployment Time:
• Restricted to certain borrower types
• Secondary portfolio only
• UK-only
• Strict portfolio concentration limits
• Manager needs sign-off for each
deal
Away from certain high-
profile failures, we are
aware of several investment
platforms which are
functioning strongly and
have succeeded in putting
capital to work in senior
debt.
Broadly, we would consider
a period of c. 12-18 months
sufficient to invest a
portfolio of £200m+ across
7-10 assets in both bilateral
transactions and greenfield
projects.

11. Private & Confidential Investing in Infrastructure 24 June 2014
Challenges of allocating to infrastructure debt – what is the right approach?
11
Primary Bilateral
Transactions
Secondary PFI Primary PFI
Target Return Higher Lower Medium
Origination Fee Yes No Yes
Speed of Execution Slower
Can be fast if seller can
be identified
Slower
Flexibility over Deal
Structuring
Yes No Yes
Prepayment Protection Usually negotiable No Deal Dependent
Construction Risk
Buy-out friendly?
Deal Dependent
Generally
Typically Not
No
Yes
Sometimes

12. Private & Confidential Investing in Infrastructure 24 June 2014
Challenges of allocating to infrastructure debt – the various access options?
12
Independent
Managers
Insurance
Parents
Bank-Owned
Infrastructure
Equity
Background
Smaller Start-
ups
• Many solution providers are managers
with a significant insurance background,
or banks, seeking to find institutional
partners to help them overcome the
various Basel III challenges to holding
long-dated infrastructure debt on the
balance sheet.
• A number of providers come from an
infrastructure equity background (many
of these are Australian in origin) and
there are also a number of smaller start-
ups, typically formed by bank
infrastructure teams seeking a new
home.
• We feel that given the long-dated and
illiquid nature of infrastructure debt
assets, the corporate stability and
longevity of an investment platform is key.

13. Private & Confidential Investing in Infrastructure 24 June 2014 13
Conclusion

14. Private & Confidential Investing in Infrastructure 24 June 2014
Does Infrastructure Debt Still Make Sense For Pension Scheme Investment?
14
• Infrastructure debt makes sense for pension scheme
investors. It offers many attractive features, including:
• Liability-matching characteristics
• An illiquidity premium over comparably-rated
corporates
• An appeal to buyout providers if structured correctly
• The market is moving fast and allocating is not trivial –
allocations should be made via a specialist manager with a
strong understanding of the client’s goals in allocating to
the space.

15. Private & Confidential Investing in Infrastructure 24 June 2014
2-6 Austin Friars, London EC2N 2HD Telephone : +44 (0) 20 7250 3331 www.redington.co.uk
Contacts
Pete Drewienkiewicz
Head of Manager Research
Direct Line: 020 3326 7138
pete.drewienkiewicz@redington.co.uk
15
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