The psychologist Sigmund Freud is famous for having once asked, “The great question that has never been answered, and which I have not yet been able to answer, despite my thirty years of research into the feminine soul, is ‘What does a woman want?’”
In the infrastructure world, the same question is being asked by fund managers with respect to public pension funds. Due to their liability-matching requirements, these multi-billion dollar pools of capital have long been wooed by managers eager to make their mark on the asset class.
But judging by an exclusive event recently held in California, infrastructure fund managers aren’t having much luck figuring out what pensions want from them.
On June 25 and 26, senior executives representing about $1 trillion of Canadian, US, UK, Australian and Middle Eastern institutional assets gathered at an event organised by Ryan Orr, executive director of the Collaboratory for Research on Global Projects at Stanford University, to compare notes on how to best approach the infrastructure asset class.
The good news is that all of these groups want to initiate or increase significant allocations to infrastructure. However, a key insight from the Stanford Roundtable on Pensions and Infrastructure, attended by 55 pension officers, academics, state officials and event sponsors, was that – by and large – pensions are currently not getting what they want from infrastructure fund managers.
According to people familiar with the event, pensions present at the roundtable firmly said they were reluctant to pay private equity-style fees of 2 percent management and 20 percent carry for infrastructure investments. In most cases, their infrastructure allocations are being carved out of fixed income allocations. That means they’re giving up Treasury bills and AAA corporate bonds to invest in the asset class – not interests in private equity funds. With that comes an expectation for lower returns and, correspondingly, lower fees.
But right now fund managers are still, for the most part, sticking to the private equity model for infrastructure. That means not only higher fees that clash with fixed-income allocations but also closed-end fund structures that don’t line up with pensions’ investment horizons.
So what’s a frustrated pension chief investment officer to do? The general answer is “let’s invest directly in infrastructure ourselves”, and roundtable participants fielded three different options for accomplishing this.
The first was partnering with infrastructure developers – firms such as Skanska or ACS, which have extensive expertise in the sector – to invest in infrastructure projects alongside them. The problem with this approach is that, like the guy in the front of the classroom unaware that a pretty girl in the back of the class has a crush on him, developers are unaware of all the pension money interested in partnering with them. There’s an opportunity here for some matchmaking by intermediaries and also for developers to be more pro-active, market sources say.
The second option for doing it themselves is the creation of formal pooled vehicles, whereby pensions would get together, put out a request for proposals for managers, aggregate their dollars and put them to work on their terms. As previously reported by Infrastructure Investor magazine, pensions including California and New Jersey have entertained such an idea. But the general consensus at the roundtable was that such multi-pension arrangements are difficult to orchestrate.
The third – and most promising approach – was a more informal alliance among pensions to form a club and invest in opportunities on a deal-by-deal basis. The member pensions would share intelligence, deal opportunities and due diligence resources and invest together in deals where it made sense to do so, given their different needs.
Make no mistake, though. Pensions get the fact that infrastructure investing is tough. They realize that it takes an enormous level of time, human resources, expertise and money that they simply do not have. They also realize that investing in third-party managed funds can give them political cover from politicians eager to legislate their allocation schedules. So outsourcing the process to a third-party fund manager will likely remain an attractive proposition for many, whether they realise this yet or not.
But if that attraction is to spark meaningful relationships, managers are going to have to do a lot more listening.