San Diego sees compelling opportunities in midstream

The City Employees’ Retirement System has set aside $125m for private equity and infrastructure investments in 2016.

The collapse in oil prices, a lack of midstream infrastructure and Mexico’s energy reform are prompting the San Diego City Employees’ Retirement System (SDCERS) to consider the North American midstream sector for potential investments in the year ahead.

“Energy will continue to be the area of focus for infrastructure,” StepStone Group (Stepstone), SDCERS's private markets consultant, wrote in the Annual Review it recently presented to the pension's board. “With a change in the macro environment, StepStone is bullish on the energy market but will remain patient as a distressed investor.”

According to SDCERS’ chief investment officer Liza Crisafi, StepStone, which is the fully discretionary advisor of the pension fund’s private markets mandate, exercised patience in 2015 by refraining from making any infrastructure investments due to macro monetary policies that kept demand and valuations high.

StepStone has also identified the power sector as a source of significant investment opportunities, thanks to the expected retirement of coal and nuclear plants and the ongoing build-out of renewables.

“Overall, StepStone believes the market opportunity in private equity and infrastructure remains robust. The fund will seek to capitalise on the current dynamics in the market by continuing to focus on high-quality manager selection and conservative underwriting of assets,” the consultant stated in its annual review.

SDCERS’ board approved StepStone’s recommendation to invest approximately $125 million in private equity and infrastructure in 2016. While the amount is less than the $170 million recommended the previous year, it is in line with actual commitments made in 2015 – $115.9 million to 15 private equity investments.

Asked whether SDCERS would consider investing in other sub-sectors or regions in addition to North America and midstream, Crisafi said the pension fund “maintains a global allocation to infrastructure which considers all sub-sectors and all regions.”

Infrastructure funds SDCERS has previously committed to vehicles including Energy Capital Partners, Macquarie Greater China Infrastructure Fund, SilverStone I, Stonepeak Infrastructure Fund and EnCap Flatrock Midstream Fund.

The pension fund set a 3 percent target allocation for infrastructure when it launched the programme in 2011. As of June 30, 2015, infrastructure accounted for 1.7 percent of the fund’s $6.8 billion portfolio.

According to StepStone’s report, infrastructure has now been integrated into private equity. “StepStone realised that SDCERS could achieve greater benefits and cost savings by combining the private equity and infrastructure allocations, especially the reporting and back office operations,” Crisafi told Infrastructure Investor in an e-mailed response.

SDCERS administers defined benefit plans for the City of San Diego, the San Diego Unified Port District, and the San Diego County Regional Airport Authority and provides service retirement, disability retirement, death and survivor benefits to approximately 20,800 members.