The marketplace for infrastructure is so under-developed that the asset class is currently a riskier investment than core real estate and private equity, according to a major municipal US pension plan.
The $30.5 billion Los Angeles County Employees Retirement Association (LACERA) reached the conclusion in a recent memorandum on infrastructure investing written by the pension’s principal investment officer for real estate, John McClelland.
McClelland noted that LACERA already has about $345 million of exposure to infrastructure-like investments via publicly-traded investments, both fixed income and equity, as well as private equity commitments with Carlyle, TPG, KKR and Blackstone that have been used to finance pipelines, liquid storage terminals and utility assets.
Staff would want the marketplace to demonstrate better liquidity, improve valuation methods and offer investment vehicles that have clear distinctions between brownfield and greenfield inevstments.
The only type of infrastructure investment currently missing from the portfolio, he said, is “brownfield infrastructure”, or infrastructure investments in existing assets. Investing in this type of infrastructure “may present a viable option to consider once there is more proven performance and a developed marketplace”, he wrote, but for the moment, LACERA will not make an allocation and won’t hire a consultant to further consider the opportunity.
The reason for this decision, McClelland wrote, is the pension has “several concerns” about the market for infrastructure that need to be resolved before a direct allocation can be considered.
These include a lack of liquidity and a resulting uncertainty over an exit strategy; a lack of valuation standards, which is making it difficult to mark assets to market; a need to refine investment vehicles so that brownfield infrastructure investments are not commingled with greenfield, or new-development assets; the need for a decrease in “excessive” management fees for brownfield funds; and the need for managers to build longer track records to demonstrate expertise in the sector.
“Even if the concerns outlined above are addressed,” McClelland added, “the sector will still lack a good benchmark.” Developing such a benchmark will be difficult because infrastructure assets seldom trade and interim valuations are highly subjective, he said.
Lisa Mazzocco, LACERA’s chief investment officer, concluded in a letter appended to the memo that “unlike core real estate and private equity, the marketplace for infrastructure is not well developed, which makes it a riskier alternative”. She agreed with McClelland that, prior to recommending any allocation to infrastructure, “staff would want the marketplace to demonstrate better liquidity, improve valuation methods and offer investment vehicles that have clear distinctions between brownfield and greenfield investments”.
Despite this view, the pension still likes the “long-term appeal” of infrastructure and will monitor developments in the marketplace to determine the appropriateness of making an allocation in the future.
McClelland and Mazzocco did not respond to a request for comment by press time.