Direct ambitions

The future of infrastructure investment at CalPERS may look distinctly Canadian.
Last year, the $179 billion California Public Employees’ Retirement System hired Randall Mullan away from British Columbia Investment Management Corporation to head up the California pension giant’s foray into the infrastructure asset class.

Although Mullan and the CalPERS staff are keeping details of their initial investment activities under wraps for now, enough has been disclosed by the pension – the largest in the US – to paint a profile of an institution enamoured of infrastructure and large enough to become a major player within it.
That said, CalPERS is just getting started relative to other major pension investors in infrastructure, like the Canada Pension Plan Investment Board and British Columbia Investment Management Corporation (BCIMC). To date the Sacramento-based pension has made commitments to infrastructure partnerships of some $390 million. Until a year ago, CalPERS had no official carve-out for the asset class.


The hiring of a new head of asset allocation in 2007 coincided with a redefinition of several types of investment strategies into a new asset class allocation that CalPERS calls “inflation-linked”, which includes commodities, inflation-linked bonds, forestland and infrastructure.

Overseeing CalPERS’ significant asset class shuffle and implementation is Farouki Majeed, a senior investment officer. He joined the pension from the Abu Dhabi Retirement Pensions & Benefits Fund, where from 2004 he had served as the emirate pension’s first chief investment officer. Before that Majeed, a native of Sri Lanka, was deputy director of investments at the Ohio Public Employee Retirement System.

Other than a seven-point hit that the global fixed income allocation took, CalPERS’ inflation-linked allocation change has been the most significant within its portfolio, moving from 0 percent to 5 percent. Within that allocation, infrastructure assets have the flexibility to move to as much as 3 percent of the overall portfolio value. In today’s market that would be equal to $5.37 billion – not an insignificant amount, and of course the overall CalPERS pie, and infrastructure’s slice within it, are expected to grow.

A key move for Majeed was luring Mullan from Victoria, BC, down to Sacramento. At CalPERS, Mullan will be charged with fulfilling CalPERS’ stated ambitions of becoming among the most recognised and respected infrastructure investment programmes in the world. While this will mean making investments in funds, a form of investment that dominates the pension’s private equity portfolio, it will also include CalPERS directly owning and co-owning assets defined as “infrastructure” – transportation, utilities, water, energy, communications, social, etc.

CalPERS has not unveiled a direct infrastructure investment yet. However, Mullan’s previous employer was a prodigious direct investor. Among the high-profile infrastructure investment consortia BCIMC joined were Puget Energy, Thames Water and Transelec Chile. A 2008 report from BCIMC lists 21 direct investments.

While the CalPERS staff confirm their approach to the asset class, an investment management company owned by a division of CalPERS has emerged as a bidder for the Port of Virginia, a deal that, if completed, would represent the first major privatisation of a US port. The bidder, CenterPoint Properties, is owned by CalEast Global Logistics, which is a platform backed by CalPERS but managed by LaSalle Investment Management. It is unclear what official role CenterPoint will play in ongoing CalPERS infrastructure investments, if any.


The CalPERS platform was established well before the Obama administration proposed a set of incentives that would match federal leverage against pools of capital earmarked for infrastructure. In response to this, a number of major US public pensions, including CalPERS, have reportedly discussed pooling their assets into a huge pool for direct investment in infrastructure. A spokesperson for CalPERS did not comment on the report, which appeared in the April issue of Pensions & Investments and quoted an official from the New Jersey Division of Investment.

One advantage to the multi-state pool, according to a legal expert and veteran of infrastructure deals, would be a neutralisation of political forces that would demand that infrastructure investment be kept in California. If CalPERS were part of a multi-state platform, projects could more naturally be selected for their performance characteristics than for state job-creation potential, since the target investments would presumably be across the country. The CalPERS infrastructure programme proposal includes language saying that investment staff would not seek to cause job losses, “(p)rovided that CalPERS’ fiduciary responsibilities are met”.

Keeping with its inflation-beating aims, the pension will benchmark the performance of its infrastructure investments based on real returns earned over the Consumer Price Index (CPI). This ranges from 3 percent to 5 percent over CPI for “core” assets to 8 percent to 12 percent over CPI for riskier “opportunistic” assets, including greenfield developments.

Clark McKinley, a CalPERS spokesman, says the investment team is currently reporting on infrastructure developments to the pension board during “closed sessions”. He adds: “The reports are private because there could be an adverse impact on our ability to maneuver in the markets if we went public at this time. Generally, we start small and ramp up, typically investing in established infrastructure funds, doing some co-investing and, eventually, it’s likely that we would be commingling capital deployments with other big investors for major projects.”

According to the most recent timeline disclosed by CalPERS’ inflation-linked team, the pension is searching for an infrastructure portfolio manager to report to Mullan, and has also submitted to the compensation committee an “incentive plan” for the staff. The staff has also “developed an extensive deal log of fund offerings” that it will now begin to vet “subject to due diligence and having consultants in place”.