Insurers and pension funds should increase investment in infrastructure debt to finance the building of bridges and roads and mitigate lower returns from government bonds, BearingPoint Inc. said.
“As regulatory changes cause banks to pull back from infrastructure investment, an attractive space is opening for a third party,” the U.S. consulting company said in a report published on its website today. “Institutional investors such as insurers appear ready to seize the opportunity.”
Insurers are working to maintain returns on bond holdings as stimulus efforts by central banks keep interest rates at low levels. Allianz SE, Europe’s biggest insurer, held 456 billion euros ($616 billion) of fixed-income investments at its insurance business as of June 30. That’s 90 percent of a portfolio that also includes equities and real estate.
Insurers and pension funds need investments that meet their commitments on returns to clients and shareholders, BearingPoint said. Infrastructure debt would offer “a way out, as it comes with very attractive margins and allows insurers to shape the duration so that they can reduce capital costs,” according to the report.
Meanwhile, banks are reducing their long-term financing of infrastructure projects because they are constrained by Basel III regulatory requirements, according to BearingPoint’s survey of 55 banks, asset managers and institutional investors.
“A majority of banks and asset managers felt that, for future projects banks will mostly provide short-term financing for the construction phase of an asset, selling the debt to institutional investors after the asset has established a track record,” the consulting firm said.
To reduce dependency on government debt investments, European insurers have already flocked to alternative asset classes such as infrastructure.
Allianz, based in Munich, is increasing investment in corporate debt issued by industrial companies and infrastructure projects ranging from wind parks in northern France to parking meters in Chicago, Michael Diekmann, chief executive officer said last month.
France’s Axa SA, Europe’s second-biggest insurer, has also been increasing bets on corporate bonds and infrastructure debt, helping hold the company’s portfolio yield steady, CEO Henri de Castries said in September.
Legal & General Group Plc, the biggest manager of U.K. pension assets, could invest 15 billion pounds ($24 billion) in infrastructure if the government revised its planning and energy policies, Chief Executive Officer Nigel Wilson said in an interview in June.