LACERA eyes $1bn annual infra deployment to reach 5% allocation

The US public pension has to date focused on mid-market funds, which it finds ‘less competitive’, CIO Jim Rice tells us.

The Los Angeles County Employees’ Retirement Association is planning to continue to deploy about $1 billion per year in its bid to meet its 5 percent allocation to infrastructure by 2026.

The US public pension fund is a relatively nascent infrastructure investor, having made its initial allocations in 2019 through listed infrastructure. It has since expanded into private infrastructure funds, growing its allocation from 3 percent to 5 percent last year.

Initial investments were made in the open-ended Axium Infrastructure North America vehicle, followed by $500 million to KKR Diversified Core Infrastructure Fund. The latter cheque remains its largest infrastructure investment to date.

The way we’re structuring our private programme, at least at first, is to overweight core and core-plus,” chief investment officer Jim Rice told Infrastructure Investor. “We expect to end up with a mix less weighted to core over time. It’s designed to generate more yield initially, based on where we are in the life of our private programme. Ultimately we want to end up with a mix of half core and half non-core.”

Inflation protection and a source of income were also cited by Rice as key reasons for its infrastructure expansion, with the latter being “one of the principal parts of why we’re investing in infrastructure”.

The KKR and Axium investments have been followed by commitments to the likes of Partners Group Direct Infrastructure 2020, DWS’s Pan-European Infrastructure Fund III and DIF Infrastructure VI. However, the shift to core-plus has already begun, with commitments to the digital infrastructure-focused Grain Communications Opportunity Fund III, DIF Core-plus Infrastructure Fund III and Guardian Smart Infrastructure Partners, a new manager formed by Robert Mah and Chris Lee, formerly of Alberta Investment Management Corporation and Highstar Capital, respectively.

At this point, though, the LACERA portfolio is conspicuous by the absence of any of infrastructure’s mega-funds.

“We assess [funds] on a case-by-case basis. We tend to like managers who invest more in mid-market sized allocations where it’s maybe less competitive and able to generate higher returns,” maintained Rice. “We’ve considered and will consider the larger funds, we’ve just never gotten to the point where we’ve made an allocation.”

‘Early stages’ for infra

The mid-market appetite was exemplified in 2021 by a $100 million investment in Antin Infrastructure Partners Mid Cap I. LACERA also committed to the HitecVision New Energy Fund IS, the first energy transition fund by the Norwegian manager, although that is placed in its natural resources and commodities portfolio.

“Energy transition is something we’re seeing a lot of managers come out with strategies for and we’re trying to understand the best way to do well in that space,” said Rice. “We consider our investible sectors broadly : energy, transportation, social infrastructure and telecoms. In transportation, we saw during covid this sector was more sensitive to GDP than we would have liked, so that’s something we also consider.”

When asked if infrastructure is living up to LACERA’s expectations, Rice responded: “We’re still in the early phases of our private markets program as we’re relatively new and haven’t gone through a full cycle of investing in assets and having them sold. Inflation sensitive real assets generally did better in our overall portfolio over the past year, mainly in the public markets.”

He added: “We’re clearly seeing inflationary pressures. Seeing how some of the infrastructure investments respond to higher inflation, whether they’re really able to fully recognise inflation passed through their underlying assets into revenue, is something we’ll see now how effective that is.”

Going forward, there might be more investments such as those in Guardian Smart Infrastructure and HitecVision. LACERA has recommended  the formation of an emerging manager programme targeting infrastructure managers on their first or second funds, Rice said, with a request for proposals due out next year.