WASHINGTON — Pension funds may be attracted to Build America Bonds but should be careful to diversify instead of only investing in their own state’s or city’s BABs, a New York City-based private-equity director said at a conference here Thursday.
“I wouldn’t put the whole kitchen sink in there,” said John Adler, private-equity director of the Service Employees International Union’s capital stewardship program.
Adler, who spoke yesterday on a pension fund panel at an American Road and Transportation Builders Association conference, said that BABs “found a really willing market in pension funds to invest in municipal debt that, by and large, is going to support infrastructure development.”
But pension funds are already exposed to their own states’ economic conditions, so they should carefully weigh the costs and benefits of “doubling down” by investing in state infrastructure projects, he said.
There may be political support for investing in local or state projects, he said, but cautioned investors against seeing the projects as “social investments.” Pension funds should make infrastructure investment decisions based on cost-benefit analyses and anticipated returns, he said.
That also applies to BAB-financed infrastructure projects, he said.
As New York City plans to sell $800 million of BABs next week, Adler was asked whether New York pension funds should buy as many BABs as possible or be cautious about putting too many of their resources into them. Adler said he “would love to see the city’s pension funds be able to invest” in the taxable bonds, but recommended they keep their portfolios diverse, citing the New York teachers union’s decision to buy the city debt obligations during its fiscal crisis in 1975.
Speaking on the same panel was John J. Szczur, investment director for the International Union of Operating Engineers and Participating Employers. He predicted an increase of infrastructure investment deals and said that during the last year, pricing has been more favorable for pension funds to invest in such projects.
Adler added that so-called greenfield projects — new infrastructure, as opposed to “brownfield” projects on existing infrastructure — are ideal investments for pension funds.
“We are long-term, patient investors ... We don’t need to get repaid right away while the project is under development, and that’s not true of all capital,” he said. In addition, pension funds have their own interests in greenfield projects because of the economic development that comes along with them.
However, Adler noted, right now most pension funds are brownfield-oriented. “We would like to see more pension fund capital deployed into greenfields,” he said.
