California Public Employees’ Retirement System is contemplating elevating infrastructure, timber, commodities and related inflation-hedging investments to an asset class, potentially freeing up another $1.9 billion for buyout shops backing such deals. The new allocation is not expected to siphon money from more traditional private equity funds.
This month the CalPERS investment committee planned to hold an asset allocation workshop to decide if “inflation-linked” investments should constitute a fifth asset class for the pension fund, joining global public equity, private equity; real estate; and bonds and other fixed income. The goal of the proposal, which the investment staff floated in January, would be to allocate more money to assets that provide steady cash flow and a hedge against inflation.
Expect infrastructure projects to constitute the bulk of the new asset class, which would also cover commodities, inflation-linked bonds and timber. Under a pilot program already under way, $573 million in existing private equity and real estate investments has been reclassified under the new category. The proposed total allocation to the inflation-linked asset class is $2.5 billion.
Would infrastructure projects compete for dollars that otherwise might go to buyout shops? CalPERS spokesman Clark McKinley responded the allocation would actually create more opportunities for them. For example, CalPERS could choose to invest in a power plant and invite general partners and other investors to commit capital alongside the pension fund. Such investments “could have a real estate component as well, or a fixed income component. Private equity definitely will have a piece of this infrastructure program. It won’t be competing,” McKinley said.
According to a study presented to CalPERS by the Pension Consulting Alliance Inc., there’s a need for $1.6 trillion to be invested in infrastructure projects in the United States over the next five years. Despite the bounty of investment opportunities, CalPERS plans to take its time deploying capital. “We won’t be jumping into this in a hasty way. We’re only going to do it if we see something very promising down the road,” McKinley said.
The interest by CalPERS in infrastructure highlights the growing interest of limited partners in tempering volatility in their investment portfolios. “Many pension funds are trying to see how it fits into their risk-return profile,” said David Fann, president and CEO of PCG Asset Management LLC, a long-time advisor to the CalPERS private equity program. “The returns [for infrastructure] are low double digit, 10 [percent] to 12 percent, versus returns for private equity, which are 18 [percent] to 22 percent on average, and there’s a longer hold time. But there’s steady cash flow. If the market tanks, you still have to cross the bridge and go to work.”
CalPERS is not alone in looking to bulk up its exposure to infrastructure. Fund-of-funds manager AIG Investments just closed its infrastructure-focused AIG Highstar Capital III fund with $3.5 billion, with commitments coming from pension plans, endowments and family investment offices.
Oregon State Treasury is also dabbling in the space through an opportunity fund, which is more of a small catch-all category than a new asset class, according to Jay Fewel, the state’s senior equity investment officer. “Anything can wind up there that falls outside the standard asset classes” of stocks, bonds, cash, real estate and private equity, he said. “It might not have the return threshold that you’re looking for in private equity, but we have a place we can put things that are off the beaten track.” With roughly $65 billion under management, Oregon’s allocation target to the opportunity fund is 3 percent, or $1.95 billion, and the state is looking to hire a professional to explore more infrastructure investment opportunities.
That said, not everyone’s building a bridge to infrastructure. “We would not really look at a dedicated infrastructure fund,” said the manager of one Midwestern public pension fund. “If some of our generalists do infrastructure-related deals, so be it. We’re not against that. I think we typically would not focus on any fund that does one thing,” said the manager, who declined to be indentified.