Spotlight: Policemen's Annuity and Benefit Fund of Chicago

Q: Why has Chicago Policemen’s decided to increase its allocation to infrastructure?

AD: We have been paying attention to increased institutional use of infrastructure for some time. I think infrastructure is perceived as being a particularly suitable asset class for pension funds due to its long-term horizon, the fact that it can generate cash in some form and the fact that most of the cashflows are linked to inflation, so that gives us an in-built inflation hedge.

Q: You have invested in multi-billion dollar funds like GIP III and also in smaller funds like the $274 million Ullico Infrastructure Fund. Are there advantages to investing in big and small funds?

AD: We have a wide range of fund sizes that we are comfortable with. In the case of GIP III, obviously the fund is $15.8 billion. That gives it the ability to take very large equity stakes in deals, to become competitive with a number of sovereign wealth funds and groups such as the very large Canadian pension plans – that’s very attractive to us.
The focus with Ullico is much more on mid-market transactions, between $25 million and $75 million being their sweet spot. We think that offers a totally different opportunity set, and therefore in our portfolio we’re likely to get a nice blend of infrastructure investments.

Q: What strategy do you look for in a fund manager?

AD: We don’t necessarily want managers that are just participating in auctions and forced to be price takers. We like to see managers that show some innovation in sourcing so they can see ideas that are not on the radar screen of other investments. We also like to see creativity in structuring investments, groups that are open to playing a minority role, or a lead role, or entering into joint ventures, or in some cases actually just being the main owner and/or strategic partner.

Q: Do you have ESG mandates to consider before investing?

AD: As a public fund based in Illinois we have an aspirational goal to invest in managers that are run by minorities and women. Overall, we aspire to have 20 percent of our assets in such funds. That is something we aspire to, so that naturally comes in play that we will look at smaller funds.
In the case of Ullico, it was really just because the whole firm was set up with a view to supporting union labor and to building partnerships and joint ventures with groups which would then be staffed by union labor. We like that commitment to the worker.

Q: Do you have any geographical preferences?

AD: We leave that to the managers to decide where they invest. However, our concern about allocating to pure non-US is the currency exposure that would be built into that. Some funds hedge currency and some do not. We do not hedge currency ourselves, so we therefore need to be assUred that we’re not essentially getting our returns eroded by currency exposure.

Q: What effect do you think President Donald Trump will have on the US infrastructure sector?

AD: We think it is broadly positive for the infrastructure sector that there is discussion over a large inflationary policy and spend – up to $1 trillion – by the administration. We don’t know the actual form this potential infrastructure spend will take. Now it seems it’s likely not to be a fiscal stimulus, that it’s actually likely to be PPPs and may take the form of tax credits for commercial real estate developers. So there’s a lot of uncertainty currently surrounding what this infrastructure spending programme might actually look like. This recent allocation to increase our allocation to infrastructure was not made with an eye on that programme. It predated that. It predated the election, actually.