Sac. County Partners with Pantheon on Secondaries Play

CIO Scott Chan foresees a glut of infrastructure assets arriving to market, and has a plan to capitalize on it.

087  Scott Chan(May 5, 2015) – Sacramento County’s public pension has partnered with fund-of-funds Pantheon to buy infrastructure assets from the secondary market, aiCIO has learned.  

Pantheon will earn an undisclosed fee to act as a deal pipeline and operate a separate account for the assets, according to Sacramento County Employees’ Retirement System CIO Scott Chan.

Through the partnership, the $7.5 billion public pension aims to capitalize on a potential market inefficiency it spotted some time ago.

“We see the potential for a decent amount of supply of infrastructure and energy assets on the secondary market because of how much money has been raised, regulatory changes, and a mismatch between fund structures and institutional goals,” Chan told aiCIO.

Several factors may dampen demand for an influx of supply, he noted. “Flagship secondaries funds aren’t as interested in buying infrastructure and energy funds, because they may not have private equity-style return profiles. Furthermore, it’s a hard area in which to develop expertise.”

For these reasons, Sacramento County’s investment team and board have positioned the fund to snap up deeply discounted real asset investments on the secondary market. 

Real assets accounted for 10% of the fund’s overall portfolio as of the close of 2013, nearly all of which (90%) was real estate. According to Chan, funding for the infrastructure play will likely drain out of this allocation. “Over the next three years, I think we will be net sellers of core real estate, because prices have reached fair value or in some cases are overvalued,” he said. “So we’ll be allocating those assets somewhere else.”

Partnering with an asset manager was a necessity, Chan said, due to the fund’s small internal staff and the specialized knowledge required for the infrastructure play. Pantheon was one of many firms to bid for the deal with Sacramento County, but one of very few with the necessary team and track record in place.

The firm—which has offices in London, San Francisco, Hong Kong, and New York—managed more than $28 billion as of the end of 2013 with a staff of 71 investment professionals. Its infrastructure program focuses on the secondary market and co-investments, according to Pantheon’s website, and targets energy, transportation, communication, water, and social infrastructure assets.

Chan said he anticipated investing $100 million through the partnership over the next three years as a “base case.” But, he continued, “if it works well and we invest a lot more, I’ll be really happy.”

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