Europe requires significant new long term and sustainable investment to maintain, and extend its competitiveness, deal with the challenges of an ageing population and shift to a low-carbon and resource-efficient economy. Current estimates are that an additional €2 trillion will be required for energy, transport, digital and other infrastructure projects, between now and 2020. Public investment, such as the Euro 315 billion Investment Plan for Europe will help, but clearly there is also a need for substantial levels of private investment.
Insurance companies, in particular, are seen to be key players. At the end of 2014 European insurers had almost €10 trillion invested on behalf of policy holders, but of that only €22 billion in infrastructure assets. However, infrastructure is a useful asset class, providing predictable and secure income streams, which match their long dated liabilities more effectively than other, more traditional, investments.
According to a recent survey by Prequin, the majority of insurers are currently below their strategic target allocation to infrastructure.
A critical barrier has been the absence of a distinct and suitably calibrated calculation of the regulatory capital that should be held against infrastructure investments. As a result, as part of the recently announced action plan for a Capital Markets Union changes are being made to the capital rules under Solvency II.
Qualifying infrastructure investments (defined as infrastructure investments that offer predictable long-term cash flows and whose risks can be properly identified, managed and monitored) will now form a distinct asset category under Solvency II and benefit from an appropriate lower risk calibration. This will lead
to a lower capital charge.
In addition investments in the new European Long-Term Investment Funds (ELTIFs) will benefit from the same capital charges as equities traded on regulated markets, which is lower than that for other equities. This also brings them in line with investments in European Venture Capital Funds and European Social Entrepreneurship Funds. The Commission’s hope is that ELTIFs are of interest to Europe’s smaller insurers that do not
wish to invest via the direct route.
At the same time as the CMU action plan was published, the European Insurance and Occupational Pensions Authority (EIOPA) published its Advice to the European Commission on the identification and calibration of infrastructure investments’ risk categories. It recommended a reduction of around 30% in the risk charge for qualifying infrastructure, and risk charges for infrastructure equity investments in a range between 30% and 39%. According to the Advice, qualifying infrastructure investments will need to satisfy conditions relating to the predictability of the cash flows to investors, the robustness
of the contractual framework, and their ability to withstand relevant stress scenarios.
In addition to insurers, banks also remain important in providing or arranging loans for infrastructure projects. In July 2015 the Commission published a consultation paper on the potential impact of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD IV) on bank lending to the economy which includes a review of banks’ capital requirements for long term and infrastructure finance.
The consultation will provide the Commission with a better understanding of the impact of the new rules on capital requirements on the availability of bank financing for infrastructure. As a consequence, as announced in the CMU action plan, it will make changes on infrastructure calibrations,
We support a variety of infrastructure vehicles for our institutional investor and asset manager clients.
We deliver fund administration and governance solutions to a diverse range of over 100 investment management groups with €100 billion assets under administration across a wide range of open and closed-ended fund structures in UK, Jersey, Ireland and Luxembourg.
We are Europe’s largest independent third party loan servicer, managing €160 billion of loans across a wide range of real assets including infrastructure.
We provide comprehensive corporate and listing services in the key European jurisdictions including UK, Jersey, Luxembourg and Ireland, across a wide range of closed ended funds, holding companies and SPVs, and to a diverse portfolio of global clients.
For fund structures
Karl Midl, Director
t: +44 (0)20 7954 9509
m: +44 (0)7717 003881:
For debt structures
Peter Walker, Director
t:+44 (0) 207 397 4592
m: +44 (0) 7990 503761
Date: 15 Oct 2015