The California Public Employees’ Retirement System has revised its infrastructure policy in order to give it an edge in pursuing investments and to support diversification. The $277.3 billion retirement system is allowing its infrastructure staff to include more financing and debt in its investments and has clarified rules about diversification for investment vehicles, general partners and managers.
The changes might be an indication that competition is heating up in infrastructure deal markets and the retirement system wants to be able to make decisions more quickly and with more firepower while keeping within its diversification parameters.
CalPERS’ infrastructure policy had required prior board approval for commitments to commingled funds with leverage of more than 65 percent and direct investments with leverage of more than 50 percent. Now, the infrastructure staff can make investments in commingled funds without prior board approval regarding the use of leverage, and the limit on the use of leverage for direct investments has been increased to 65 percent.
“The objective of the proposed revisions to permitted leverage is to increase staff’s ability to pursue investments that are consistent with defensive, lower-risk investments,” notes a memo by CalPERS’ infrastructure consultant, Meketa.
No changes have been made to CalPERS’ overall infrastructure program leverage limit, which is 65 percent of the market value of assets held within the program.
“Staff sees numerous defensive- and defensive plus–quality infrastructure investments levered above 50 percent of enterprise value with unrated debt,” notes a CalPERS memo. “Many such investments are desirable targets for the infrastructure program as they match the program’s low-risk, stable return objectives.”
The retirement system also “removed the existing credit rating requirement with respect to new debt investments to enable the program to acquire suitable forms of debt securities such as bank debt and other project finance debt instruments, which are ordinarily not rated.”
CalPERS decided against eliminating a policy that limits investments in “individual commingled funds to a maximum of 25 percent of the committed capital of any such commingled fund,” CalPERS notes. In other words, CalPERS does not want to be more than a 25 percent interest in any single fund in order to avoid overcommitting to a vehicle that may not ultimately raise enough capital to be a viable investment vehicle.
The retirement system did institute a new limit for single-investment concentration, whereby amounts that may be invested in any commingled fund, separate account or other managed vehicle cannot exceed 20 percent of the program allocation.
CalPERS also clarified the scope of the existing single-manager concentration limit — 30 percent of the program allocation — so that it “clearly applies in respect of all types of managed vehicles, without exception.”