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UK pension eyes secondaries sale for troubled fund

UBS's 2008-vintage infrastructure fund holds a stake in Southern Water, which is trying to come back from a record fine for environmental breaches.

A scandal involving raw sewage and a record fine has one UK pension looking to the secondaries market, according to affiliate title Infrastructure Investor.

A “large holding” in Southern Water by UBS’s 2008-vintage International Infrastructure Fund I is “particularly weighing on returns” after the company was fined £90 million ($119.5 million; €105.9 million) for deliberately dumping raw sewage into protected waters, according to a document published by the East Sussex Pension Fund.

The UBS holding has been marked down by 33 percent and the fund has been generating a 4.3 percent return since inception, “lower than many other funds” in the East Sussex portfolio, it said.

The pension added in the documents that the “secondary infrastructure market at the moment is very buoyant” and it “could conceivably sell the UBS infrastructure fund without needing to provide much of a discount”.

East Sussex has £30 million invested in the vehicle. The county in the south of England is, incidentally, a catchment area of Southern Water’s activities.

UBS declined to comment. East Sussex did not reply to a request for comment.

Macquarie Asset Management acquired a majority stake in Southern Water a month after the record fine was handed down by a UK court.

Macquarie agreed to support a previously agreed £2 billion investment plan with UK water regulator Ofwat and to invest £230 million in improving Southern Water’s infrastructure, Infrastructure Investor reported. It also promised to limit distributions from the fund until 2025 and only accept dividends when the utility was delivering on its turnaround plan.

Prior to the acquisition by Macquarie, UBS owned 22 percent of Southern Water, according to rating agency Moody’s. It is not clear whether it cashed out any of its position.

Just over 40 percent of secondaries buyers expressed an appetite for infrastructure in Evercore’s half-year 2021 report, making it the fifth-most popular asset class after buyout, growth, venture capital and early secondaries. This was down from fourth-most popular for the whole of 2020, according to the investment bank.

Rod James contributed to this article