Tapping into Pension Funds for Long Term Investment in Infrastructure

by | Jan 29, 2013 | Newsletters

[vc_row type=”vc_default” full_width=”stretch_row_content_no_spaces” css=”.vc_custom_1500547593342{padding-right: 100px !important;}” el_class=”noPaddinRow”][vc_column width=”1/6″ el_class=”noPaddingLeft” offset=”vc_hidden-md vc_hidden-sm vc_hidden-xs”][vc_raw_html]JTNDZGl2JTIwY2xhc3MlM0QlMjJtYWluLXN0cmlwJTIyJTNFJTBBJTNDZGl2JTIwY2xhc3MlM0QlMjJibHVlLXN0cmlwMCUyMiUzRSUzQyUyRmRpdiUzRSUwQSUzQ2RpdiUyMGNsYXNzJTNEJTIyYmx1ZS1zdHJpcDElMjIlM0UlM0MlMkZkaXYlM0UlMEElM0NkaXYlMjBjbGFzcyUzRCUyMmJsdWUtc3RyaXAyJTIyJTNFJTNDJTJGZGl2JTNFJTBBJTNDJTJGZGl2JTNF[/vc_raw_html][/vc_column][vc_column width=”5/6″ el_class=”justifyText” css=”.vc_custom_1530305315956{padding-right: 310px !important;}” offset=”vc_hidden-md vc_hidden-sm vc_hidden-xs”][vc_empty_space height=”50px”][vc_row_inner el_id=”newsletters”][vc_column_inner width=”1/6″][/vc_column_inner][vc_column_inner width=”2/3″][vc_custom_heading text=”Tapping into Pension Funds for Long Term Investment in Infrastructure” font_container=”tag:h1|font_size:22|text_align:justify|color:%236699cc|line_height:1.8″ use_theme_fonts=”yes”][/vc_column_inner][vc_column_inner width=”1/6″][/vc_column_inner][/vc_row_inner][vc_empty_space height=”25px”][vc_column_text]INTRODUCTION

To address the deteriorating state of infrastructure in Nigeria, the Governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi, has estimated that the country requires a yearly investment of US$10 billion (about N1.6 trillion) over the next 10 years, an amount the government cannot solely provide.

Global trends indicate that the private sector, institutional investors in particular, will drive investments in infrastructure development. In this regard, Pension Funds Administrators (PFAs) have the long term assets which can be a stable source of funding required for infrastructure projects.

Market experts estimate that the total value of funds under management by PFAs as at December 2012 was around N3 trillion and further estimate that the total of funds under management will grow by 30 per cent per annum in coming years. Stakeholders in infrastructure development have suggested that a significant portion of these pension fund assets be invested in infrastructure projects rather than investing almost exclusively in corporate equities and government debt instruments. The reasoning is that equities are usually volatile (for example the capital markets crisis between 2008 and 2009) and long term debt instruments e.g. 25 year government bonds (which are essential in infrastructure development) are rare in Nigeria.

POTENTIAL IMPACT OF THE 2012 PENSION FUND REGULATIONS

The ability of PFAs to invest in infrastructure is influenced by the guidelines set by the National Pension Commission (Pencom). In this regard, the recent 2012 Regulations (the new regulations) encourage PFAs to invest more in infrastructure projects by streamlining requirements;

  1. Broadening of the Definition of Infrastructure

The 2010 regulations had previously limited the phrase “core infrastructure” by citing specific examples (such as power, railway etc). However, the new regulations simply imposes a viability limit, it states that PFAs can invest only in core infrastructure projects, whose business plans and financial projections indicate that they are viable as well as economically and financially rewarding for investment by pension funds.

  1. Mandatory Due Diligence for Investments

PFAs are required by the new regulations to ensure that appropriate legal and financial due diligence is undertaken on all projects and instruments prior to investment. This would ensure the quality of infrastructure investments made by PFAs are of a high caliber and give PFAs more comfort in investing in infrastructure.

