Infrastructure investors go big

Pension funds and other asset owners increasingly are investing in U.S. infrastructure, often buying the assets from infrastructure money managers.

This could be a win-win. Investor interest comes at a time when the first crop of infrastructure funds raised in the U.S. in 2004 and 2005 are coming to the end of their 10-year life span. Managers are expected to bring more transactions to market to take advantage of growing interest by direct investors.

Industry insiders expect more infrastructure core projects to change to institutional investor ownership. Investors prize the core projects, even though returns generally are lower than investments in new projects, because of the yield that core infrastructure could generate.

Several deals have been made in this year alone:

• the C$287.3 billion ($218.6 billion) Canada Pension Plan, C$154.4 billion Ontario Teachers' Pension Plan and the C$77 billion Ontario Municipal Employees' Retirement System closed a deal to buy the company that operates the Chicago Skyway toll road from Cintra Infraestructuras, a subsidiary of Ferrovial SA, and Australia-based infrastructure manager Macquarie Group Ltd.;


• the $304.3 billion California Public Employees' Retirement System, Sacramento, and insurance company Allstate Corp. took stakes in the company that operates the Indiana Toll Road. The company, which was bought by IFM after it went bankrupt in 2015, had been owned by Macquarie Group and Ferrovial;


• CalPERS bought a stake from Sumitomo Corp. of Americas in the operator of two solar photovoltaic power generation facilities near Palm Springs, Calif.;


• CalPERS also is among the finalists bidding on Virginia's Pocahontas Parkway, which Macquarie put up for sale this year, sources said. Canada Pension Plan already owns a stake in the toll road; and


• Dutch firm PGGM and John Hancock Financial in July bought a 30% stake in DQE Holdings LLC, the Pittsburgh-based parent of utility Duquesne Light Co. and wholesale power marketer Duquesne Power LLC, from Macquarie Infrastructure Partners. PGGM is the e200 billion ($219 billion) firm that manages the assets of the e184 billion Pensioenfonds Zorg en Welzijn, Zeist, Netherlands.

More deals are in the works, including Macquarie Infrastructure Partners' 50% stake in the operating company that owns the Dulles Greenway toll road in Virginia and the expected sale of the operator of the Northwest Parkway Toll Authority in Colorado.

Officials at CalPERS, OMERS and CPPIBG declined to comment.

“There's a decent amount of activity in surface transportation projects,” said Michael Likosky, principal and head of infrastructure in the New York office of 32 Advisors LLC, an infrastructure brokerage firm. “Pension funds are playing a larger role than ever before.”

Driving the activity is that more of these projects are being put up for sale, Mr. Likosky said. A number of toll road public-private partnerships have declared bankruptcy or nearly went bankrupt, providing pension fund investors with potential bargains.

What's more, asset owners making these direct investments are not looking for private equity-style returns, he said.

“They are OK with lower returns,” Mr. Likosky said. For example, CalPERS' benchmark for its $2.6 billion infrastructure portfolio is the consumer price index plus 4%. In the 12 months ended Sept. 30, the CPI's all items index rose 1.5% before seasonal adjustment.

Asset owners are more interested in the predictable cash flows generated by existing toll roads, Mr. Likosky said. Because the toll roads have been operating for several years, investors have the luxury of knowing how much traffic revenue is being generated, he said. Original investors relied on often-flawed traffic projections.

Asset owners also are more comfortable investing in infrastructure these days because many are now more experienced in the asset class, Mr. Likosky said.

Ontario Teachers' Pension Plan officials make direct investments in infrastructure on an opportunistic basis, said Deborah Allen, spokeswoman for the Toronto-based pension fund. “Prices are pretty high these days,” she said. “We don't want to overpay. ... It depends on how much it costs and how it balances out with the risks.”

With more deals on the horizon, institutional investors are taking steps to ensure they have the capabilities to invest directly in infrastructure. “We see large institutional investors — insurance companies and pension funds — forming groups or expanding existing groups that can invest in infrastructure directly,” said Michael Gordon, U.S. president and CEO of Lombard International, a global insurance company that partners with fund managers and institutional investors.

The expected increase in direct investments is part of the overall growth in infrastructure investment by institutional investors.

Fundraising approached record levels in the third quarter, with 17 infrastructure funds closing on a combined $23 billion, nearing the highest-ever quarterly fundraising total of $24 billion in the fourth quarter of 2013, according to London-based alternative investment research firm Preqin.

Meanwhile, the largest number of infrastructure deals in the third quarter came in North America, with 71 deals worth a combined $15.2 billion in the U.S., according to Preqin.

“I think there's a lot of interest in U.S. infrastructure, and so as fixed-income yields have not been there, a lot of investors that are looking to match assets and liabilities effectively are looking at infrastructure,” Mr. Gordon said.

The vast majority of asset owners invest in infrastructure through funds because they lack the internal capabilities to invest directly, but there is a growing appetite by public pension funds, sovereign wealth funds and other asset owners for direct investment, said Mark Vecchio, partner and the co-chairman of the New York corporate group at law firm Venable LLP. “Definitely more public pension funds and sovereign wealth funds would more likely be involved,” said Mr. Vecchio, who works with asset owners, including Australian pension funds.

“There is now some enthusiasm because of the noise by the (presidential) campaigns on both sides about the importance of investment in infrastructure,” he added.

Whether the new president and Congress end up enhancing existing infrastructure programs or creating the national infrastructure bank that President Barack Obama has called for, any enhancement of infrastructure financing would entice more investment in U.S. infrastructure, Mr. Vecchio said.