Private equity performance fees are a growing source of consternation among Dutch pension funds where some have been stung for billions in fees despite beneficiary payments lagging roaring inflation and Europe’s cost of living crisis.

“Private equity fees are a difficult topic,” admits Harold Clijsen, chief executive of PGB Pensioendiensten, pension provider for Pensioenfonds PGB (PGB), the Netherlands €34.8 billion ($35.2 billion) industry-wide pension fund.

PGB targets a 7.5 per cent allocation to private assets of which only 2.5 per cent is in private equity, focused on European and US small and mid-cap buyouts.

That relatively small allocation means PGB’s current total fee spend across the whole portfolio is only 43 basis points, well under its maximum permitted budget of 55 basis points that must include all transaction and performance fees, and which shapes a highly selective budget allocation.

But other funds are suffering a much bigger hit. Civil service pension fund ABP, one of the biggest pension funds in the world, paid €2.8 billion ($2.84 billion) in costs to private equity funds last year yet has only recently increased beneficiary payments for the first time since 2008.

Elsewhere, the €277.5 billion ($281.3 billion) healthcare scheme PFZW paid €1.26 billion ($1.28 billion) in performance fees to its private equity managers in 2121, equivalent to two thirds of total asset management costs thanks to private equity’s 2-20 model comprising a fixed 2 per cent management fee and a 20 per cent performance fee.

Clijsen is supportive of fixed fees (especially for smaller private equity mangers) arguing they are an important element to successfully running investee companies.

But he questions performance fees particularly given limited partners’ ability to drive them down when so many investors are chasing illiquid allocations.

“The problem is the performance fee which kicks in hard,” he says. “But we don’t have much pricing power because all the money in the world is looking for profitable investments.”

For now, he’s still convinced private equity is worth the cost because of the returns.

“In the end you have to consider net return after fees and last year’s performance showed private equity does add value to the portfolio.”

Still, strategy at PGB is shaped around lowering the fee spend wherever possible including prioritising re-ups in funds PGB is already invested in to cut out the advisor fee, as well as co-investments beside fund managers and with other pension funds to lower the fees attached to advice and monitoring.

PGB’s growing scale also works in its favour. Back in 2005 PGB only invested on behalf of one industry fund. Now it represents 4,000 employers across 16 different industries and assets under management have grown to €34 billion from €11 billion.

“We are large enough to be an interesting client,” says Clijsen. “Our partners know we are there for the long run and this makes us attractive to do business with. We also tend to invest in follow-up funds but that said, when a large part of the team or key personnel leaves the company, that could trigger a change of mandate.”

Clijsen rules out developing an internal private equity team even though PGB runs its matching portfolio inhouse and he believes inhouse management is the most effective solution to high private equity fees. All the return-seeking allocation is outsourced, and PGB would struggle to compete for private equity talent; investing in European and US private equity also requires a team on the ground, he reasons.

Return seeking allocation

Away from private equity, other corners of the return-seeking allocation are also attracting his attention. He is concerned about the impact of stagflation crimping growth in the listed equity allocation and impacting beneficiary pay-outs.

“We need returns from equity and other assets in order to grow capital and achieve indexation. When inflation is high, people expect to get compensated because of the increased cost of living. But increasing compensation is difficult in a recession or zero growth environment. We were able to increase pensions with 3 per cent this year.”

One approach designed to cushion the portfolio from falls in equity include an equity hedging strategy using options to protect the downside.

“When equity is more expensive in relation to yields and momentum turns negative, we do hedge some equity risk. When equity drops, this adds a little on the return side; the idea is to protect capital and therefore the coverage ratio,” he explains.

Elsewhere in the liquid allocation, PGB is prioritising passive market weight and equal-weight strategies in combination with more quant-driven strategies like factor investing in order to gain additional return.

“We want a consistent approach to liquid markets on one hand and on the other we want to cut costs. At this moment, we are looking for more cost cutting through developing our own strategies for selecting equities.”

