A tale of two pensions

Everyone knows that infrastructure is a still-developing asset class. From time to time though, one may need a reminder of this. Last month it came from two pensions in the same state moving in vastly different directions on the viability of the asset class.


The $208.2 billion California Public Employees’ Retirement System disclosed plans to make $900 million in commitments to infrastructure funds in 2010 and $400 million in direct investments into infrastructure assets on its own. The initiatives are part of a broader objective for the pension to establish itself as a “premier infrastructure investment manager”, according to a presentation prepared for the Sacramento-based pension’s investment committee.

But in the south of the state, there seems to be less optimism about the asset class. The $30.5 billion Los Angeles County Employees Retirement Association (LACERA), a major municipal pension, decided against making an infrastructure allocation or even hiring a consultant to further consider the opportunity.

Why the divergent paths? For CalPERS, early experiments in asset class appear to have gone well. CalPERS’ existing infrastructure portfolio returned a 13.9 percent return, net of fees, for the year ended 30 September 2009 according to Meketa Investment Group, the pension’s infrastructure investment consultant. Since the inception of the inflation-linked asset class in 2007, it’s a less impressive 3.2 percent.

Good enough for re-ups
Still, the performance appears good enough that the pension has already re-upped some of its infrastructure commitments. In 2009, the pension committed an additional $300 million to Alinda Capital Partners for its second fund, having committed $100 million to the firm’s first fund. Commitments of $200 million to the CIM Infrastructure Fund and $100 million to Carlyle Infrastructure Partners round out the pension’s existing $700 million in commitments.

Add that to the $1.3 billion in direct and indirect commitments targeted for this year and, at today’s total fund value, it brings total exposure to 1 percent. At a targeted allocation of 1.5 percent, one can take this steady clip of investment as sure evidence that the pension is serious about being a major player in the asset class.

Unlike core real estate and private equity, the marketplace for infrastructure is not well developed, which makes it a riskier alternative

LACERA memorandum

Not so in Los Angeles, where LACERA took a pass on the asset class for the time being, according to a memorandum prepared for  a periodic review of emerging investment opportunities. Investing in infrastructure “may present a viable option to consider once there is more proven performance and a developed marketplace”, according to the memo. But for the moment, LACERA will keep out of the market because “unlike core real estate and private equity, the marketplace for infrastructure is not well developed, which makes it a riskier alternative,” Lisa Mazzocco, LACERA’s chief investment officer, concluded.

Like any good rejection letter, though, Mazzocco also gave potential managers a few tips on what the asset class could do to raise itself up to LACERA’s standards: “Staff would want the marketplace to demonstrate better liquidity, improve valuation methods and offer investment vehicles that have clear distinctions between brownfield and greenfield [new development] investments.”

When that will happen to LACERA’s satisfaction is anybody’s guess. It’s a reminder that the infrastructure asset class still has some way to go to reach maturity – with the very different views as to its current viability a sure indication of this.