Money managers see big jump in infrastructure, energy assets

Rising valuations and investors' search for yield pushed up the top money managers' assets under management in many alternative investment asset classes in 2014.

Infrastructure had the most growth among the alternatives investment managers, up 48% to nearly $16 billion in the 12 months ended Dec. 31, according to Pensions & Investments' annual survey of managers of U.S. institutional, tax-exempt assets. Even so, infrastructure asset growth slowed from the nearly 72% increase in 2013.

Energy was the next fastest growing alternatives asset class, up 41% to $3.2 billion. Energy managers regained territory they lost in 2013, when energy assets dropped 75% to $2.25 billion.

Managers of another energy-related strategy, master limited partnerships, also increased their assets under management by 18.5% to $7.2 billion, exhibiting a slower growth rate than the 68% in 2013.

Other alternative asset classes showing strong double-digit growth included buyouts, up 35% to $9.4 billion, and real estate equity, gaining 24.5% to $366 billion. Those growth rates sped up mightily from the previous survey's gains of 14.4% and 3.4%, respectively.

The largest 25 real estate equity managers fared a bit better than the entire group, with their combined real estate equity assets up 28.7% to $321.3 billion at year-end 2014. The 25 largest managers of equity real estate account for 88% of the total real estate equity assets reported in 2014, compared with 85% a year earlier and 84% of all real estate equity assets in 2012

Within the real estate equity category, domestic assets among the largest 25 managers grew 17.4% to $272.4 billion while international real estate was up 124% to $39.5 billion. The year before, international real estate equity assets had fallen 31.2%.

The top 25 real estate equity managers also saw their assets in timber double, to $9.4 billion, in the 12 months ended Dec. 31. During the same period, overall timber assets fell nearly 2.7% to $15 billion, a small dip compared to the previous survey when overall timber assets dropped 6.4%.

By comparison, the NCREIF Property index rolling four-quarter total return for 2014 was 11.82%, with 5.36% income return and a 6.21% appreciation. The NCREIF Timberland index rolling four-quarter return was 10.48%, with 2.86% from income and 7.46% from price appreciation.

Real estate investment trust assets overall grew 18% to $80.6 billion; the total of the largest 25 managers of REIT assets for U.S. institutional tax-exempt clients was up 18% to $77.2 billion. The FTSE NAREIT All-Equity REITs index was up 28.03% for the 12 months ended Dec. 31.

“It was a strong year for real estate generally,” said Brad Case, senior vice president, research and industry information at the National Association of Real Estate Investment Trusts, Washington.

“The economy is steadily improving while construction is low in all property types, which leads to increases in occupancy and rental growth across the board. It was a period of time when it was hard to do badly in real estate,” Mr. Case said.

P&I's data on the individual asset classes and strategies are based on assets managed internally for U.S. institutional tax-exempt investors as of Dec. 31.

J.P. Morgan Asset Management, which had held the top slot on both the real estate equity and infrastructure rankings for the past five years, was replaced by TIAA-CREF, which moved up from the third position on the real estate equity ranking, and IFM Investors Pty. Ltd., which shot up from fifth place on the infrastructure lineup.

Nevertheless, New York-based J.P. Morgan Asset Management's real estate equity assets grew 10.6% to $33.1 billion; its infrastructure assets slipped 7.2% to $2.4 billion.

By comparison, TIAA-CREF's real estate equity's assets shot up 142% to $48.1 billion, boosted when it took a 60% interest in a real estate joint venture with Henderson Global Investors, which gave the New York-based money manager exposure to international real estate. (In April, TIAA-CREF acquired the remaining interest in the joint venture.)

IFM Investors' infrastructure assets grew 171% to $3.4 billion, boosted by a number of large acquisitions in 2014, including a 29.9% ownership stake in the Vienna International Airport in December.

IFM Investors, based in Melbourne, Australia, is owned by 30 Australian retirement funds. During the year, the firm boosted its New York-based North American business, hiring Jessica Egan Thompson for a new position as associate director of North American debt investments. She reports to Richard Randall, who joined IFM Investors as executive director of North American debt investments in October 2013.

Joseph Azelby, managing director and CEO, global real assets, J.P. Morgan Asset Management, attributed JPMAM's increase in real estate equity to investors' continued interest in assets that provide income given the low-interest-rate environment and “pretty full equity” valuations.