Funded status

The fund’s assets are split 60/40 between the return and matching portfolio respectively. Although rising interest rates and inflation are concerning in the return seeking allocation, they have buoyed the matching portfolio where PGB’s coverage ratio is currently 120 per cent.

The internal team also run a dynamic risk hedging strategy whereby when interest-rate risk is low, the fund calculates a lower risk budget and reduces its interest rate hedge; when rates move higher it increases the hedge.

At the start of the year around 45 per cent of the liabilities’ interest rate risk was hedged, but this has now risen to around 65 per cent on the prospect of further hikes but where decision making also balances the threat of recession – and lower rates.

“There is still an upside in interest rates because if inflation doesn’t come down, rates will rise further,” he says.

After eight years as PGB’s CIO, Clijsen became chief executive in 2020 turning his hand to new tasks like conversing with corporates looking to move their pension management to PGB and gauging the impact of local developments on the total organisation. One element he finds interesting is the impact of legislation on pension fund management, particularly new rules set to encourage beneficiary engagement, encouraging DC investors to take more control of the investment process.

“Beneficiaries now have choices on risk appetite; how they think about ESG and which investments we should make for them,” he says. PGB already runs extensive questionnaires, group-interviews on risk budgets and ESG-polices and has introduced a digital tool which helps participants set their own risk budget.

It’s a shift that he predicts will force Dutch pension funds to adopt more transparency around their investment process, holding consequences for trustees and boards unable to adapt that could result in PGB accruing more assets under its stewardship over time.

“I expect more consolidation in the sector. We are prepared to take on more pension plans for employers who want to outsource to a professional, social, pension fund,” he concludes.

The twinned and conjoined crises of Ukraine and inflation might have dominated the year of your average fund CEO or CIO, and after years of endless growth and prosperity doubtless some have revelled at the challenges. It is also a welcome change from the more amorphous issue of net zero (without an overshoot) which has been at or near the top of board agendas for months, and in other cases years.

For the climate enthusiastic C-suites with a combined material and moral compass on their portfolios, they will not have forgotten those net zero commitments. For those who have aligned out of obligation, NGO pressure or peer pressure those commitments may already be deprioritised, if not forgotten.

But roll forward towards the end of 2023 and Europe will have somehow scraped through its feared gas constrained winter at a cost yet unknown and inflation will be at its most painful. However, with the interest rate medicine starting to bite, glimmers of light may be seen on the other side of multiple country recessions, if not a global one.

In the climate world the global emissions Stocktake under the Paris process will be the backdrop for COP28 in the UAE  and it will be unwelcome news, even accounting for the drop in emissions which economic slowdowns bring.

It is then a two-year roller-coaster ride towards COP30 and the 2025 Paris Ratchet where the world expects the net zero momentum to peak in a flurry of new bold commitments to limit the worst of climate damages. Net zero pledges will be nearly five years old at both the investor and company levels and civil society will be hoping to have the champagne on ice, ready to declare victory.

Except the victory won’t happen.

The theory of change surrounding the net zero alignment initiatives has always been that mass collaboration at all levels of the investment chain will create unstoppable momentum that no policymaker can resist, as a private -sector led transition leaves them able to simply follow the wave of change. That they will almost reactively put in place policies to merely assist rather than radically transform the pace of transition being driven by company engagement and portfolio allocations.

The International Energy Agency (IEA) has long produced climate scenarios showing what numbers are needed to achieve certain climate outcomes and more recently, pushed hard by civil society pressure has even added a narrative and tone supporting the transition, but has always stopped short of forecasting the future.

That mantle fell in 2018 to a non-profit consortium called the Inevitable Policy Response (IPR) formally commissioned by the Principles for Responsible Investment that gently landed its first transition forecast in early 2019.

Set against a backdrop of a potential Trump second term and Asian intransigence, some funds, particularly US investors, thought IPR forecasts of acceleration optimistic. It became eerily accurate as a series of perceived low probability events, such as EU border taxes announcements, combined with high probability technological and private sector momentum saw a record number of country net zero commitments.

