In Summary
  • Infrastructure, too, is an emerging asset class, which portends huge potential benefits for pension funds with regard to return enhancement and portfolio risk mitigation.

  • Economic infrastructure is more likely to generate commercial returns on investment and attract private funds.

  • Social infrastructure is required to meet social needs, which means returns often do not cover costs.

Amid increasingly difficult economic conditions and volatile markets, pension funds are grappling with diminishing and volatile returns from traditional asset classes — including Treasury bonds and bills, equities, corporate bonds and bank deposits.

These were previously proven sufficient from return and risk management perspectives. But their returns have become less attractive and more positively correlated, resulting in lower returns while losing their diversification elements. Pension funds should look towards alternative investments such as private equity, property and infrastructure.

KEY PROJECTS

Most local pension schemes are familiar with private equity and property investments. But infrastructure, too, is an emerging asset class, which portends huge potential benefits for pension funds with regard to return enhancement and portfolio risk mitigation. It also enables them to participate in the country’s infrastructure development agenda.

In recognition of this, the government is advocating pension fund participation in public-private partnerships (PPPs), even designating key projects, including the Nairobi-Nakuru-Mau Summit road expansion, as a potential PPP.

Investing in infrastructure also provides an alternative source of funding, reducing the government’s dependence on debt to finance infrastructure developments.

Infrastructure can be broadly classified as economic (transport, renewable energy and telecommunications) and social (schools, prisons and hospitals).

Economic infrastructure is more likely to generate commercial returns on investment and attract private funds. Social infrastructure is required to meet social needs, which means returns often do not cover costs. Such investments are typically financed by the public sector.

Investors generally assess investments in infrastructure like any other. To attract funding, a project must be bankable; the returns must be competitive and sustainable.

HIGHER RETURNS

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