In addition to the general deterrent factors highlighted above, there are some more specific financial concerns that may be deterring pension investors. Some of these have been brought into the limelight in the recent economic downturn.
Illiquid investments
Infrastructure investments are generally illiquid; they cannot be readily bought or sold, so holding them can create issues in volatile markets. In 2008 during the economic turmoil, when equity values fell rapidly many infrastructure values held up well. What appeared a good thing actually created a number of fund management issues. Some funds found the percentage of total value held in infrastructure breached allocation limits, but they could not speedily reduce their exposure to correct this.
The lack of yield
Pension funds are continuously trying to balance their assets with their liabilities to current and future beneficiaries, and for that reason they need to make investments that give them an immediate return or yield. This means that exposure to expensive and uncertain bidding processes and the time required for asset construction are incompatible with their need for yield. This in effect means that they are limited to investing in funds that are already generating distributions or to investing directly in existing, fully operational infrastructure.
Not always index linked
Many pension fund liabilities are index linked, typically to a national consumer price index, and so they seek investment opportunities that also provide index-linked returns. However, there is a limited pool of infrastructure investments that have an explicit index link.
The size of investment
The pension fund community includes a significant number of small funds with investment allocations that are insufficient for infrastructure. For example, in the United Kingdom there are approximately 2,500 pension funds, of which approximately 1,000 are managing funds of less than UK£5 million; only 190 are managing funds of more than UK£1 billion.5
Pension funds also provide debt to infrastructure projects, but in the past this has often relied on mono-line insurance. The decline of the monoline insurers has led to a decline in debt offerings.