  1. Minimum Number of Rating Agencies

Rating of infrastructure bonds issued by companies or governments may now be done by just one Rating Agency. The reduction of the number of rating agencies required would reduce the cost of issuing infrastructure bonds by any of the above entities.

  1. Qualifying Criteria for Infrastructure Funds

PFAs may invest in Infrastructure Funds subject to certain requirements. The basic requirements remain the same:

  1. a) The Funds must be registered with the Securities and Exchange Commission;
  1. b) The value of the infrastructure fund shall not be less than N5 billion;
  1. c) The infrastructure fund must have well-defined and publicized investment objectives and strategy;
  1. d) Funds shall be managed by an experienced Fund Manager whose Key Principals shall each have at least 10 years experience;
  1. e) A minimum of 75% of the infrastructure fund shall be invested in projects within Nigeria.

In addition to the above, the new regulations have introduced the following new criteria:

  1. a) PFAs may only invest in Infrastructure Funds whose underlying assets are tangible, physical assets.
  1. b) Minimum investment requirements have been reduced to 1% where DFIs and MDFOs are co-investors and 3% without those institutions as co-investors. Formerly, Fund Managers were required to maintain a minimum investment of 3% where Development Finance Institutions (DFIs) or MDFOs are co-investors while Fund Managers without DFIs or MDFOs as co-investors are to maintain a minimum investment of 5%.
  1. c) Funds are required to have pre-defined liquidity/exit routes. Furthermore, PFAs must ensure that the bonds or debt instruments issued to finance the infrastructure project have a feasible and enforceable redemption procedure in the event of project suspension or changes in regulatory or policy decisions.
  1. d) Key Principals of the Fund Manager must give at least 90 days notice before exiting the Fund. This ‘exit clause’ shall be expressly stated as a condition in the investment agreement/covenant between the PFA and the Fund Manager.

The changes in the minimum investment requirements are, presumably, to encourage the establishment of infrastructure funds. These additional requirements ensure that the PFAs invest in stable infrastructure funds and that they have recourse to any assets which the infrastructure fund may have.

  1. Eligible Unlisted Companies

Rule 4.3 of the new Regulations provides that PFAs may invest in bonds and debt securities issued by “eligible unlisted companies”. Although the new regulations do not provide a definition for “eligible unlisted companies”, in the Rules on Collective Investment Schemes of the Securities and Exchange Commission provides features of an unlisted company as a company that:

  1. a) has demonstrated compliance with the code of corporate governance;
  1. b) has consistently produced audited accounts for the preceding 5 years;
  1. c) has a consistent history of profitability for at least the preceding 5years; and
  1. d) has not been leveraged above a reasonable amount as may be prescribed by the Securities and Exchange Commission from time to time.

By enabling PFAs invest in bonds issued by eligible unlisted companies, the regulations allow project companies issue infrastructure bonds without being listed on the stock exchange as long as they are in compliance with the above requirements by the Securities and Exchange Commission.

Unaffected Provisions

The maximum investment limits for PFAs in infrastructure still remain the same. PFAs may not invest more than 15% of their total assets in Infrastructure Bonds issued by corporate entities and only 5% of their assets in Infrastructure Funds.

Infrastructure bonds in which PFAs may invest in still have a minimum rating requirement of ‘A’. PFAs may also invest in infrastructure bonds with a minimum rating of ‘BBB’ subject to a minimum limit.

CONCLUSION

In order to be more effective, it is suggested that the PFAs set aside a percentage of their assets under management (up to 5% as permitted by the Regulations) into a common pool, called Super Pension Funds, to be managed by infrastructure investment professionals. These Super Pension Funds (also called superannuation funds) will then be able to make direct investments into infrastructure project companies.

Canadian and Australian super pension funds have about 10% equity investments in their portfolios. Some of these Super Pension Funds have, through time and experience, garnered enough expertise and even play leading roles in consortia when bidding for projects.

