Michael Powell, head of alternative assets at Universities Superannuation Scheme (USS), the UK’s second largest pension, has expressed a preference for direct investment in infrastructure going forward.
In a recent interview, Powell said: “Infrastructure is an asset class where pension funds feel more confident about investing directly rather than going through funds. We want to be a big co-investor, sometimes with funds but also with other like-minded investors particularly pension funds.”
USS, which has yet to complete a co-investment in infrastructure – though it is understood to have got close to completion on a number of occasions – has invested through a number of funds. It has what it describes as “core relationships” with CP2, the Australian fund manager, and GS Infrastructure Partners I, the $6.5 billion infrastructure fund raised by Goldman Sachs in 2006. It has also backed Henderson Private Capital’s PFI Secondary Fund I as well as renewable energy-focused funds raised by HgCapital and Impax Asset Management.
Powell said the infrastructure portfolio had initially performed disappointingly but had been performing much better recently. However, he said the pension would focus on co-investments and re-upping with existing funds going forward rather than on new fund investments.
He added that he was sceptical of funds with high fees and carried interest following a period characterised by over-leverage. “Our view is that infrastructure can't sustain 2&20 fee terms,” he said. “Too much leverage was used to try and get the return up to a level where the incentives were justified – and it didn’t work.”
USS currently has around 2.5 percent of its total portfolio committed to infrastructure, compared with a long-term target of 3 percent. Most of its infrastructure investments were made between 2005 and 2006, making infrastructure the most mature part of USS’ alternatives programme. Powell joined USS to head the 15-strong alternatives team in September 2006.
Powell’s thoughts on renewable energy infrastructure investing can be found in the February 2010 issue of InfrastructureInvestor magazine.