Insurers have broadly welcomed the European Commission's plans to expand the market for infrastructure projects, but warned they will not invest in infrastructure "at any cost".
The Commission is currently figuring out details of the 'Juncker plan' to mobilise €315bn of investment, from €21bn of public money that will be leveraged 15 times by private investment (IAR, 26 November 2014, Insurers pin hopes on 'Juncker plan' to ease infrastructure investment)
Speaking at the Insurance Asset Risk conference in London on 15 June, insurers said they were keen to invest in infrastructure.
Allianz's €600bn portfolio has approximately €74bn in illiquid assets that includes real estate, private equity and infrastructure. Edouard Jozan, head of ALM and investment strategy at Allianz France, said the group wishes to raise this to €110bn to represent 15-20% of the portfolio.
"We have eight to 10 years-plus liabilities so we find infrastructure attractive to match these liabilities … and we get an illiquidity premium," he said. But the move "is not a search for yield at any cost," Jozan said.
Jozan said he welcomed the Juncker plan's aim to bring more private investors and more projects to market. "We are not too concerned that spreads would tighten much more, because all those players – whether the EIB [European Investment Bank] or other insurers – can find their place in the landscape."
French insurance group Axa wants to invest €10bn over the next four years in infrastructure, according to Emmanuelle Nasse Bridier, Axa's group chief credit officer, as part of the insurer's plan to diversify its asset base into illiquid assets.
She also welcomed the Juncker plan's aim to expand the pipeline of projects, as the only real alternative to long-dated infrastructure investments is government bonds, which can be volatile. "The key advantage of infrastructure is that it provides predictable cash flows," she added.
Andreas Viljoen, policy expert in the European Commission's financial markets directorate, said there was enough investment capacity in the market, "but we still see a lack of investor confidence."
He said the objective of the Juncker plan was not to increase liquidity in the market nor bankroll infrastructure investment, but guarantee "the first loss of equity and subordinated debt tranches of infrastructure investments in order for private investors to come in and buy the senior tranches."
Munawer Shafi, insurance LDI fund manager at Aviva Investors, said infrastructure investors were being rewarded for illiquidity and complexity, so if the plan is successful it will reduce spreads. The overall attractiveness of the sector will also depend on the capital charges – a review of which is another element of the plan (IAR, 3 June, Bernardino hints at features of capital-light infrastructure investments).
Axa's Nasse Bridier said there were already some public-private infrastructure projects where the spreads on offer were extremely tight, which brings into question the risk versus reward.
"To be able to have sustainable development of the market, we need to have the right pricing of the risk," she said.
Viljoen dismissed concerns that the plan would put downward pressure on yields. "It really depends on how the deals are constructed. These are not standardised transactions," noting that insurers can invest with different levels of guarantees depending on the project.
He emphasised that there would be "no crowding out" of private investors, and that there is access to many different types of debt or equity with different risk-reward profiles
The Commission is aiming for its seed fund – the European Fund for Strategic Investments – to be active from September this year.