The IPR update in 2021 was released immediately prior to the giddy days of COP26 in Glasgow where the GFANZ initiative, chaired by former Bank of England governor Mark Carney rolled out its impressive list of supporting net zero private actors from the asset owner, asset manager, service provider and company communities

The IPR 2021 update and its subsequent quarterly updates have only cemented end points of its initial 2019 forecast – that net zero is somewhere between very unlikely and impossible. This sacrilegious language will be most unwelcome news to the net zero aligners who must already be preparing to defend it to civil society when the blindly obvious becomes….inevitable.

It is not that net zero itself is unlikely, it just that net zero without an emissions overshoot is now virtually impossible.

In the fine print of all those net zero commitments lies the caveats that “governments must play their role” for private sector actors to succeed. Some aligners are already changing business models or portfolios regardless of the policy settings – who knows the implications for those brave actors once the required net zero policy settings fail to materialise.

Even for those taking unilateral action, it is the type of action taken that is part of the problem. While the divestment community continues to claim victory, or at least masthead momentum, the reality is that divestment is leading only to a privatisation of high emitting assets and the capital released is not going directly into new incremental clean solutions but spread elsewhere.

Funds and companies can thus claim they are meeting their targets, but this new type of financial engineering will and is resulting in zero climate impact without investment in assets that can potentially reduce demand for fossil fuels. The supply side theories of change are failing and failing badly.

The key question for all stakeholders is to now ask themselves:

  • How will this all unravel? “
  • When will it all unravel?
  • How can we maintain our reputations when it does unravel and
  • Will civil society buy our defence when we point to the net zero fine print?

For funds and companies to come out of this remotely unscathed and without a chaotic war of words and blame games there now needs to be a new focus.

The Clean Capital, NETS & Asia Trifecta

Firstly, all net zero aligners need to focus on clean solution capital – large scale renewable energy investment and breaking down of the CIO arguments around illiquidity barriers.

Secondly, Negative Emissions Technologies (NETS) needs to move from a dirty word to a formalised discussion leading to huge collaborative investment between investors and governments.

Finally, Asia needs to become the predominant investment theme. The IPR forecasts that OECD countries will likely meet their 2050 net zero targets but this will be done with no impact on climate whatsoever at the current rate, due to the residual emissions left in Asian countries and supply chains.

Engagement at the sovereign and sovereign debt levels about how to switch this momentum is urgent to minimise the inevitable overshoot. We will now enter unchartered waters from a physical climate point of view. The battles to prevent overshoot are effectively lost and damages are already high. The war is not yet lost, but without an injection of realism into the net zero debate, the pain of recognition and adjustment will be greater.

Once the C-suites return from their summer breaks, they would do well to address these questions.

While the Ukraine and this economic crisis will pass and possibly several more cycles after them, the climate war is omnipresent as far as we can see into the future.

Only a dose of realism can save us now.

 

Julian Poulter is head of investor relations at Inevitable Policy Response (IPR) and a partner at Energy Transition Advisors (ETA).

The Inevitable Policy Response (IPR) is a climate transition forecasting consortium commissioned by the Principles for Responsible Investment in 2018 that aims to prepare institutional investors for the portfolio risks and opportunities associated with an acceleration of policy responses to climate change.

When Mark Anson, CIO and chief executive of the $28 billion Commonfund, headed up US pension fund CalPERS between 2001 and 2005 he got embroiled in a research project exploring why beta levels in private equity were so low compared to public equity. Analysing the low levels over one period (betas, he recalls, of 0.4 -0.5 compared to the public stock market) triggered much head scratching: private equity is still equity and surely its illiquidity should make it even more risky? Only by playing the models in an excel spreadsheet did he realise the delay between movements in public markets washing into private markets in a statistically significant lag that can go back over a series of quarters.

