“We would absolutely love to invest more in Dutch infrastructure”

When APG's Infrastructure team was created over 18 years ago, a mere 1% of ABP's total assets was allocated to it. Since then the team has grown consistently. Today it has over 40 investment managers who together manage a portfolio worth around 26 billion euros. Recently ABP, APG's largest pension fund client, has announced it will further increase its allocation to infrastructure to 7% of its asset mix. We asked Jan-Willem Ruisbroek, who has led the infrastructure investment strategy since 2018, about the reasons for this growth and the challenges and opportunities he sees for his team in the future.

The textbook reason to invest in infrastructure is that is has low correlations with other asset classes, meaning that in addition to the absolute returns it creates, it provides value because of the diversification it offers. Jan-Willem Ruisbroek's personal view on this starts with the real purpose of a pension fund. He says this is essentially quite simple: to transform pension savings into long-term cash flows the total discounted sum of which is larger than today's savings. "This is exactly what infrastructure does exceptionally well. If you buy infrastructure, you buy stable cash flows." He then proceeds to list the reasons why this is so: "Infrastructure is an essential good for which there will always be demand. It's there for the long term, it requires high capital investments, there usually won't be a competing asset next to it, and cash flows are inflation-linked. All of this makes infrastructure a very attractive asset class for pension funds."

You describe a low-risk, stable, predictable asset class, yet your team's average return over the past 15 years is around 9%. How can you achieve such high returns from a low-risk asset?

"We have been able to time the market very well and the team has proved to be good at asset selection. However, in more recent years a lot of additional capital has flowed into infrastructure investments. That inflow has made the market significantly more competitive. Infrastructure projects are usually sold in competitive processes to the highest bidder. So if you win you know that you paid more than all the others were prepared to do, that's the winner's curse. The inflow of capital has driven up valuations and put pressure on returns, so there is no guarantee that we'll be able to make a 9% return in the coming 15 years."

If you have to outbid all the other parties, can you also afford to take responsible investment criteria into account?

"This is a topic that is riddled with dilemmas. First off, I believe you should always aim for the highest possible sustainability criteria, and that it's inherently good to be uncompromising in this. And I don't believe that this necessarily has to come at the expense of returns. An additional dilemma is the definition of responsible investments. Should an investment in say an offshore windmill farm that is already operational qualify? Technically it probably could, but one could question if such investments actually make the world more sustainable. After all, these windmills are already there, and too much demand for such investments may even have some adverse effects. Sometimes investors seem determined to win such projects, primarily to be able to claim to the outside world that they have been greening their portfolio. This pushes prices up significantly and creates bubbles in certain let's say high ESG sectors that then become so expensive you can't make a decent return any longer."

How do you avoid such bubbles?

"For example, by developing new projects instead of competing with other investors for a part of existing ones. This is what we've done in the case of Noordzeker, where we have taken the lead in setting up a consortium to develop offshore wind farms. The key to this approach is that you have to be willing and able to accept an additional construction risk. Because constructing an offshore wind farm is an exceptionally complex undertaking. We can't do this on our own, which is why we always work together with partners who possess complementary expertise. But we do understand the complexity and the risks involved. This is part of how we differentiate ourselves. We're willing to go a step further than many other institutional investors based on the knowledge and experience we've built up over the years. Noordzeker, and also the Groendus and Kenter acquisitions, are examples of how we try to monetize our expertise in infrastructure."

There is enormous demand for infrastructure investments in emerging countries. Do you see opportunities there to put your capital and expertise to good use?

"We have a global mandate and we're looking around the globe for opportunities. In fact we recently conducted a study to determine the investments in sustainable infrastructure that are needed to achieve net-zero by 2050, across all regions and across a number of infrastructure categories. The outcomes show that a lot of capital must be invested in emerging countries to achieve this goal. So although we try to invest in infrastructure worldwide that fulfills our criteria in terms of sustainability, this is often difficult and the risks involved can be substantially higher. And taking into account our clients’ risk-return preferences means there will always be a strong “home-bias” in our portfolio. So for us investments in emerging economies are a matter of finding a balance between maximizing impact and staying within an acceptable risk profile."

If you have to look closer to home, what investment opportunities do you see?

"There are fantastic opportunities in harbors, and we have some in our portfolio. Many harbors are going through a transition right now. Space that used to be occupied by import terminals and storage facilities for fossil fuels is increasingly being used to create service hubs for the offshore wind industry. A number of Dutch harbors are exceptionally well positioned to serve as operations and maintenance facilities for the 70 gigawatts of offshore wind power that should be installed in the North Sea by 2050. But while we can buy toll roads in France and parts of the electricity grid in the UK, in the Netherlands private investments in public infrastructure like harbors are prohibited by law. This also means we can't invest in strengthening our heavily congested electricity grid. I find this an unfortunate situation that to me makes little sense. On the one hand we have these huge collective piggy banks called pension funds, while on the other, every Dutch tax payer is in debt because he owns part of the national debt. To fund the energy transition in the Netherlands, we prefer to borrow even more instead of investing our savings and making a nice return in the process. So at the moment the opportunities for us are limited, but as a Dutch pension fund investor we would absolutely love to invest more in Dutch infrastructure."