Intentional Impact and Diversification Through Social Infrastructure

on

Stockholm (NordSIP) – “The Franklin Templeton Social Infrastructure Fund seeks to identify win-win investment opportunities where social impact and competitive financial returns conspire to improve the world,” Raymond Jacobs, Managing Director at Franklin Real Asset Advisors (FRAA), explained to NordSIP.

This strategy seeks to respond to social infrastructure needs in Europe. According to the European Investment Bank (EIB), the social infrastructure investment funding gap in the EU is around €150 billion per year with the largest shortfall seen in the healthcare sector (49%), followed by affordable housing (40%) and education (11%).

Social Infrastructure to Serve Local Communities

“This strategy is focused on the real estate market and targets specific opportunities to maintain and strengthen social infrastructures available to local communities,” Jacobs clarifies. “Water treatment plants or waste management facilities are not part of the investment strategy,” he explains. “For us, investing in social infrastructure is about purchasing hospitals, nursing homes, schools, affordable housing, fire or police stations, courthouses and other civic and judicial facilities. The properties are then leased back to the users and operators at a pre-agreed rent for a set long-term period,” the Managing Director says. “With our assistance, they are able to focus on their mission without the burden of having to own and maintain the property. Meanwhile, we are supporting the long-term social use of the buildings and are able to take a fresh look at the property and find new sustainability solutions that might have otherwise gone unnoticed.”

“We purchased a courthouse in Madrid and leased it to the municipality. Asides from maintenance and energy efficiency upgrades to higher environmental standards, we plan to optimise the use of the building further,” Jacobs explains. “In one instance, we were able to support the construction of a Gesell Chamber allowing victims of sensitive crimes to testify in a safe environment and thereby, improving the functioning of the courthouse.”

- Promotion -

“Another advantage of the fund is that owners and users of social infrastructure assets know that we care”, the Managing Director tells NordSIP. As most assets are bought through selective marketing in off-market processes, the defining feature of these transactions is not necessarily the highest bid. Instead, it is often the alignment of the fund’s goals with the original asset owner’s mission. “In one instance, in Italy, we acquired a hospital owned and operated by a religious order, which was no longer able to continue its activities. For the original owner, our competitive advantage was our interest in the continued provision of health care services, whereas others would have paid a higher price to develop it into a hotel, thus depriving the local community of healthcare services.”

 A Diversified and Uncorrelated Portfolio

On the purely financial side, the fund offers both geographical diversity and low market correlation. “Over the last 18 months, we have invested over €200 million in 9 assets across 6 countries in all the target sectors,” Jacobs explains. “Geographically, the assets will be mainly spread across the Eurozone (target 70%), followed by the UK (target 15%) and Scandinavia (target 10%). If opportunities emerge, there is also room for another 5% in Switzerland or Central Europe.”

“Risk-wise, the fund’s assets provide good diversification as social infrastructure is less correlated with the market than commercial real estate,” the Managing Director explains. “Of course, there are risks inherent to the social business model as properties are, in many cases constructed for special purposes. An administrative decision could be made to merge police or fire stations, and healthcare facility consolidations could also decrease the demand.  It is important to understand the alternative uses and value of the assets and price them appropriately.”

Moreover, the fund’s long-term investments and protection against inflation are appealing to its target investor audience. “The Fund is open every quarter for subscription to new and returning investors. Institutional investors are the main target audience, particularly pension funds, insurance companies, family offices and private banks,” Jacobs explains. “It is a core income-producing real estate strategy and provides a good dividend. The leases have maturities ranging from 10 to 30 years and are inflation-linked.”

An Intentional Social Impact

“On the social impact side of the investment, we have focused on the integration of impact management throughout the entire investment process,” the Managing Director tells NordSIP. Together with Tideline, a San Francisco-based impact consultancy, FRAA developed an impact management framework that emphasises transparency and authenticity throughout the entire investment process.

“From the very beginning, the initial assessment looks at what a building does, how it functions in the community, and how it can be improved. This clarity allows us to keep track of the project’s impact progress against forecasts and actual performance from the moment of acquisition throughout the lifetime of the investment.”

“Impact is different from ESG. It is more intentional than ESG. An impact investor takes responsibility for changing the world. This is where we want to be: using our assets to help facilitate a better future,” Jacobs concludes.

Image © NordSIP

 

Partner Insights

Must Read

New ETF Applies ESG to Government Bonds

Stockholm (NordSIP) - UBS Asset Management announced the launch of a new ETF that applies ESG criteria to a Global Government Bond index benchmark,...