The Sacramento County (Calif.) Employees’ Retirement System has recently committed $115 million to infrastructure and energy, divided between two managers, with $100 million committed to a separate account with Pantheon Ventures and $15 million committed to EnCap Investments’ EnCap Flatrock Midstream Fund III.
“What gains our interest with infrastructure and infrastructure secondaries is that we’re finding good risk/reward profiles compared with other real asset investments,” says Scott Chan, chief investment officer with SCERS. “For example, we’re looking at secondaries with a projected net IRR of around 12 to 15 percent, while core real estate, on the other hand, is about 6 to 6.5 percent net IRR unlevered and levered you get in the 7.5 to 8 percent net IRR range, so we’re really not getting paid as much for that illiquidity with those investments.”
The separate account with Pantheon, which will be purchasing secondaries of infrastructure and energy partnerships, marks the first time SCERS has invested with Pantheon.
“Pantheon is one of the few managers we looked at that actually has an infrastructure and energy division in the secondary market and has already done deals,” Chan continues. “I think a lot of folks are just trying to get off the ground.”
EnCap’s EFMF III launched in January 2014 with a $2.25 billion fundraising goal and closed this month after being oversubscribed at $3 billion. The fund targets the midstream sector of North America’s oil and gas industry.
“With midstream energy assets, we think that you really need deep expertise in the basins to understand the value of the land,” Chan explains. “The worst thing that could happen is if you build your midstream assets and then find out the land underneath can’t be drilled effectively or efficiently. So, when considering this investment, we were looking for folks that have a good understanding of the basins, have the expertise to, first and foremost, value the land and have the connections to develop the midstream assets themselves. EnCap fit that description”
SCERS’ real assets allocation, which is currently at its 15 percent target, has three main objectives: to generate moderate income, to be a diversifier to its equity portfolio and to hedge inflation over the long term. Core real estate is the largest asset class within the real assets allocation and currently comprises approximately 8 percent of SCERS’ $7.6 billion portfolio. “Other real assets,” which includes infrastructure, energy, agriculture, timber and natural resources, is the second largest class in the real assets portfolio.