Time to get direct

In September, the Washington State Investment Board (WSIB) vetted a suggested commitment to infrastructure – a proposed $500 million investment with far-reaching import.

For WSIB, a Pacific Northwest pension administrator with $62.4 billion under management, the allocation – recommended by its private market committee – was part of a $1.75 billion bundle that also included private equity (Roark Capital Partners III, Silver Lake Partners IV and Triton Fund IV) and real estate (Evergreen Real Estate Partners).

Next chapter

The allocation represented a next chapter in the development of the pension’s tangible asset programme, a bucket including agriculture, mining and timber as well as infrastructure. WSIB created the tangible asset platform in 2008, shifting its previous $150 million investment in Alinda Capital Partners I and a second infrastructure investment, a $100 million commitment to Highstar Capital III.

For Global Infrastructure Partners II (GIP II) and Stonepeak Infrastructure Fund, which each garnered a $250 million investment from WSIB, it further validated what has for both been a fruitful fundraising effort: GIP II, targeting $8 billion, can count the Maine Public Employees Retirement System (MainePERS) and the Virginia Retirement System (VRS) as pension fund clientele, while Stonepeak, with a $400 million anchor commitment from TIAA-CREF, landed a New Mexico Educational Retirement Board (NMERB) commitment in April.

Perhaps most significantly, the WSIB infrastructure commitment highlighted a US institutional trend: the board, like the California State Teachers’ Retirement System (CalSTRS), which in February made a $500 million investment in the asset class, as well as VRS and NMERB, decided to depend on manager selection and put their faith in the fund model. Direct investing in infrastructure is, so far, largely absent in the US.

But if institutional investment in infrastructure in the US is going to progress further, then that does not seem like a tenable situation in the long run. At some point, America has to go direct.

In announcing its record $500 million allocation to Industry Funds Management (IFM), a Melbourne, Australia-based asset manager with a $10 billion infrastructure business, CalSTRS investment head Chris Ailman was careful to point out that the $145 billion pension administrator had no experience with infrastructure, and did not want to risk venturing past the investment fund model. But Ailman, who joined CalSTRS in 2000, might as well have been talking on behalf of MainePERS or VRS. Aside from TIAA-CREF, a direct investor in the Interstate 595 (I-595) toll road project in Florida, and the California Public Employees Retirement System (CalPERS), which in 2010 acquired an interest in London’s Gatwick Airport, US direct investments in infrastructure have been notably absent.

Finding a reason for that is difficult. Institutional America is, after all, familiar with direct investing as a phenomenon. In fact, Harvard Management Company, manager of the Harvard University endowment, and fellow Ivy League bastion Yale University, helped develop direct investing in the 1980s. North of the Border, in Canada, the success of the likes of Alberta Investment Management Corporation (AIMCo), La Caisse and Ontario Teachers’ Pension Plan (OTTP) in infrastructure is attributable to direct investing.

How? Capital, for a start. A large pension can finance a significant position in a public-private partnership (PPP), a brownfield toll road concession for instance. But Canada has seen a high degree of professionalization at the likes of AIMCo, La Caisse and OTTP, staffing each institution with investment personnel who are not politically appointed and whose portfolio management is not fraught with bureaucratic processes.

Highly compensating a government worker in Canada is also not as much of a factor as it is in the US. (At the same time, compensating a chief investment officer of a public pension might cost less than compensating Wall Street). In effect, a pension in Canada is empowered to act like an investment company, rather than a quasi-government entity.

Regardless, the benefit of investing direct has to be realised and used in tandem with the manager selection long entrenched Stateside in order to differentiate and maximise portfolio returns. Direct investing is not part of a black-or-white argument, held up as superior or inferior to hiring a manager – but part of a bigger picture in a growing asset class.