U.S. institutional investors are moving ahead with plans to invest directly in infrastructure projects.
Not only do these investors have allocations to spend, but the need is great. In the U.S. alone, a $2 trillion capital infusion is needed to repair and rebuild roads, bridges, water lines, sewage treatment plants and dams, according to “Infrastructure 2011: A Strategic Priority,” a recent joint report by the Urban Land Institute and New York-based consulting firm Ernst & Young.
Worldwide infrastructure spending is expected to top $50 trillion over the next 25 years, according to the report. Pressure to cut government spending to reduce the federal deficit is expected to cause the U.S. to fall further behind in infrastructure repairs and upgrades, the report noted.
The California Public Employees' Retirement System, Sacramento, is among the U.S. institutional investors furthest along in direct infrastructure investment plans. It has already made direct investments and expects to make more direct investments with a portion of the up to $5 billion that system executives expect to invest in the asset class over the next three years. Executives of the $225.5 billion retirement system are meeting with state and local government officials to assess public-private partnerships, said CalPERS spokesman Wayne Davis.
The California State Teachers' Retirement System, which made its first infrastructure investment in April through a fund, is in the process of “ramping up its capabilities” so it can make direct investments as well, said Ricardo Duran, spokesman for the $148.2 billion West Sacramento-based retirement system.
They are not alone. Experienced global infrastructure investors — including the Abu Dhabi Investment Authority, China Investment Corp., Government Investment Corp. of Singapore, Ontario Teachers' Pension Plan, Canada Pension Plan Investment Board, Ontario Municipal Employees Retirement System — also are making direct investments in infrastructure.
Direct investment is a huge part of the C$152.3 billion (US$146.62 billion) CPP Investment Board's infrastructure investment strategy, a CPPIB spokeswoman said. The CPPIB is targeting investments of C$300 million to C$1.5 billion but will consider a larger investment in a single infrastructure project, the spokeswoman said. CPPIB, based in Toronto, is also open to being a principal lead investor as part of a larger consortium, according to a summary of its infrastructure investment approach released in November.
But unlike CalPERS, while the CPPIB will invest in projects in Canada, the board operates at arm's length with the government and does not pursue projects with governmental entities in Canada, the spokeswoman said.
Returns of infrastructure portfolios that include direct investment strategies also are outperforming their benchmarks. For example, the Toronto-based C$107.5 billion Ontario Teachers' Pension Plan earned 13% for calendar year 2010 on its infrastructure portfolio, compared with 4% for its benchmark. For the same period, the infrastructure portfolio of the Toronto-based C$54 billion Ontario Municipal Employees plan earned 10.1%, compared with the 8.5% of its infrastructure benchmark.
The bigger investors are pursuing direct investments, said Anthony Frammartino, partner in The Townsend Group, a Cleveland-based consulting firm.
“I would expect other large plans to also make the attempt to try to go increasingly direct,” Mr. Frammartino wrote in an e-mailed response to questions. “Whether it is internally or if groups like us set up compelling options for them, I do think that is the direction they go ultimately.”