Today lagged beta is a well-known phenomenon. But speaking in a recent webinar hosted by the Journal of Portfolio Management, Anson stressed the enduring importance of measuring lagged betas in portfolio construction: it may seem like private equity doesn’t suffer the vicissitudes of the public equity market, but both are linked much more closely than estimated by current metrics. And only when investors understand the amount of systemic or beta risk that will wash into their private portfolios, can they budget how much beta risk to allocate to private equity compared to public equity.

Anson said that private equity investors should include two to three lagged betas in addition to the current period beta to estimate the full amount of systematic risk embedded in a buyout/growth equity portfolio. For venture capital, the lagged betas can extend back three to four quarters, and for real estate—the least liquid asset class—the lagged betas can extend up to five quarters.

Accumulating all the systemic risk associated with private asset classes also reveals the true correlation of the illiquid asset classes with the public markets. When lagged betas are included, the correlation of private equity with public equity increases substantially, critical for risk budgeting.

Alpha

Measuring lagged beta also reveals the true amount of alpha. “You cannot measure alpha until you account for all the beta associated with an active investment,” said Anson, noting how lagged beta used to be claimed as alpha but now investors are smarter, realising there is not as much alpha.

Accurately measuring beta is also important because it safeguards against over allocating and the risk of a liquidity crunch. In the GFC, funds over allocated to private equity, underestimating the amount of systemic risk embedded in their portfolios and inadvertently increased their risk profile.

He added that the amount of volatility in public markets is also embedded in private markets, only private markets amortise that volatility over time. Because portfolios are marked on a quarter by quarter basis they can absorb the volatility. Volatility does exist and is impactful in alternatives, but it’s not as transparent as it is in public markets. “Volatility is still there and still needs to be accounted for,” he said.

Continuing, Anson explained that because private equity managers only mark to market their portfolios on a quarterly basis, they have significant discretion as to how they “price” their underlying portfolio companies – the resulting volatility of private capital portfolios is typically understated. If lagged betas are used to accurately measure the correlation coefficients between illiquid and liquid asset classes, and also to better estimate the actual volatility of private equity and venture capital, then investors will have an economic constraint that limits the amount allocated to these illiquid asset classes.

Small is beautiful

Research by Commonfund estimates private equity investors can achieve a long-term liquidity premium of 3.5 per cent over and above public equity markets.

“We believe in it, track it and measure our performance to check if we’ve earnt it or not,” said Anson.

His one caveat? Achieving that premium depends on investing with top-notch managers.

Only first or second quartile managers will outperform public markets. He also noted that large private equity managers (those with PE funds greater than $5 billion) often don’t fully capture the liquidity premium and do not produce any independent alpha. However, smaller PE funds, and specifically, small PE funds that are sector specialists, fully capture the liquidity premium plus another 2 per cent of alpha.

Due Diligence

Private equity investment requires giving control and discretion to GPs. Still, every sophisticated investor goes through a due diligence process, marking the portfolio.

Elsewhere LP advisory committees bring input, advice and sometimes criticism to GPs on how they are marking portfolios and reporting flows . CommonFund ranks PE managers according to their Distributed to Paid In capital (DPI) levels that takes into account the capital flowing out of the fund. Investors may have a high IRR or high multiple on invested capital (MOIC), but have no realised gains, warned Anson. “How much money are you getting out of your managers?” he asked.

Venture capital

Anson also reflected on changes in the VC market.  Firstly, start-up companies are staying private longer. In the old model, an entrepreneur funded with seed capital and then a second and third round of financing (Series A and B) before going public. Today, start-up companies might have a Series C through G round of financing before going public.

Second is the rise in unicorns. Today, venture capital managers spend more time looking for a unicorn—a start-up company that achieves an IPO value of $1 billion or more. A single unicorn can carry the whole performance for a venture capital fund. This is also why venture managers will back a start-up company through several rounds of financing—to capitalize on that unicorn status. The third change has been the entrance of Non-Traditional Investors (NTIs). In the past, the venture capital industry was a small, tightly knit community of select venture capital managers that had access to the best ideas and entrepreneurs.

