EBRD woos pension funds, SWFs

The European Bank for Reconstruction and Development is trying to involve institutional investors such as pension funds and sovereign wealth funds in co-financing projects in infrastructure in its countries of operation, EBRD President Sir Suma Chakrabarti told Emerging Markets.

The bank is the latest in a series of international financial institutions to try to find ways to counteract a drought of investment in long-term infrastructure projects in emerging markets caused by low interest rates and commercial banks’ deleveraging.

“We are exploring – and this is also in the annual meeting schedule – to see whether institutional investors would be interested in co-financing with us,” Chakrabarti said in an interview. “We know that a lot of pension funds, sovereign wealth funds, are out there looking for places where they can get attractive returns.”

Banks, the traditional financing partners of the EBRD, have been cutting back lending in Central and Eastern Europe after the financial crisis hit. Besides, the Basel III regulations are likely to make banks less interested in long-term lending because they will be required to hold higher capital and show that they have long-term funding to cover long-term assets.

Pension funds would be a good match for the EBRD because they have long-term liabilities for which – in an environment of low interest rates – they need some long-term investment that offers a higher yield.

“We just started the conversation with various funds around the world. For the moment what we’re doing is showing them the financial health of the EBRD, who we are, what we do, getting them to understand us,” Chakrabarti said. “We’ll see in a few months’ time whether there is a set of propositions [coming out of the talks].”

He did not want to name the pension and sovereign wealth funds the EBRD was talking to but said they were in different countries in North America, Western Europe and the Middle East. Chinese funds are also a possibility.

Issuing long-term, joint project bonds for infrastructure, creating infrastructure financing funds or co-financing various projects and sectors are among the possibilities explored.

The EBRD had a “very good year” last year, when it invested nearly E9 billion in more than 390 projects, Chakrabarti said. However, he added, “the environment is getting more and more difficult”.

He said that demand for loans was showing signs of weakening in some places, with people “becoming more and more conservative”.

“If you look at the average size of our projects, they are reducing. We’re having lots of projects, but the average size has been reducing. This means that those who are borrowing are slightly more conservative about the size of their borrowing, because they’re not sure that the economy is going to pick up,” Chakrabarti said.

There is demand for smaller investment in small and medium-size enterprises (SMEs) and the bank is looking towards possibly doing more loans in that area, especially in local currencies, because this is what the SMEs need, he said.

In some countries, the EBRD may issue bonds on the domestic markets in local currencies to finance investment while in others it may work with central banks on currency swap arrangements, he said. 

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