In 2014, J.P. Morgan Asset Management was a net buyer of real estate, especially in the first two quarters.

“We were very, very active in the first half of 2014,” but acquisitions slowed after that as prices moved up sharply in the second half, Mr. Azelby said.

Higher valuations made it more difficult for real estate managers to invest in commercial real estate.

“Whether its debt or equity, there's an immense amount of capital available, and that capital is looking for a home,” said Stanley Iezman, chairman and CEO of Glendale, Calif.-based real estate money manager American Realty Advisors.

“The amount of capital available is making it very difficult to buy anything.”

For investors, this translates into lower returns, he said.

“Value-added investors are paying dearly for their properties as well,” which make investors question whether they are being compensated for the amount of risk they are taking, according to Mr. Iezman.

American Realty Advisors ranks 17th on P&I's real estate equity manager list, with assets growing 11% to $6.45 billion last year.

J.P. Morgan Asset Management was a net buyer of infrastructure assets as well, because “our clients are net buyers,” Mr. Azelby said.

J.P. Morgan Asset Management saw a steady flow of deals and new client capital commitments last year, he added, noting JPMAM is investing in power and the renewable sector.

As infrastructure matures as an asset class, more pension funds are creating infrastructure allocations.

“We see more and more pension funds create allocations and begin to execute,” Mr. Azelby said.

The majority of infrastructure investors make commitments to commingled funds. Large sovereign wealth funds and a handful of pension funds are interested in direct infrastructure transactions “to whatever degree they can access them” and have the internal capacity to do so, Mr. Azelby said.

“Infrastructure assets are quite large and ... investors have to write very large checks to make it worthwhile,” he said.

The firm has not sought new separate account clients because the “platform is quite well capitalized,” Mr. Azelby said. “If we did we would be highly selective.”

This year, TIAA-CREF also topped the list of private debt (up 38% to $23.7 billion) and energy (up 36% to $2.2 billion) managers, while exhibiting sizable gains in its infrastructure (up 54% to $2.1 billion) and timber (up 27.5% to $1.8 billion) portfolios.

While TIAA-CREF's alternative investment portfolios have enjoyed gains from appreciation, the majority “is the consistency of our strategy to grow our real asset portfolios, our alternatives portfolios and our privates (private investments) portfolio,” said Jose Minaya, senior managing director and head of private markets asset management who is based in TIAA-CREF's Charlotte, N.C., office.

Past acquisitions now are bearing fruit in the form of additional assets under management. Since 2010, TIAA-CREF acquired the Westchester Group Investment Management for agriculture and GreenWood Resources for timber, in addition to last year's Henderson joint venture, he noted.

“What you are seeing is that these teams are now maturing,” he said. “It takes time to get people on board and develop relationships and develop a pipeline.”

TIAA-CREF has built its energy business “organically,” adding executives to the firm's energy investment team, Mr. Minaya said. “Energy is the biggest area of growth from a human capital side,” he said.

This “hit its stride in 2013 and 2014,” Mr. Minaya said.

“A focus for us has been the renewable energy space. Our existing platform includes assets like wind, solar, landfill gas, which provide an income component,” Mr. Minaya said.

In the REIT category, Morgan Stanley again tops the list, with assets up nearly 15% to $9.6 billion managed in REITs for U.S. institutional tax-exempt investors, followed by BlackRock Inc. with REIT assets up 33% to $6.7 billion.

Vanguard Group ranked third, with REIT assets up 61% to $5.9 billion.

Once again the top manager of master limited partnerships was Tortoise Capital Advisors LLC, with assets up 28% to $4.2 billion.

Michelle R. Kelly, managing director of Leawood, Kan.-based Tortoise Capital, said the firm has gained new investors through a combination of funds including institutional class mutual funds and separate accounts.

Tortoise was founded in 2003, a time when investors were unfamiliar with investing in master limited partnerships. The MLP market has grown substantially since then, to 120 energy MLPs with a combined market cap of about $445 billion, Ms. Kelly said, from roughly 30 MLPs with a market cap of $32 billion in 2003.

In 2013 and 2014, a variety of new MLPs broadened the asset class, she said, contributing to the growth. MLPs usually had invested in midstream assets, which involved such things as transportation and storage.

Some of the new partnerships invest more broadly, in such investments as frac sand, refining and petro chemical companies, “that changes the risk/return spectrum of MLPs,” she said. “Understanding what's under the hood is important.”