Investing in infrastructure can ensure constant long-term returns on investments for PFAs while simultaneously redressing the infrastructure deficit in Nigeria.[/vc_column_text][/vc_column][/vc_row][vc_row type=”vc_default” full_width=”stretch_row_content_no_spaces” css=”.vc_custom_1500547593342{padding-right: 100px !important;}” el_class=”noPaddinRow”][vc_column el_class=”noPaddingLeft” offset=”vc_hidden-lg vc_hidden-xs”][vc_raw_html]JTNDZGl2JTIwY2xhc3MlM0QlMjJ0YWItbWFpbi1zdHJpcCUyMiUzRSUwQSUzQ2RpdiUyMGNsYXNzJTNEJTIydGFiLWJsdWUtc3RyaXAwJTIyJTNFJTNDJTJGZGl2JTNFJTBBJTNDZGl2JTIwY2xhc3MlM0QlMjJ0YWItYmx1ZS1zdHJpcDElMjIlM0UlM0MlMkZkaXYlM0UlMEElM0NkaXYlMjBjbGFzcyUzRCUyMnRhYi1ibHVlLXN0cmlwMiUyMiUzRSUzQyUyRmRpdiUzRSUwQSUzQyUyRmRpdiUzRQ==[/vc_raw_html][vc_empty_space height=”25px”][vc_row_inner][vc_column_inner width=”1/6″][/vc_column_inner][vc_column_inner width=”2/3″][vc_custom_heading text=”Tapping into Pension Funds for Long Term Investment in Infrastructure” font_container=”tag:h1|font_size:22|text_align:justify|color:%236699cc|line_height:1.8″ use_theme_fonts=”yes”][vc_column_text]INTRODUCTION

To address the deteriorating state of infrastructure in Nigeria, the Governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi, has estimated that the country requires a yearly investment of US$10 billion (about N1.6 trillion) over the next 10 years, an amount the government cannot solely provide.

Global trends indicate that the private sector, institutional investors in particular, will drive investments in infrastructure development. In this regard, Pension Funds Administrators (PFAs) have the long term assets which can be a stable source of funding required for infrastructure projects.

Market experts estimate that the total value of funds under management by PFAs as at December 2012 was around N3 trillion and further estimate that the total of funds under management will grow by 30 per cent per annum in coming years. Stakeholders in infrastructure development have suggested that a significant portion of these pension fund assets be invested in infrastructure projects rather than investing almost exclusively in corporate equities and government debt instruments. The reasoning is that equities are usually volatile (for example the capital markets crisis between 2008 and 2009) and long term debt instruments e.g. 25 year government bonds (which are essential in infrastructure development) are rare in Nigeria.

POTENTIAL IMPACT OF THE 2012 PENSION FUND REGULATIONS

The ability of PFAs to invest in infrastructure is influenced by the guidelines set by the National Pension Commission (Pencom). In this regard, the recent 2012 Regulations (the new regulations) encourage PFAs to invest more in infrastructure projects by streamlining requirements;

  1. Broadening of the Definition of Infrastructure

The 2010 regulations had previously limited the phrase “core infrastructure” by citing specific examples (such as power, railway etc). However, the new regulations simply imposes a viability limit, it states that PFAs can invest only in core infrastructure projects, whose business plans and financial projections indicate that they are viable as well as economically and financially rewarding for investment by pension funds.

  1. Mandatory Due Diligence for Investments

PFAs are required by the new regulations to ensure that appropriate legal and financial due diligence is undertaken on all projects and instruments prior to investment. This would ensure the quality of infrastructure investments made by PFAs are of a high caliber and give PFAs more comfort in investing in infrastructure.

  1. Minimum Number of Rating Agencies

Rating of infrastructure bonds issued by companies or governments may now be done by just one Rating Agency. The reduction of the number of rating agencies required would reduce the cost of issuing infrastructure bonds by any of the above entities.