In a catch-22 companies staying private for longer is stretching the time between investors putting money in and getting their cash out. This in turn is increasing dependence on unicorns.

Fiona Reynolds, long-time CEO of the PRI and now CEO of publishing firm Conexus Financial*, responds to the rising denunciation of ESG investing and claims that over-thinking, over-regulation and over-standardisation is complicating what is actually a very simple investment philosophy.

Along with many interested observers I have been following the debate that has been raging around ESG issues with some interest and lots of eye rolling. Whether it’s been about “woke capitalism” or reducing ESG to “one simple measure” there is a familiar pattern, in that they all oppose or more often than not just fundamentally misunderstand what I at least consider ESG is all about.

My initial reaction was that I was just going to sit in the corner and watch the debate unfold from afar, knowing that this little storm in a teacup would soon pass. But as I watch the development of ESG investing, sustainable investment or call it what you will, it is with some concern, and not all of that concern is because of the detractors, who are in some cases either politically motivated, acting on behalf of lobbyists, misguided or just plain ill informed.

My concern mainly stems from attempts to over complicate, overregulate and over standardize the ESG space. We are never going to be able to capture the value of an investment or every issue taking place within a company in a simple data point, score, or other measurement. Evaluating ESG issues are much more nuanced that that. My concern is that these attempts, or in what I call the ‘financialization’ of ESG issues, just might lead to its demise, as people just want to be able to tick the regulatory box, be compliant and move on.
ESG at its core has always been a simple concept, investors who are investing over a long-time horizon, need to consider the material risks that environmental, social and governance issues may have on their investments, and they need to understand how externalities will impact those investments, as investors don’t operate in a vacuum.

That the private sector has a role to play in ensuring that we create a fairer and more equitable world and put simply, that it’s not ok, to profit from exploiting people or the planet. In addition, investors have leverage and the responsibility to use it, whether that is with individual investee companies, with governments or as asset owners with the fund managers they chose to employ to manage their portfolios.

Of course, this doesn’t mean that implementing ESG issues is simple or straightforward and to be able to assess ESG issues investors need data, tools and access to information from the companies they invest in. In fact, the more demand there is from investors for better data the better it will become and, in my view, the right role for regulators in this space is to ensure that we have meaningful data, so that investors can make their own informed decisions.

This is happening but as we all know there is much more to be done, but in the meantime, we cannot wait for perfect data – and of course, data is only one aspect. We should also remember a very important point that Einstein once made: ‘Not everything that can be counted counts and not everything that counts can be counted.’

Investors also need governments to set the broad policy directions, for example to set Net Zero targets and then provide the industry policies and framework for investors to deploy clean capital across the economy. But beyond this, do investors really need endless regulations and legislation to tell what the right thing to do is?

Do they need governments to tell them that no its not acceptable to have modern slavery in supply chains? Or that the planet is choking, and we need to stop investing in polluting industries and invest in clean energy and technology and agricultural solutions? Or that we should invest in companies or with asset managers who are contributing to solutions for the future and who want to have a positive impact?

ESG principles can all be boiled down to a few simple truths: we all have responsibilities as citizens, and we should all act ethically, and we should invest in ways that don’t contribute to human suffering or to the detriment of the planet we all inhabit. Do we really need endless regulations and legislation to understand these basic concepts before acting? I hope the answer is no.

An investor’s role is not to solve the world’s biggest problems, which is ultimately the role of governments. But investors do have a role, in ensuring the sustainability of their investments and considering externalities particularly negative ones in managing those investments.

As a concept, it really is that simple.

 

*Conexus Financial is publisher of www.top1000funds.com

A shift towards positive correlation between stocks and bonds may already be underway and this phenomenon could persist for many years and be widespread across all global markets if history is a guide, according to Dr Noah Weisberger, a managing director in PGIM’s Institutional Advisory and Solutions (IAS) group.

