The Employees Retirement System of Texas (ERS) will be targeting two to three new investments totaling $300 million for fiscal year 2015, which begins September 1, and will be focusing on building key relationships with general partners and other infrastructure advisors over the period, its investment staff said during a joint meeting of the fund’s board of trustees and its investment advisory committee on Tuesday.
The $300 million target, which can range from $225 million to $375 million, is greater than the $235 million ERS was aiming for last year when it adopted its infrastructure programme.
The changes come just six months after the pension fund had said it would freeze investments in private infrastructure due to a market environment characterised by “too few good deals,” ERS’ chief investment officer Tom Tull said at the time.
ERS also added direct investments to its strategy and separated public infrastructure from private infrastructure, moving the former to its public equities portfolio while private infrastructure remained within the private equity asset class.
As of June 30, ERS had committed $275 million to infrastructure with the net asset value of its infrastructure portfolio totaling $204 million. The amount represents 0.7 percent of the fund’s $26.1 billion portfolio and is below the 3 percent target allocation the pension fund has set for private infrastructure. Public infrastructure has a target allocation of 1 percent.
“We are expecting to meet our target allocation of 3 percent by 2020 or 2021,” Pablo De La Sierra, newly-appointed private markets portfolio manager in charge of infrastructure and real assets, said during the meeting. De La Sierra joined ERS on August 14 from Isolux Infrastructure where he served as managing director of energy investments, North America.
Altius Associates, ERS’ consultant that helped the pension fund set up its infrastructure programme, has identified the following sub-sectors as attractive and warranting attention: greenfield opportunities in assets with strong, regulated cash flows or long-term contracts; US energy infrastructure since developments in the shale sector are creating a need for pipelines, storage and processing plants; and transportation.
“The transportation sector is an interesting sector,” said Jay Yoder, a partner at Altius Associates. “It’s universally unloved because it has performed so poorly during the financial crisis that it may be an attractive contrarian play today.”
According to Yoder, energy infrastructure will remain a large and profitable sub-sector, while co-investments will become increasingly important with opportunities arising from utilities continuing to shed assets.
“I think Jay’s biases are in line with mine and Pablo’s and that is that US independent power is a very attractive space,” Wesley Gipson, ERS’ director of private equity/infrastructure said.
ERS’ infrastructure investments to date include three 758-megawatt natural gas-fired power plants in Texas, in which the institution has co-invested alongside Panda Power Funds. They comprise Panda Temple I and Panda Sherman, which went online in July, and Panda Temple II, which is expected to begin operations in June 2015.
The pension fund also made a $125 million commitment to Actis Energy III, comprising a $75 million commitment to the fund and $50 million in a side-car co-investment vehicle.
Established in 1947 and headquartered in Austin, the Employees Retirement System of Texas is a public pension fund providing retirement and other benefit programmes to state employees, retirees and their dependents in the state of Texas.