Public pension fund managers want in on infrastructure

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WASHINGTON — Public pension funds are taking advantage of the benefits of infrastructure investment, which fund managers say offers a perfect combination of longevity and stability.

Of the 25 largest public pension plans scattered around California, Washington, Texas, Wisconsin, Florida, Georgia, North Carolina, Ohio and New York, 23 of them have invested in infrastructure or announced that they plan to do so, according to a January report.

In that report Clive Lipshitz, a managing partner at Tradewind Interstate Advisors and Ingo Walter, a finance professor at New York University studied the 25 largest public pension plans and found that managers are becoming increasingly interested in investing in infrastructure.


The average allocation is relatively small, at 0.68% with one of the highest being the Teacher Retirement System of Texas at 1.7%.

The Texas pension fund system allocates 5% to energy, natural resources and infrastructure.

Infrastructure takes up 2% of the trust and provides stability for energy, which can sometimes experience volatility, said Carolyn Hansard, senior investment manager of energy, natural resources and infrastructure said at the Teacher Retirement System.

“What we like about infrastructure is that it is tied to global growth, high barriers to entry and inflation protection, if it is truly infrastructure, and backed by long term contracts,” she said. “Additionally, the assets tend to have long term horizons, 20 to 30 year assets, just like a pension investor.”

Underfunding of U.S. public pensions has gotten more severe over time with public pension obligations estimated at $5.96 trillion at the end of 2017, supported by assets of $4.33 trillion, according to the report. That leaves a shortfall of $1.63 trillion as more baby boomers expect to retire in the next few years and place even greater strain on those systems.

Infrastructure investment delivers diversification and predictable cash flows for public pension funds, according to the report.

In 2009, the Dallas Police and Fire Pension System invested in the development of Texas Expressway 110 and in 2012 and the California State Teachers' Retirement System committed $42.8 million to four California infrastructure projects, according to the report.

Lipshitz said the interest in infrastructure investment could rise over time and believes public pension funds could be yet another tool in the tool box to fund infrastructure.

In a recent op-ed from the Hill, the authors of the report write that what public pension funds currently invest in like private equity-type funds, doesn’t give them the cash flow they currently need. They write that public pension funds are using the “wrong investment vehicles for the wrong purpose.”

“Over time some of the U.S. public pension plans will start adopting that approach of investing directly in infrastructure assets and the point we make in this paper and in that op-ed is that there is a substantial amount of money in the pension system that could be and I think will be allocated over time increasingly to this type of asset,” Lipshitz said.

Infrastructure funding isn’t labeled as such in investment portfolios and instead are usually incorporated with real assets because it has very similar attributes to real estate with a similar cash flow, Lipshitz said.

“Now within real assets, infrastructure is a growing piece as well, so there’s no reason to think that this trend of increasing real asset exposure will decrease or frankly that infrastructure will decrease,” he said.

Overall, public pensions funds’ role in infrastructure could be meaningful, but “another arrow in the quiver.”

Public-private partnerships have long been talked about as another way to fund infrastructure, and leaning less on the federal government for funds. Lipshitz noted that P3’s are, like public pension fund investment, another tool.

“Again, neither of these things is going to replace the other, it’s just an additional tool in the tool kit,” he said.

As for riskiness, Lipshitz said like anything, if done incorrectly, it could be risky.

“Any asset class has riskiness inheritance to it,” he said. “You’d have to look at the underlying asset. If done right, infrastructure should be less risky than some other types of investing.”

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