This could lead to a “more volatile world” for those trying to maintain balanced portfolios, Weisberger said, and may force investors to either raise their risk budgets or lower their return expectations.

Speaking in a podcast discussion with Amanda White, director of institutional content at Conexus Financial, Weisberger noted the correlation between stock and bond returns has been negative for  the past two decades, allowing market participants for most of–or even all of–their careers to view bonds as a partial hedge for stocks .

But going back earlier to the post-war period, there were 35 years following the mid-60s to around 2000 when stock and bond correlation was positive. Preceding this was a long period of, again, negative correlation.

Investors are possibly conditioned to think of market conditions as higher frequency phenomena, but “this phenomenon – stock-bond correlation being negative or positive – can persist for a really, long time,” Weisberger said.

Predicting a turn in correlation is difficult because it involves a range of different factors and policy levers that can be hard to pinpoint, Weisberger said. Was positive correlation 1965 to 2000 period determined by the oil price shock? Or, was it overly accommodative monetary policy? Or, was it strong productivity growth and the tech bubble?

IAS looks at broad macroeconomic themes like fiscal sustainability, the degree of perceived monetary independence, the degree to which supply or demand is driving the economic cycle, and investor sentiment. These policy and economic conditions “connect very intuitively to…stock-bond correlation,” Weisberger said.

He believes macroeconomic conditions could be pointing to a period of positive correlation: increasing uncertainty about the sustainability of fiscal policy, concerns about the independence of monetary policy, greater volatility of interest rates and the negative co-movement between economic growth and policy rates.

“Those are the things that we think have, in the past, driven stock bond correlation, at least in the US, and prospectively going forward is what could push us into a positive regime from the negative one that we have become accustomed to,” Weisberger said.

White asked if the same factors will apply to global markets or just to the US. Looking at some other developed markets like the UK, Japan and Germany, Weisberger said he was struck by the degree to which developed market stock and bond correlations move together.

“Correlations seem synchronised across developed markets, and there doesn’t seem to be much evidence that any one country leads or is led by any other country.”

Comparing US factors with local factors in other developed markets, IAS found roughly two-thirds of a developed market’s stock-bond correlation movement is due to US factors–in particular, policy risks–and about one-third is due to local economic drivers such as sentiment.

“And, so, like most things in life, the answer is never clean cut and easy,” Weisberger said. “It’s not like CIOs ought to pay attention just to the US, and it’s not like CIOs ought to pay attention just to what’s going on in their local economy. They really need to keep paying attention to both local and global developments.”

Digging into the numbers, the co-movement between economic growth and interest rates is particularly interesting, Weisberger said, acting as a “fascinating summary statistic, if you will, for an investor’s economic intuition of what is fundamentally driving the economy.

To illustrate, he asked: “Is the monetary authority trying to surprise the economy with the degree to which they’re being overly easy or overly tight? Or is the monetary authority responding to the strength or the weakness of the overall economic environment?

“So, none of this is about the level of interest rates, or the level of inflation. In our framework, it’s all about co-movements and more fundamental economic drivers. I think there’s a very important distinction.”

The shift to positive correlation could mean “a more volatile world” from the perspective of a balanced portfolio, Weisberger said, increasing the risk of larger and more damaging tail outcomes.

“Some of the risk metrics that used to be achievable–you know, a certain level portfolio volatility or a certain target Sharpe ratio–may no longer be achievable when you don’t have that extra buffer coming from negative correlation reducing volatility in the portfolio,” Weisberger said. “You just don’t have that anymore.”

Investors may either need to increase their risk budgets or, if they can’t do that, accept lower returns, he said. They will need to look to other asset classes to play the defensive role of bonds, although there are no obvious stand ins.

Investors also need to ask themselves whether they should assume negative or positive correlation in their forecasts, or take a more agnostic approach, he said.