  1. Qualifying Criteria for Infrastructure Funds

PFAs may invest in Infrastructure Funds subject to certain requirements. The basic requirements remain the same:

  1. a) The Funds must be registered with the Securities and Exchange Commission;
  1. b) The value of the infrastructure fund shall not be less than N5 billion;
  1. c) The infrastructure fund must have well-defined and publicized investment objectives and strategy;
  1. d) Funds shall be managed by an experienced Fund Manager whose Key Principals shall each have at least 10 years experience;
  1. e) A minimum of 75% of the infrastructure fund shall be invested in projects within Nigeria.

In addition to the above, the new regulations have introduced the following new criteria:

  1. a) PFAs may only invest in Infrastructure Funds whose underlying assets are tangible, physical assets.
  1. b) Minimum investment requirements have been reduced to 1% where DFIs and MDFOs are co-investors and 3% without those institutions as co-investors. Formerly, Fund Managers were required to maintain a minimum investment of 3% where Development Finance Institutions (DFIs) or MDFOs are co-investors while Fund Managers without DFIs or MDFOs as co-investors are to maintain a minimum investment of 5%.
  1. c) Funds are required to have pre-defined liquidity/exit routes. Furthermore, PFAs must ensure that the bonds or debt instruments issued to finance the infrastructure project have a feasible and enforceable redemption procedure in the event of project suspension or changes in regulatory or policy decisions.
  1. d) Key Principals of the Fund Manager must give at least 90 days notice before exiting the Fund. This ‘exit clause’ shall be expressly stated as a condition in the investment agreement/covenant between the PFA and the Fund Manager.

The changes in the minimum investment requirements are, presumably, to encourage the establishment of infrastructure funds. These additional requirements ensure that the PFAs invest in stable infrastructure funds and that they have recourse to any assets which the infrastructure fund may have.

  1. Eligible Unlisted Companies

Rule 4.3 of the new Regulations provides that PFAs may invest in bonds and debt securities issued by “eligible unlisted companies”. Although the new regulations do not provide a definition for “eligible unlisted companies”, in the Rules on Collective Investment Schemes of the Securities and Exchange Commission provides features of an unlisted company as a company that:

  1. a) has demonstrated compliance with the code of corporate governance;
  1. b) has consistently produced audited accounts for the preceding 5 years;
  1. c) has a consistent history of profitability for at least the preceding 5years; and
  1. d) has not been leveraged above a reasonable amount as may be prescribed by the Securities and Exchange Commission from time to time.

By enabling PFAs invest in bonds issued by eligible unlisted companies, the regulations allow project companies issue infrastructure bonds without being listed on the stock exchange as long as they are in compliance with the above requirements by the Securities and Exchange Commission.

Unaffected Provisions

The maximum investment limits for PFAs in infrastructure still remain the same. PFAs may not invest more than 15% of their total assets in Infrastructure Bonds issued by corporate entities and only 5% of their assets in Infrastructure Funds.

Infrastructure bonds in which PFAs may invest in still have a minimum rating requirement of ‘A’. PFAs may also invest in infrastructure bonds with a minimum rating of ‘BBB’ subject to a minimum limit.

CONCLUSION

In order to be more effective, it is suggested that the PFAs set aside a percentage of their assets under management (up to 5% as permitted by the Regulations) into a common pool, called Super Pension Funds, to be managed by infrastructure investment professionals. These Super Pension Funds (also called superannuation funds) will then be able to make direct investments into infrastructure project companies.

Canadian and Australian super pension funds have about 10% equity investments in their portfolios. Some of these Super Pension Funds have, through time and experience, garnered enough expertise and even play leading roles in consortia when bidding for projects.

