Public pension funds seek infrastructure as market heats up

Mon Jun 13, 2016 3:42pm EDT
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By Robin Respaut

SAN FRANCISCO (Reuters) - The California Public Employees’ Retirement System recently bought a stake in a private Indiana toll road with a troubled history, one sign of how popular infrastructure investments have become among U.S. pension funds.

In May, CalPERS bought a 10 percent stake of the road's concession, representing the first U.S. transportation investment for the nation’s largest public pension fund. The Indiana Toll Road had been acquired out of bankruptcy in 2015 for about 50 percent more than its original 2006 price by a fund made up of more than 70 U.S. pension plans.

Infrastructure - such as roads, bridges, rail, airports, water storage, utilities, and pipelines - has long been favored by pension funds in Canada, Australia, and the United Kingdom. Now, as an era of strong returns in stocks and bonds is believed to be winding down, more U.S. public pension funds are looking to buy real assets for their portfolios, seeking cash-generating, stable investments in a low-interest environment.

The number of institutional investors with stakes in infrastructure has more than doubled since 2011 to more than 2,750 from 1,300, according to Preqin, an alternative assets research firm. Among the top 10 public pension funds investing in infrastructure, allocations more than quadrupled over the past five years to $17.7 billion.

The pace is likely to continue. Forecasts for infrastructure are more bullish than other real assets, such as real estate or private equity, with the majority of fund managers planning to increase the pace of investment in the next year, according to a 2016 report by Preqin and financial services firm BNY Mellon.

For a graphic on rising demand for infrastructure assets, see:

Such competition has made it more difficult for public pension funds to secure revenue from projects like Indiana Toll Road.

“There’s too much capital chasing too few deals,” said Randy Gerardes, Wells Fargo Securities Senior Analyst.   Continued...

Travelers pass a sign for Gatwick Airport in southern Britain, December 17, 2015. CalPERS, the biggest U.S. public pension fund, made its first direct infrastructure investment in 2010, when it purchased a stake of London's Gatwick Airport.   REUTERS/Neil Hall/File Photo