CalPERS may carve out new asset class

The 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 plan to hold an asset allocation workshop to decide if “inflation-linked” investments should constitute a fifth asset class for the state 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.

When asked if infrastructure projects would compete for dollars that otherwise might go to buyout shops, CalPERS spokesman Clark McKinley says that the proposed allocation would create more opportunities for buyout firms. For example, CalPERS could choose to invest in a power plant and invite investors to commit capital alongside the state pension fund.

CalPERS says that there’s a need for $1.6 trillion to be invested in infrastructure projects in the United States over the next five years, according to a study presented to the state pension fund by the Pension Consulting Alliance Inc.

The move by CalPERS to look more at infrastructure highlights the growing interest of LPs in tempering volatility in their investment portfolios. “Many pension funds are trying to see how it fits into their risk return profile,” says David Fann, president and CEO of PCG Asset Management LLC, an advisor to the CalPERS private equity program.

Indeed, 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 state pension funds, endowments and family investment offices. The 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.

With roughly $65 billion under management, Oregon’s allocation target to the opportunity fund is 3%, 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 fun,” 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,” says the manager, who declined to be identified. —Joshua Payne