Investing in infrastructure can ensure constant long-term returns on investments for PFAs while simultaneously redressing the infrastructure deficit in Nigeria.[/vc_column_text][/vc_column_inner][vc_column_inner width=”1/6″][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row type=”vc_default” full_width=”stretch_row_content_no_spaces” css=”.vc_custom_1500547593342{padding-right: 100px !important;}” el_class=”noPaddinRow”][vc_column el_class=”noPaddingLeft” offset=”vc_hidden-lg vc_hidden-md vc_hidden-sm” css=”.vc_custom_1530307272835{padding-right: 75px !important;padding-left: 60px !important;}”][vc_raw_html]JTNDZGl2JTIwY2xhc3MlM0QlMjJtb2ItbWFpbi1zdHJpcCUyMiUzRSUwQSUzQ2RpdiUyMGNsYXNzJTNEJTIybW9iLWJsdWUtc3RyaXAwJTIyJTNFJTNDJTJGZGl2JTNFJTBBJTNDZGl2JTIwY2xhc3MlM0QlMjJtb2ItYmx1ZS1zdHJpcDElMjIlM0UlM0MlMkZkaXYlM0UlMEElM0NkaXYlMjBjbGFzcyUzRCUyMm1vYi1ibHVlLXN0cmlwMiUyMiUzRSUzQyUyRmRpdiUzRSUwQSUzQyUyRmRpdiUzRQ==[/vc_raw_html][vc_empty_space height=”25px”][vc_row_inner][vc_column_inner width=”1/6″][/vc_column_inner][vc_column_inner width=”2/3″][vc_custom_heading text=”Tapping into Pension Funds for Long Term Investment in Infrastructure” font_container=”tag:h1|font_size:22|text_align:justify|color:%236699cc|line_height:1.8″ use_theme_fonts=”yes”][vc_column_text]INTRODUCTION

To address the deteriorating state of infrastructure in Nigeria, the Governor of the Central Bank of Nigeria (CBN), Sanusi Lamido Sanusi, has estimated that the country requires a yearly investment of US$10 billion (about N1.6 trillion) over the next 10 years, an amount the government cannot solely provide.

Global trends indicate that the private sector, institutional investors in particular, will drive investments in infrastructure development. In this regard, Pension Funds Administrators (PFAs) have the long term assets which can be a stable source of funding required for infrastructure projects.

Market experts estimate that the total value of funds under management by PFAs as at December 2012 was around N3 trillion and further estimate that the total of funds under management will grow by 30 per cent per annum in coming years. Stakeholders in infrastructure development have suggested that a significant portion of these pension fund assets be invested in infrastructure projects rather than investing almost exclusively in corporate equities and government debt instruments. The reasoning is that equities are usually volatile (for example the capital markets crisis between 2008 and 2009) and long term debt instruments e.g. 25 year government bonds (which are essential in infrastructure development) are rare in Nigeria.

POTENTIAL IMPACT OF THE 2012 PENSION FUND REGULATIONS

The ability of PFAs to invest in infrastructure is influenced by the guidelines set by the National Pension Commission (Pencom). In this regard, the recent 2012 Regulations (the new regulations) encourage PFAs to invest more in infrastructure projects by streamlining requirements;

  1. Broadening of the Definition of Infrastructure

The 2010 regulations had previously limited the phrase “core infrastructure” by citing specific examples (such as power, railway etc). However, the new regulations simply imposes a viability limit, it states that PFAs can invest only in core infrastructure projects, whose business plans and financial projections indicate that they are viable as well as economically and financially rewarding for investment by pension funds.

  1. Mandatory Due Diligence for Investments

PFAs are required by the new regulations to ensure that appropriate legal and financial due diligence is undertaken on all projects and instruments prior to investment. This would ensure the quality of infrastructure investments made by PFAs are of a high caliber and give PFAs more comfort in investing in infrastructure.

  1. Minimum Number of Rating Agencies

Rating of infrastructure bonds issued by companies or governments may now be done by just one Rating Agency. The reduction of the number of rating agencies required would reduce the cost of issuing infrastructure bonds by any of the above entities.

  1. Qualifying Criteria for Infrastructure Funds

PFAs may invest in Infrastructure Funds subject to certain requirements. The basic requirements remain the same:

  1. a) The Funds must be registered with the Securities and Exchange Commission;
  1. b) The value of the infrastructure fund shall not be less than N5 billion;
  1. c) The infrastructure fund must have well-defined and publicized investment objectives and strategy;
  1. d) Funds shall be managed by an experienced Fund Manager whose Key Principals shall each have at least 10 years experience;
  1. e) A minimum of 75% of the infrastructure fund shall be invested in projects within Nigeria.

