Why LPs are friends, not foes

It was the proverbial talk of the town for quite some time, but no one knew when exactly it might happen: US pensions investing directly in infrastructure.

Gatwick Airport: CalPERS
checks in

To be sure, it’s still the exception rather than the norm. But in June, two transactions again demonstrated that US pensions, under-staffed as they might be for direct investing, are nevertheless capable of doing it. And fund managers should cheer them every step of the way.

In Texas, the Dallas Police and Fire Pension System took another direct equity stake in a project by contributing 6.6 percent of the equity in the $2.7 billion LBJ Express road project in Dallas. Last year, the pension broke new ground when it committed 10 percent of the equity in the $2 billion North Tarrant Express project, also in Texas. This made it the first US pension to take a direct stake in the construction and maintenance of an infrastructure asset.

Not to be outdone, the $205.2 billion California Public Employees Retirement System finally took its first direct interest, and in a big way. The Sacramento-based public pension fund – the largest in the US – agreed to buy a 12.7 percent stake in London’s Gatwick Airport. CalPERS said in a statement it had committed up to £106 million (€127 million; $156 million) to acquire the stake.


Both transactions share similarities that market observers will note. In each case, a fund manager was involved in helping pave the way for pension participation. In Texas, the Dallas Police and Fire Pension System invested both times alongside infrastructure fund manager Meridiam, which had bid for both the North Tarrant and LBJ with Cintra, the Spanish toll road developer. With Gatwick, the airport had first been wrestled from the clinched fist of an unwilling seller by fund manager Global Infrastructure Partners, which closed the £1.5 billion deal in December 2009.

So lesson number one is that pensions are ready to invest directly – but are not yet ready, perhaps, to do it entirely on their own.

Also, neither pension was an existing limited partner in the fund with which it was sharing the investment: the Dallas Police and Fire Pension System did not invest in Meridiam’s debut €600 million fund, nor did CalPERS go into Global Infrastructure Partners’ $5.64 billion fund, which closed in 2008. CalPERS’ investment committee chair George Diehr said in a statement that the pension bought in to Gatwick because “we see it as a good fit for our burgeoning infrastructure program”.

So lesson number two is that fund managers can successfully take direct investment propositions to US pension plans, regardless of whether they are an existing limited partner or not.

They might get something in return. Meridiam is currently raising a $1 billion North American fund, while Global Infrastructure Partners is gearing up to raise its second infrastructure fund. It’s hard to imagine that either pension would pass up a chance to have a look at the flipbook or entertain a meeting with the managers who helped it out with its direct investments.

If that ends up turning out to be the case, it might not be a bad lead for others to follow. The $132 billion California State Teachers’ Retirement System, the second-largest public pension plan in the US, has already expressed its intentions to invest directly, while CalPERS said it plans to make $400 million of investments this year on a direct basis.

The CalPERS deal underscores another reason why US pensions as direct investors are a boon for the industry. Having an investor of CalPERS’ heft interested in infrastructure assets (and a savvy buyer, too, given that it invested when the pound was relatively weak and a volcanic eruption reduced traffic levels at the airport) can only mean better liquidity for the asset class as a whole.

All the more reason for fund managers everywhere to view direct investing by pensions as more an opportunity than a threat.