As part of its plan to add real assets investments into its portfolio, the Los Angeles County Employees’ Retirement Association (LACERA) is exploring ways to build its infrastructure program through direct investments, co-investments, separately managed accounts, and club investments to gain exposure. The proposed infrastructure strategies, developed with its consultant Albourne America, also include a direct infrastructure investment in local Los Angeles companies.
This strategy option includes engaging in local co-investment opportunities and using a separate account manager to access direct but non-controlling stakes. The $56.3 billion retirement system adopted a 2%, or $1.1 billion, allocation towards the real asset class last year.
Through a direct infrastructure program, LACERA is seeking to generate risk-adjusted returns in line with non-local investments, while simultaneously benefitting the local community and reducing the management and performance fees usually tied with a general partnership.
A few past Los Angeles-based projects would have been a potential candidate for an investment, such as the Los Angeles International Airport’s Consolidated Rent-a-Car facility and Automated People Mover, which were developed as public-private partnerships.
At its November 20 board meeting, board members raised a few concerns about such a program, including the potential of local infrastructure entities encountering a conflict between fiduciary duties of seeking returns and public concerns about increasing rates. Another concern was that the public might question the authenticity of fairness of an auction if LACERA wins a local bid, as well as reputational risk from flaws in its invested projects, for example, poor drinking water quality from a water supply it has invested in.
The team intends to build upon its experience gained from co-investment programs in private equity and direct exposure in real estate through separate account managers. All of the direct investment structure types it considered were placed in two categories: capital provider and deal generator.
Capital provider structures include discretionary and non-discretionary co-investments with general partners, separately managed accounts, and direct co-investments. Deal generator structures included club deals, joint venture with operating partners, separately managed accounts through operating partners, and direct (pure) investments.
LACERA’s analysis of these types of investments included research on other pension plans using the “collaborative model,” such as the California State Teachers’ Retirement System (CalSTRS), and the “Canadian model.”
Ideally, the pension will allocate between $700 million and $1.2 billion to infrastructure private fund commitments in 2020 and 2021. It was not made clear through its reports how much it would spend on direct investments.
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