In addition to the above, the new regulations have introduced the following new criteria:

  1. a) PFAs may only invest in Infrastructure Funds whose underlying assets are tangible, physical assets.
  1. b) Minimum investment requirements have been reduced to 1% where DFIs and MDFOs are co-investors and 3% without those institutions as co-investors. Formerly, Fund Managers were required to maintain a minimum investment of 3% where Development Finance Institutions (DFIs) or MDFOs are co-investors while Fund Managers without DFIs or MDFOs as co-investors are to maintain a minimum investment of 5%.
  1. c) Funds are required to have pre-defined liquidity/exit routes. Furthermore, PFAs must ensure that the bonds or debt instruments issued to finance the infrastructure project have a feasible and enforceable redemption procedure in the event of project suspension or changes in regulatory or policy decisions.
  1. d) Key Principals of the Fund Manager must give at least 90 days notice before exiting the Fund. This ‘exit clause’ shall be expressly stated as a condition in the investment agreement/covenant between the PFA and the Fund Manager.

The changes in the minimum investment requirements are, presumably, to encourage the establishment of infrastructure funds. These additional requirements ensure that the PFAs invest in stable infrastructure funds and that they have recourse to any assets which the infrastructure fund may have.

  1. Eligible Unlisted Companies

Rule 4.3 of the new Regulations provides that PFAs may invest in bonds and debt securities issued by “eligible unlisted companies”. Although the new regulations do not provide a definition for “eligible unlisted companies”, in the Rules on Collective Investment Schemes of the Securities and Exchange Commission provides features of an unlisted company as a company that:

  1. a) has demonstrated compliance with the code of corporate governance;
  1. b) has consistently produced audited accounts for the preceding 5 years;
  1. c) has a consistent history of profitability for at least the preceding 5years; and
  1. d) has not been leveraged above a reasonable amount as may be prescribed by the Securities and Exchange Commission from time to time.

By enabling PFAs invest in bonds issued by eligible unlisted companies, the regulations allow project companies issue infrastructure bonds without being listed on the stock exchange as long as they are in compliance with the above requirements by the Securities and Exchange Commission.

Unaffected Provisions

The maximum investment limits for PFAs in infrastructure still remain the same. PFAs may not invest more than 15% of their total assets in Infrastructure Bonds issued by corporate entities and only 5% of their assets in Infrastructure Funds.

Infrastructure bonds in which PFAs may invest in still have a minimum rating requirement of ‘A’. PFAs may also invest in infrastructure bonds with a minimum rating of ‘BBB’ subject to a minimum limit.

CONCLUSION

In order to be more effective, it is suggested that the PFAs set aside a percentage of their assets under management (up to 5% as permitted by the Regulations) into a common pool, called Super Pension Funds, to be managed by infrastructure investment professionals. These Super Pension Funds (also called superannuation funds) will then be able to make direct investments into infrastructure project companies.

Canadian and Australian super pension funds have about 10% equity investments in their portfolios. Some of these Super Pension Funds have, through time and experience, garnered enough expertise and even play leading roles in consortia when bidding for projects.

Investing in infrastructure can ensure constant long-term returns on investments for PFAs while simultaneously redressing the infrastructure deficit in Nigeria.[/vc_column_text][/vc_column_inner][vc_column_inner width=”1/6″][/vc_column_inner][/vc_row_inner][/vc_column][/vc_row][vc_row type=”vc_default” full_width=”stretch_row” el_class=”footerWidget”][vc_column width=”1/4″][/vc_column][vc_column width=”2/4″][vc_row_inner][vc_column_inner width=”3/4″][/vc_column_inner][vc_column_inner width=”1/4″][/vc_column_inner][/vc_row_inner][/vc_column][vc_column width=”1/4″][/vc_column][/vc_row]