Hidden hand

Why are some pensions much keener on infrastructure than others? The role of consultants may be key.

Last week InfrastructureInvestor.com reported on the very different stances that two US pensions have adopted towards the infrastructure asset class.

On the one hand, the biggest pension of them all – the $208 billion California Public Employees Retirement System (CalPERS) – announced that it would commit $900 million to infrastructure funds and $400 million in direct infrastructure investments in 2010. Arguably even more significant was the unveiling of its mission statement to become “a premier infrastructure investment manager”.

On the other hand, the smaller but still hefty $30.5 billion Los Angeles County Employees Retirement Association (LACERA) said that it had decided against making an infrastructure allocation for the time being. In a memorandum prepared for a periodic review of emerging investment opportunities, the organisation’s chief investment officer, Lisa Mazzocco, said the asset class was “not well developed” which made it a “riskier alternative” to core real estate and private equity. 

She added that it needed to develop further and demonstrate more proven performance before the possibility of investing should be revisited.

Of course, given that infrastructure is still a maturing asset class, it’s no surprise that there should be divergent approaches. Talking to infrastructure investment professionals for a fundraising special in the April 2010 issue of Infrastructure Investor magazine, we were reminded of the fact that many Canadian and Australian pensions are comfortable with infrastructure accounting for between 5 and 10 percent of their overall portfolios.

In Europe, the picture tends to be very different. While Nordic and Dutch pensions lead the way, elsewhere infrastructure has up to now been viewed with much caution. There is confidence, though, that this caution is being overcome. Anecdotally, the reason for this appears to lie in the greater conviction among pension consultants that the performance of the asset class can now be effectively measured and benchmarked. And, overall, the view is that infrastructure has had a ‘good crisis’ relative to other illiquid asset classes.

The influence of consultants is also particularly strong in the UK pension market. There is a belief that consultants are right now recommending significant allocation increases in institutions where exposure to infrastructure may currently be negligible – perhaps between zero and 1 percent of the overall portfolio.

The role of consultants may also be the key to understanding the different paths chosen by CalPERS and LACERA. The former is advised by Meketa Investment Group, the consultant and infrastructure specialist. The latter, in announcing that it had decided against making an infrastructure allocation, added that it had also decided against hiring a consultant to further consider the opportunity.