U.S. pension funds have long trailed other countries in infrastructure investing, but new and potentially more attractive opportunities are now presenting themselves in the U.S. due to emerging energy sources and the local governments’ fiscal limitations. New drilling techniques that are opening up oil and gas fields trapped under shale rock in places such as Texas, Oklahoma, Pennsylvania, West Virginia and Wyoming, along with a developing alternative energy sector, are the sources of these new infrastructure investment opportunities. Russell Investments estimated the value of the listed infrastructure market at $3 trillion as of June 30, 2011.
“There are new pockets of oil and gas around the country being drilled and no infrastructure to bring those to market,” said Manoj Patel, co-head of global infrastructure securities at New York-based RREEF, a global real estate, infrastructure and private equity investment firm.  Alternative energy is becoming more common as well, creating a demand for infrastructure investment. Wind farms and solar panels tend to be located far from where people live, so power transmission lines need to be built to deliver the power to their homes.

Darren Spencer
Darren Spencer

The return on infrastructure investments is around 8-10% at the safe end of the spectrum, according to Patel. A mid-2011 survey of global consultants by researcher Preqin found that clients of 58% of the consultants planned to increase their infrastructure investing in 2012, while more than 20% planned to significantly increase it. None planned to lower it. “One of the key drivers of infrastructure investing is the large capital requirement for financing,” said Darren Spencer, a director of alternative investment consulting, Americas, with Russell Investments, noting that the ability of the U.S. government to make these investments is limited.
Most U.S. pensions have yet to step up these investments, however. “The vast majority of U.S. pension funds are only just becoming introduced to the idea of unlisted infrastructure fund investment, let alone direct investments,” said Alex Jones, a content producer with Preqin. “More and more of the larger investors that have been investing in the asset class for some time are starting to look at direct investments. However, most investors do not have the resources to do this. The bottom line is that U.S. investors are currently way behind the likes of the big Canadian investors and European institutions when it comes to direct investment in infrastructure.” TIAA-CREF and the International Finance Corporation were the only two U.S.-based institutions among the top 15 global infrastructure investors, according to Preqin. Three out of the top four were Canadian public pension funds.
Long-term investment periods, low volatility, inflation-protected returns, steady revenue streams and, in the case of direct investment, ownership of a real asset, are among the advantages of infrastructure investment. “We certainly are advocates of infrastructure investing for our clients and think it makes sense for pensions,” Spencer said. “It is attractive to funds with long-term liabilities to get pinned to a steady cash-flow stream, and they are providing essential services to the economy. But there is a very large capital requirement for infrastructure. It is difficult to go out and build a new asset.”
The $221 billion California Public Employees’ Retirement System approved a plan last September to invest approximately $5 billion in infrastructure projects over the next three years, with up to $4 billion invested in the U.S. and $800 million invested in California. “We are looking for long-term economic value by providing safe, reliable, efficient and high-quality services that are vital to California that not only meet our risk-return objectives, but that we believe have the extra benefit of creating jobs and ultimately improving the economic climate,” George Diehr, chair of CalPERS’ investment committee said in a release at the time.
Spencer added that European, Canadian and Australian pensions have larger internal investment staffs, with more experience finding, analyzing and executing infrastructure investments. “They [U.S. Funds] are not going out and sourcing, underwriting deals. They tend to invest in private equity funds.”
Part of the reason U.S. pensions fell behind in participating in this investment class was a simple lack of opportunity, according to Patel. Local governments traditionally had access to ample funding through municipal bonds, reducing the need to tap private investors. But that is drying up, and privatization of roads and bridges, once unheard of in the U.S., is becoming acceptable to talk about. Spencer points to the Chicago Skyway construction in 2005 as a watershed.

“Privatization has evolved as an acceptable form of financing. The trend is there, but it is going to take a long time,” Spencer said. “There is a real need for private investment in infrastructure. The U.S. highway system was built in the 1950s and nothing has been done to that.” Patel noted that the I-495 Express Lanes in Virginia, known as HOT lanes, are being built by private companies Fluor-Lane and Australia-based Transurban Group.

Kevin Parker
Kevin Parker

Another perk to infrastructure investing is the chance for pensions to add ESG (environmental, social and governance) investments to their portfolios. Technologies such as solar and wind power have become more popular investments and are expected to grow. “It works,” said Kevin Parker, head of asset management at Deutsche Bank. “People investing in operating assets don’t like uncertainty. The idea behind a utility is it’s supposed to work. There is no doubt about that now.”  —Levi Davis