The Lancashire County Pension Fund (LCPF), one of the largest schemes in the UK Local Government Pension Scheme (LGPS), has acquired a 12.5% equity stake in Madrileña Red de Gas (MRG), a gas distribution company in Spain’s Madrid region.
MRG, one of Spain’s three biggest gas distribution companies, is owned by a consortium formed by EDF Invest, Gingko Tree Investment and Dutch pension fund manager PGGM.
Mike Jensen, CIO at LCPF, told IPE: “We are building a diverse direct infra portfolio, and, up until this transaction, we had a renewable bias, a factor of the attractive deals we had seen.
“We had bid – unsuccessfully, unfortunately – for transport assets (London City Airport and Eurostar), and we will continue to look at a wide range of infra assets across a variety of sectors and geographies.”
Jensen said the post-financial crisis recovery story in Iberia was part of the appeal of this latest acquisition.
But he added: “Specifically, we see MRG as a particularly well-run company with good growth potential and a great regulatory relationship. In addition, we will be in partnership with leading investors.”
The cost of the acquisition has not been disclosed.
LCPF was advised by Santander Corporate & Investment Banking (France) as exclusive financial adviser and Cuatrecasas, Gonçalves Pereira (Madrid) as legal adviser.
The stake in MRG is LCPF’s fourth acquisition of overseas infrastructure assets, following its purchase of a share in EDF Énergies Nouvelles’ Portuguese wind farms last year, and ownership of two renewable energy businesses – landfill gas in the US, and cane waste power plants in Australia.
Jensen said the MRG stake illustrated the LCPF’s willingness to continue investing directly in infrastructure assets with attractive dividend yields that provide long-term returns, as well as a significant source of diversification.
Total Infrastructure makes up 9.6% of the LCPF’s total portfolio, worth £5.8bn at 31 December 2015.
The fund’s infrastructure target range is 10-15%, and it is working on further transactions at present.
Jensen said: “Over time, I would expect to increase the allocation to this asset class, given that its characteristics are so well suited to an open defined benefit pension scheme.”
The fund’s strategy for infrastructure investing is to split the allocation two-thirds/one-third between direct and funds, within a global infrastructure mandate.
The next step is to create a balanced portfolio by sector and geography, but, given the transactional nature of the market, said Jensen, this will take a prolonged period to achieve.
“From an investment thesis point of view,” he said, “we follow the usual mantra – stable companies generating stable, and where possible, inflation-linked cash flows.”
As for return, the LCPF has set a hard hurdle of 8% for the asset class and so far has substantially beaten that target across the portfolio.
Jensen told IPE: “The portfolio has performed excellently, and the landscape of opportunities for a global mandate is good. Partnerships remain important, given the size of some transactions and the strong competition for assets.
“Prices are strong, but, in what we believe will be a lower-return world going forward, they still represent value for pension funds of our type.”
The LCPF returned 14.9% on its entire investment portfolio over the 12 months to 31 March 2015.
As regards future direct infrastructure acquisitions, Jensen said the fund was ambivalent on location, as long as a specific opportunity passed its stringent investment and governance tests.
However, sterling equivalent returns are one of those tests.
“Energy remains a focus, as does transport, utilities and some social infra,” he told IPE. “Renewables will also continue to be of interest.”
And he said one of the LCPF’s advantages was its flexibility of approach.
“We are not precious on name tags of assets or on hybrid deals,” he said.
Meanwhile, Jensen said the asset-pooling partnership with the London Pension Fund Authority (LPFA) had made progress that was “on target”.
The strategic partnership was announced last July and creates a single investment vehicle exceeding £10bn.
Jensen said: “Pooling is a very logical step, and both the LCPF and the LPFA recognised the logic very early, before the government made its views clear.
“In the infra space, scale is important, so we expect pooling to make sensible investment easier and more relevant to the LGPS in aggregate.
“That said, partnerships remain key, given the need to create diversified portfolios. I expect to continue in partnership with a number of major international investors but perhaps on a more equal footing in the near future.”
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