The $190.8 billion California State Teachers' Retirement System, West Sacramento, is joining forces with APG Asset Management NV, the Dutch money manager, to form an infrastructure investment alliance.
Christopher J. Ailman, CalSTRS chief investment officer, said the alliance plans to invest billions of dollars in North American infrastructure over the next few years. He would not be more specific on a time frame.
Money won't come just from the founding members. Mr. Ailman said the plan is for the alliance to add additional institutional partners.
“This is just a start, this is the initial toe in the water,” he said. “We hope it will grow over time.”
CalSTRS and APG each will contribute $250 million to start.
Mr. Ailman wouldn't name CalSTRS' initial partner, but several sources identified the organization as APG, Amsterdam. An APG spokeswoman wouldn't confirm or deny the firm's involvement.
APG is owned by Stichting Pensioenfonds ABP, Heerlen, Netherlands, the e344 billion ($372 billion) pension fund for government and education workers in the Netherlands. APG has more than e400 billion under management, including the ABP assets.
“You've got two pension plans teaming up, instead of bidding against each other. We are working together, “said Mr. Ailman. “It's a much more effective model.”
Cooperation is not the only benefit in a world in which institutional investors are competing fiercely for infrastructure projects, Mr. Ailman said. More capital also will enable investors to bid for larger projects, he said.
For CalSTRS, it also will be about investing in infrastructure directly, Mr. Ailman said, instead of through a more expensive fund structure.
There is a third major player in the alliance: Argo Infrastructure Partners, New York. The firm, set up in 2013 by Jason Zibarras, formerly chief investment officer of J.P. Morgan Asset Management's infrastructure investments group, will serve as the alliance's investment manager and take a small, minority interest in the investments.
Argo will originate the investments and manage them for the alliance, Mr. Zibarras said in an interview. He said partners in the alliance could also suggest investments. He would not disclose how much his firm would be investing.
The alliance plans to focus on existing energy infrastructure for its initial investments because there is a guaranteed revenue stream, Mr. Ailman said. The first direct investment will be in a utility transmission line, but Mr. Ailman would not provide details.
Investments in additional transmission lines, power storage facilities and peaking power plants, which come on line when existing generation facilities can't meet demand, are assets the alliance is hoping to acquire, he said.
“We want nice stable assets,” Mr. Ailman stated.
Mr. Zibarras said a unique feature of the alliance is that Argo and the alliance partners together have determined the type of investments that will be made, as opposed to a typical fund structure in which the institutional investors have little say. He said the predetermined investment focus will help the alliance in sourcing investments. “We have been built to be nimble,” he said.
Mr. Zibarras said while the alliance wants more institutional members, keeping the membership to a “handful” will help maintain the focused investment program. Mr. Ailman said five investors total would be a “fair amount.”
While Mr. Zibarras has extensive infrastructure experience, the alliance is Argo's only client. He said he founded Argo with the sole purpose of forming an alliance with multiple institutional investors.
Mr. Ailman said the investments will be focused on North America, because the infrastructure market already is crowded with investors in places like Australia, France and the U.K. He said he expects the bulk of the investments will be in the U.S.
Even competing in the U.S. for projects might be tough, said other experts.
“Demand exceeds supply, “said Stephen Nesbitt, CEO of Cliffwater LLC, Marina del Rey, Calif., an alternative investments consulting firm.
Mr. Nesbitt said the challenge is finding projects with an attractive capitalization rate. He said the CalSTRS-APG plan sounds like a smart idea, but for it to work the alliance must show it is able to move quickly.
Indeed, the new alliance is launching at a time when competition for infrastructure assets is intensifying. In a January report, alternatives investment research firm Preqin said more than $100 billion in dry power was available for infrastructure projects in 2015. “It's going to be harder than ever to find value in 2015,” the report said.
Prior to the alliance, most of CalSTRS' infrastructure investments had been in funds, but even then the pension plan has not been able to find enough suitable investments.
The pension fund's total target allocation to infrastructure is $3.5 billion to $4 billion, of which only $1.25 billion was invested as of June 30, CalSTRS statistics show. APG has invested more than $5 billion in infrastructure projects, according to its website.
The new alliance is not the first joint effort to invest in infrastructure projects. Melbourne, Australia-based IFM Investors invests in infrastructure assets on behalf of institutional investors and is owned by 30 Australian superannuation funds. But its structure is different from the new alliance because investors are part of funds as limited partners. CalSTRS invested $500 million with an IMF fund 2012.
Pension plans in the U.K. also have formed infrastructure investment alliances, but they do not have the cross-continent participation of the CalSTRS-APG alliance.
Mr. Zibarras said fees will be less than half what would be paid infrastructure fund structure. He said a buy-and-hold investment approach and a limit on investors will help simplify the alliance's cost structure, keeping fees low. n