PA Northern Conference: Tailwinds driving 'whole host' of real asset opportunities

Structural tailwinds are driving a “whole host of opportunities” for pension scheme investors in the real asset space, according to M&G head of alternative investments, Michael Howard.

Speaking at the Pensions Age Northern Conference 2022, Howard said that there is “no shortage of opportunities” for investors, noting that while some areas are "quite keenly priced", there are "a huge amount of opportunities out there that offer very attractive value".

"From a structural perspective, we can all see why these opportunities are arising," he continued, explaining that there are "massive issues to deal with in climate change", with infrastructure assets and agriculture assets expected to be part of the solution.

In addition to this, Howard pointed out that there is a growing population, which requires various types of infrastructure that do not exist today, as well as a lot of repurposing that needs to be done on existing infrastructure, with around one in three bridges in the USA in need of repair or replacing, for instance.

Howard also argued that the opportunity set is broadening, suggesting that there are also real asset opportunities that can have a positive impact and fulfil some of the UN Sustainable Development Goals, such as renewables.

In addition to this, he pointed out that real asset investments can offer investors "resilient cashflow", as well as having "quite a lot of built in inflation protection".

"So there's a whole host of opportunities here and you can see the need to link private and public finance for some of these projects," he added, emphasising that there is a "very substantial gap" in the funding needed in many of these areas.

"Everybody talks about the energy transition and need for renewable energy... but the estimated spend that is required is an astronomical figure of $55trn, according to International Renewable Energy, to hit our 1.5 target."

Furthermore, in relation to the work needed on US bridges, Howard noted that, even though a lot of institutional money is going into the space, the investment gap is growing, and is estimated to reach $12.3trn by 2040.

Whilst he acknowledged that there are some challenges for defined benefit pension scheme investors in relation to the liquidity of the assets and holding periods, he said that there are some options for schemes to consider.

"The solution is to create an open ended structure that has a quarterly dealing point and which allows people to access a broad set of opportunities," he explained.

"I think that the important thing about all of these opportunities is they don't come without risks, but as you diversify, and you can diversify, by strategy, by sector or by country, there's a lot of ability for you to take out some of that idiosyncratic risk."

Furthermore, whilst Howard stated that it may take more "a little bit more work" in terms of the structuring for defined contribution (DC) schemes to invest in these areas, "it can be done".

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