Inflation dominated the discussion at a recent board meeting at the $200 billion Teacher Retirement System of Texas. Meeting in person at the Austin-based fund’s headquarters, committee members heard how inflation is driving the market lower; remains fuelled by war in Ukraine, and has now triggered monetary tightening that threatens recession.

“We’ve had more discussions about inflation today than ever before,” said Jase Auby, CIO of the pension fund. “Inflation today is the worst it has been since 1982 – it’s a long time since inflation was at this level.” Auby was speaking after US CPI hit 9.1 per cent – although it has subsequently fallen a tad. In the 12 months through July, CPI increased by a weaker-than-expected 8.5 per cent.

The current market decline is less severe than the average US bear market – so far. Today’s ‘Inflation Breakout Market’ (the TRS investment team has named every bear market since the Great Depression) has so far seen the market fall 21 per cent over 178 days, compared to longer and sharper market falls triggered by the GFC and COVID when the market fell 56.8 per cent over 517 days before it bottomed and 34 per cent in 33 days, respectively.

Moreover, Auby noted that forward inflation prices, marked down at 2.3 per cent by 2024, indicate faith in the Fed’s ability to tame it by hiking interest rates. “We are seeing faith in the Fed’s ability to raise rates high enough to cause inflation to go down,” he said. “The Fed feels it can control inflation; and markets think so too.” Still, Auby warned of the recessionary implications of higher interest rates and flagged that Fed faith is also linked to economically painful historical examples. Former Federal Reserve Chairman Paul Volcker crushed inflation by raising interest rates to 20 per cent in the early 80s.

ENRI

While inflation batters most of TRS’s portfolio one corner in private markets, a 6 per cent allocation to Energy, Natural Resources and Infrastructure (ENRI), is bucking the trend. “We are expected to provide protection during inflation and have performed as expected,” Carolyn Hansard, senior director in the private markets division that includes a 17.7 per cent allocation to private equity and a 14.4 per cent allocation to real estate, told committee members.

The portfolio sets TRS apart from peer funds, many of which are shutting down fossil fuel investments. “We are one of the few people investing in energy and it’s paid off,” she said. On a one-year basis, the portfolio has returned 18 per cent while over a three and five year period it has generated an IRR of  5.7 per cent and 6.2 per cent respectively.

Natural Gas

TRS is currently eyeing investment opportunities in natural gas. Europe’s scramble to find alternative sources of gas away from Russia after the invasion of Ukraine has spiked demand for natural gas. Demand is also set to benefit from gas now being labelled a green investment by European Union policy makers alongside nuclear energy. “Demand for gas has led to record prices across the globe,” said Hansard.

US groups, able to produce LNG cheaply, are poised to take advantage of global demand. TRS is eyeing LNG infrastructure opportunities especially export facilities on the US east coast which could provide a valuable alternative export point for north eastern producers, currently relying on exporting facilities on the Gulf coast. “Growth in gas demand is also a US story,” she said. “US exports are currently 10 per cent but they are expected to climb to 25 per cent.” Moreover Canada, which has plentiful gas, also lacks LNG export facilities. “The only way to ship it [Canadian gas] is to get it to the Gulf coast,” she said.

Hansard said TRS has been investing in natural gas for the last four years in a range of LNG and pipeline facilities across the US. Today, unknowns include the European energy crisis actually accelerating the transition away from fossil fuels altogether. She also questioned if one global gas price, and gas parity, will emerge.

The ENRI portfolio was set up in 2013 with fossil fuel investment at its core in the hunt for inflation protection and uncorrelated returns. Hansard noted that infrastructure investments in the energy sector have a lower risk profile and are less correlated to energy prices than direct investments in energy. Infrastructure has delivered the most consistent returns in the allocation, which has outperformed its benchmark six out of the last 12 years.

The portfolio is split between funds and principle investments. Hansard noted that although funds investments have outperformed principle investments in recent months, principle investments perform better over time – and fund investments give important access to these investments.