CalSTRS hires first infra exec, readies ‘first deals’

The California State Teachers' Retirement System, the second largest public pension plan in the US, has named its first infrastructure portfolio manager as it prepares to make its first investments in the asset class, according to a senior executive at the $132 billion plan.

The pension named Diloshini Seneviratne, a senior investment officer on its $16.8 billion private equity portfolio, as its first portfolio manager for infrastructure.

The internal promotion, effective February 2010, comes just as CalSTRS prepares to begin building its infrastructure portfolio, which is currently empty.

Diloshini Seneviratne

“We’re going to be doing our first deals,” said CalSTRS chief investment officer Christopher Ailman, adding that “at some point we’d like to go direct”. He pointed out that Canadian and Australian pension plans “have been at this for a long, long time” and have their own in-house teams dedicated to direct investing.

“It’d be much easier to partner with them, because they’ve got a pretty big portfolio of high-risk and low-risk stuff,” he said. “We’re more interested in low-risk stuff.”

For now, though, the pension’s infrastructure investment strategy is

We're going to be doing our first deals Christopher Ailman

likely to be focused on investing through infrastructure funds.

“We’re not going to go bid on a pipeline right now, we don’t have the capabilities in-house. We’d rather hire a manager,” Ailman said.

CalSTRS has plenty of experience hiring managers on the private equity side of its portfolio, where it’s made a total of $36.8 billion in capital commitments to 245 funds, according to a 31 March 2009 private equity portfolio performance memorandum.

At some point, we'd like to go direct Christopher Ailman

But any manager looking to gain CalSTRS’ business in infrastructure will likely have to come up with a fee structure unlike the 2 percent management fee and 20 percent carried interest fee often charged in private equity.

Christopher Ailman

“The private equity 2-and-20 model doesn’t work because I want stable cash flows,” Ailman said. “I don’t want to leverage it, I don’t want to pay 20 percent because I’m not trying to get this giant return out of it. I’m trying to get something about like a fixed income return.”

Seneviratne, who joined CalSTRS in September 2007, was previously an investment officer at the $212.3 billion California Public Employees’ Retirement System, the other big California pension, which is also actively scaling up its infrastructure program.

Like CalPERS, CalSTRS fits infrastructure within a larger investment bucked dedicated to inflation-linked investments. CalPERS calls these types of investments the “Inflation-Linked Asset Class” and is targeting a 5 percent allocation to it; CalSTRS calls it “Absolute Return” and also targets 5 percent.

The private equtiy 2-and-20 model doesn't work because I want stable cash flows Christopher Ailman

The Absolute Return allocation, which became official in August 2009, will be implemented in a four-step target allocation plan, according to a spokesperson. The goal is to go from a 0 percent allocation in 2009 to 2 percent, 3 percent 4 percent and eventually 5 percent “as opportunities permit”, according to the spokesperson.

Infrastructure investments will be approved by the pension’s investment committee after a review by Seneviratne and Ailman.

No seed investments or commitments have been made to the infrastructure portfolio, according to the spokesperson.

Amanda Janis contributed reporting to this piece.