CalPERS' purchase of an equity stake in the Indiana Toll road is the latest in a growing trend of direct infrastructure investments by U.S. public pension funds.

PHOENIX - The California Public Employees' Retirement System's purchase of an equity stake in the Indiana Toll Road earlier this month is part of a growing trend of public pension funds investing more directly in large infrastructure assets.

CalPERS announced the purchase of 10% of the toll road via a stake in the Indiana Toll Road Concession Company May 4. ITRCC operates and maintains the 157-mile divided highway through an agreement with the Finance Authority for the State of Indiana. The purchase is the first U.S. infrastructure investment for CalPERS, the nation's largest pension fund with a value of some $294 billion.

"This solid, long-term investment represents our first foray into a transportation asset in the United States," said Paul Mouchakkaa, managing investment director for CalPERS' Real Assets program. "We continue to make progress building up this important program, and the ITRCC aligns well with our recently adopted strategic plan for real assets."

The deal irked some stakeholders, including the Professional Engineers in California Government, who criticized the riskiness of the toll road investment.

PECG, the union that represents engineers employed in California state government, is hostile to public-private partnerships that it sees as a threat to its public employee members.

The Australian fund manager IFM Investors bought the toll road out of insolvency when ITRCC filed for Chapter 11 bankruptcy in September 2014, though ITRCC continues to operate the road. CalPERS did not disclose the price it paid for its 10% stake in the toll road, but did say that the purchase boosts its total infrastructure investment program to slightly more than 1% of the total fund, with a net asset value of approximately $3.1 billion.

Assembly Bill 2348, awaiting committee action in the state Assembly, aims to facilitate pension investment in infrastructure by allowing the Department of Finance to identify specific projects that need investment for which they can guarantee the rate of return to CalPERS and the California State Teachers' Retirement System.

Jill Eicher, Pension Infrastructure Collaborative Program director at the Stanford Global Projects Center, pointed to the CalPERS acquisition as the latest development in a growing trend of public pension funds investing directly in infrastructure projects without a fund manager acting as middleman.

Speaking at the Government Finance Officers Association conference in Toronto Sunday, Eicher said that most U.S. public pension funds have traditionally been "passive" infrastructure investors. The pension invests its money with a managed fund that invests in infrastructure, paying a management fee to the fund manager and relying on the investment decisions of that manager. But that has begun to change in just the last few years, Eicher said.

"The direct investment model introduces a new paradigm," Eicher said. "One that is new in the U.S."

Eicher said that there are about 4,000 public pension funds in the U.S., but that only a fraction of them have the resources to undertake direct investments in infrastructure. The practice is far more common in other countries: more than 50% of investors invest directly in Canadian infrastructure, compared to just 15% in the U.S., said Eicher. The first U.S. pension fund to invest directly in infrastructure was the Dallas Police and Fire Pension System's investment in the LBJ Highway in Dallas in 2009, Eicher said. She also cited the New Mexico Educational Retirement Board as another standard-bearer, that fund having made three direct investments since 2013.

Costs are a major driver of direct infrastructure investment, Eicher said, with pension funds running internal management costs of 0.5% or less compared to private equity management fees typically ranging from 1.5% to 2%. Pension funds that are large enough to make these investments also benefit from the learning experience of the acquisitions to enrich their own expertise and enjoy the control of being able to partner with like-minded investors of their own choosing. Eicher added that compiled five-year annualized reports based on data from 2008-2012 showed about a 1% for infrastructure funds, compared with an 11.42% return on direct investments.

Eicher cautioned that while smaller public pension funds are likely to be at an increased disadvantage moving forward in an economy that rewards large-scale investments, public policy hurdles and other issues mean that pension funds have to consider seriously whether direct investments are right for them.

"It is not something that can be done lightly," she said. "It is a big change."

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