Stories of the Decade 2012: Leap of faith rewarded 

A $500 million infrastructure commitment was considered a leap of faith seven years ago, as we reported in our March 2012 issue. Today, that kind of institutional capital looks more like a normal bet. 

The California State Teachers’ Retirement System’s allocation to Australian firm IFM Investors was described by Infrastructure Investor at the time as the “largest ever single allocation to an infrastructure fund by a North American limited partner”. 

That statement is, thankfully, showing its age. 

Back then, the asset class was younger, less understood and not part of investors’ portfolios in the way it is today. Fundraising in 2012 totalled $39.4 billion, whereas last year LPs put $90.1 billion into infrastructure vehicles. 

Funds raised in North America are claiming an increasing amount of capital commitments. As of 1 January 2019, there was $62.99 billion of North American funds in the market, compared with $40.58 billion from European vehicles. 

More money moving into infrastructure means an increased likelihood of large institutional commitments, similar in size to CalSTRS’ headline-grabbing allocation of seven years ago. In 2017 and 2018, there were at least four commitments of $500 million or more to infrastructure funds. 

More money also means investors with greater experience in the sector will try new ways to approach the asset class. In 2012, CalSTRS chief investment officer Chris Ailman said the pension was “relatively new to the sector and we want to get to know it well before we venture beyond the fund structure”. 

Today, with infrastructure comprising the lion’s share of its $4.2 billion Inflation Sensitive Portfolio, which accounts for 1.9 percent of the $226.1 billion pension, CalSTRS is increasingly considering co-investments to deploy capital earmarked for the asset class. 

According to Paul Shantic, director of the Inflation Sensitive Portfolio, the pension is still adopting a cautious approach to new types of investments – a step he says is necessary to “direct our resources to things we know we can do”. 

“We probably passed on a number of co-investments before the first one,” said Shantic in our July/August issue. “You just take it slow, get used to the pace and understand what your tasks are in terms of due diligence.” 

Despite shifting towards a more active infrastructure management role, Shantic says the pension’s relationships with fund managers are likely to continue in their present form. “There will always be a manager between us and the investment,” he says. 

With interest in infrastructure climbing, that’s likely to be the case for many other investors, though the amounts of money they are committing today may not always be quite so shocking.