Infrastructure investments resulted in the California Public Employees’ Retirement System’s (CalPERS) best-producing returns in the latest fiscal year ending June 30, a 20.6% net return, but competition among institutional investors for infrastructure assets makes it difficult to grow the portfolio size.
In fact, CalPERS’s almost $5 billion infrastructure program is so small given the size of the largest US pension plan, that it represents just over 1% of the assets of the $352 billion plan, show plan statistics.
Lisa Bacon, a senior vice president for Meketa Investment Group, CalPERS’s infrastructure consultant, told the system’s investment committee on August 20 that competition is keen among institutional investors for infrastructure assets, which “makes deploying capital at the kind of scale and with the kind of quality that you’re looking for a little bit difficult.”
Bacon said CalPERS is competing with other global pension plans and sovereign wealth funds looking for high-quality contracted income-producing assets guaranteeing returns.
The hope of more opportunities for investments in infrastructure has also faded because President Trump’s infrastructure plan has not materialized, noted CalPERS Chief Investment Officer Ted Eliopoulos at the investment committee meeting.
Trump had proposed in February 2018 spending $200 billion in federal funds to spur at least $1.5 trillion in infrastructure projects such as roads and bridges. The plan has not moved forward, hitting a seemingly permanent roadblock in Congress.
Eliopoulos said CalPERS officials were “hoping for and expecting more” out of the federal government.
Without the US capital infrastructure infusion, data from alternatives tracking firm Preqin shows there were 1,277 infrastructure deals in the first six months of 2018, down from 1,406 for the same period a year earlier. The average deal value, however, was up, Preqin said. It noted that in the first half of the year, the average deal was $390 million, up from $340 million from the same period in 2017.
The consultant’s report found that 54% of the infrastructure assets invested by CalPERS are in the United States. Energy infrastructure investments made up the largest group of CalPERS’s investments at 33% followed by specialized or opportunistic opportunities at 28% and transportation at 11%, the report noted.
Despite the push for income-producing infrastructure assets by CalPERS, Meketa says only one-third of CalPERS’s 20.6% return came from actual income produced from the infrastructure investments, while two-thirds came from the appreciation of the assets.
Bacon told the meeting that the active interest in infrastructure assets by investors is helping drive up asset prices.
Finding suitable investment opportunities is difficult even for infrastructure funds. The Meketa report notes that of July 2018, unlisted infrastructure funds had $173 billion in dry powder, funds that have commitments from institutional investors, but have not been allocated to investments. The number is up from $159 billion at the end of 2017 and $151 billion at the end of 2016.
CalPERS Board President Priva Mathur said at the meeting that CalPERS may want to consider developing a strategy to advocate at the federal and state levels for funding of infrastructure projects.
“I’m wondering how we can develop a stronger role in developing the infrastructure market,” she said.
Eliopoulos responded that the pension system’s investment office is “doing what we can” to encourage investing in infrastructure projects.
“The public policy side is one that we would need to think about how we’d want to try and enter that equation, and something for the Investment Office, and for the CEO as well, to develop, how we spend our resources from a policy perspective,” he said.
CalPERS has several Washington D.C. lobbyists, but lobbying by construction groups and other advocates pushing for infrastructure development has done little to push infrastructure funding forward in the federal legislative gridlock. There are no active plans in the state legislature for a state program.
CalPERS competed for at least one deal in its home state of California in the first half of 2018 but was not winning bidder, shows the Meketa report.
Back in May, Southern Power, a subsidiary of the Southern Company, announced it had entered into an agreement to sell its 33% minority interest in its solar portfolio, which included multiple facilities in California, to Global Atlantic Financial Group for $1.175 billion.
The report does not detail why CalPERS lost to Global Atlantic, just noting that the real assets team had pursued the investment opportunity.
The report does not say whether CalPERS bid for other California investment opportunities, which it lists at 37 in the first half of 2018, including other wind and solar power assets, power plants, and two airports.
Meteka said another significant California deal in 2018 was that of ArcLight Capital Partners selling two of its California wind-generating assets to the infrastructure arm of the Ontario Municipal Employees’ Retirement System (OMERS).
A March press release by OMERS shows that the pension system agreed to acquire 19 wind power energy-generating facilities in the US, including the two in California. The purchase price was not disclosed.
Another major infrastructure investment opportunity in 2018 noted by Meketa was the Los Angeles Airport Automated People Mover. The report notes that a consortium, LAX Integrated Express Solutions, won the $5 billion contract for the design and construction of the system. CalPERS is not part of the consortium and it is unclear if it participated in bidding.
The system, expected to be completed by 2022, will connect the airport’s terminals along with outside rail lines and a rental car lot.
The one-year strong investment returns for CalPERS’s infrastructure program are not an aberration. Infrastructure has been the pension system’s best-producing returns over the last decade, though this past year’s results were particularly strong.
The infrastructure portfolio performed 1,114 basis points above its custom benchmark in the June 30 fiscal year.
For the three-, five- and 10-year period ending June 30, the infrastructure program saw returns of 13.4%, 14.97%, and 14.48%, respectively.