US Economy

Why a California pension fund is betting on an Indiana toll road

There's been plenty of talk from politicians and the presidential candidates about the need to increase infrastructure investment, but more U.S. pension funds like CalPERS are putting talk into action and in a big way.

The pension funds are investing in such projects as U.S. toll roads, waste-water treatment plants, power transmission systems and clean energy. Within the infrastructure sector, the majority of the approaches by pension funds through private co-mingled funds and participation has soared in the past five years.

"Pension funds appear to be a natural investor for infrastructure given their need for both diversification and asset liability management," said Doug Criscitello, executive director of MIT's Center for Finance and Policy. "Something has got to give. Our infrastructure continues to crumble and our budgets are structurally impaired. So I think the U.S. will see more of this in the years and decades ahead."

CalPERS is now an investor in the Indiana Toll Road, which carries on average 50 million vehicles annually.
Source: ITR Concession Co.

The number of U.S. public pension funds investing in unlisted infrastructure funds stood at 164 at the end of the first quarter of 2016, up 12 percent from a year ago and a 76 percent jump from five years ago, according to investment research firm Preqin. Also, the firm's latest update found the U.S. market saw the most completed infrastructure deals in the quarter of any single country.

The nation's largest pension fund, the California Public Employees' Retirement System, invests directly and indirectly in infrastructure. While most of the investment is done through external managers, the latest two deals were done through direct investments.

"These latest investments, the toll road and the solar, fit with the most recent strategic plan," said Joe DeAnda, a CalPERS spokesman. "They are core, income generating, and long-term assets that we can hold onto."

All told, the CalPERS' infrastructure program — with about 60 percent of the investments in the U.S. and led by energy — has a net asset value of about $3.1 billion, or just over 1 percent of the fund's total market value of about $292 billion. It turns out that infrastructure investment has been smart investment over the years for the fund — beating other assets like real estate and forest land in the past three- and five-year periods, according to CalPERS' figures.

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CalPERS acquired the stake in the Indiana Toll Road's concession company, which operates and maintains the 157-mile highway through a long-term agreement with the state of Indiana. The Indiana Toll Road is a vital transport network in the U.S. and one that gets about around 50 million vehicle transactions per year.

IFM Investors, a global infrastructure fund, sold CalPERS the stake in the toll road and continues to own more than 85 percent of the Indiana concession company. IFM also sold a small stake to insurer Allstate. IFM acquired the toll road company last year for about $5.7 billion, and a significant amount of the equity for that deal came from about 70 U.S. pension funds. Financial terms of the CalPERS and Allstate transactions weren't disclosed.

"What infrastructure can offer is a mix of both current yield in terms of cash yield but also growth characteristics." said Julio Garcia, head of infrastructure for North America for IFM Investors.

Jordan Mansfield | Getty Images

Many of the funds such as IFM also invest in infrastructure globally. IFM's global investments include London Stansted Airport along with Manchester Airport in the U.K. CalPERS also is an investor in U.K.'s airport sector through its holding in Gatwick Airport.

Brookfield Infrastructure Fund, a pooled investment fund, is now on its third fund vehicle and focuses on transportation, energy and renewables. Investors have included the New Mexico State Investment Council, the Seattle City Employees Retirement System and the Public Employees Retirement Association of New Mexico.

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Over the years, Global Infrastructure Partners has had at least three fund vehicles and investments from such pension funds as the New York City Retirement System, the Missouri Local Government Employees Retirement System and the Oregon Public Employees Retirement Fund.

Private-sector ownership of airports and seaports is more common overseas than in the U.S. Canadian pension funds also have been active in the sector, competing to some degree with U.S. funds for assets. In 2015, three big Canadian pension funds bought the operator of the Chicago Skyway toll road for nearly $3 billion.

"The story in the U.S. is kind of following what we've seen around the world," said Jeff Murphy, managing director for infrastructure investments and portfolio manager for Ullico Investment Advisors. "In places like Australia and the U.K. and Canada, pensions kind of have over time increased their allocation to infrastructure and infrastructure-related projects."

Ullico, with about 40 pension funds, is focused solely on the U.S. market, and its clients tend to be union-related pensions. Ullico has invested in water and waste-water infrastructure in California, a wind farm in Hawaii as well as the underwater Neptune Regional Transmission System, which connects power generation in New Jersey with power usage on New York's Long Island. The California State Teachers Retirement System, which held $1.1 billion worth of infrastructure investments at the end of 2015, is another investor in Neptune.

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Most of the U.S. public pension funds have kept infrastructure to a small fraction of the total portfolio's market value, and experts don't believe we are likely to see that number go as high as some Canadian pension funds, where the government has encouraged such investment.

"If you look at Canada's OMERS (Ontario Municipal Employees Retirement System), they have a little bit over 20 percent allocation for infrastructure," said Chris Tehranian, head of infrastructure research for Meketa Investment Group, an investment consulting firm. "I think it will be in the 3 to 7 percent range going forward."

Meanwhile, last week President Barack Obama renewed his push for more infrastructure spending and called the Washington Metro subway system "one more example of the under-investments that have been made. We've known for years now that we are $1 trillion or $2 trillion short in terms of necessary infrastructure repair."

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When Obama came into office, he proposed the establishment of an infrastructure bank, which originally proposed about $10 billion. The concept would have created a government entity that would have had the authority to provide loans and to enter into public-private partnerships to improve infrastructure. The proposal has failed to receive the necessary support from the GOP-led Congress, but some the presidential candidates have expressed support on the infrastructure issue.

Democratic presidential candidate Hillary Clinton has called for creation of a "national infrastructure bank," similar to what Obama outlined earlier in his administration. Democratic presidential contender Bernie Sanders' website pledges to rebuild America's infrastructure, focusing on the roads, bridges, dams and grids, saying such projects are also a way to create jobs.

Donald Trump also has talked about the need for infrastructure. "We do have to rebuild our infrastructure," the Republican Party's presumptive presidential nominee said during an interview on CNBC's "Squawk Box" last week.