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Texas pension embarks on infrastructure investment

by Drew Campbell

The $24 billion Employees’ Retirement System of Texas announced plans to commit up to $235 million to infrastructure in 2014 as part of an overall plan to reach a 4 percent target allocation by 2015. The decision was made at its Aug. 20 board of trustees meeting,

“Infrastructure staff and the infrastructure consultant believe that 2014 will be an attractive vintage year for infrastructure investment,” notes the Aug. 20 board meeting agenda.

Texas ERS adopted a 4 percent target allocation to infrastructure investment in February, and in March the retirement system transferred nearly $170 million of existing power infrastructure investments into its newly established infrastructure portfolio, including investments in three Texas power plants made with Panda Power Funds.

“For fiscal year 2014, ERS infrastructure staff and the infrastructure consultant believe that the risk of rising yields combined with rising regulatory risk make core infrastructure opportunities limited, particularly in Europe,” notes Texas ERS in a statement. “As many infrastructure investors shun construction risk, value-added opportunities provide an opportunity to increase expected returns while construction risks can largely be managed through engineering and procurement contracts.”

The retirement system also will pursue midstream infrastructure investment opportunities in growing domestic oil and gas markets is a key focus.

“It is clear that the economic balance of the world is shifting,” Texas ERS notes. “Emerging markets exhibit stronger economic growth, and demand for infrastructure is on the rise as consumers demand roads, water, electricity and a cleaner environment. Asian investments will be given consideration in fiscal year 2014.”

The infrastructure staff also is currently working with private equity staff to commit an additional $125 million, including a $50 million co-investment, with an emerging markets power fund. The infrastructure team has met with about 25 infrastructure managers already, and “extensive due diligence has been conducted on one fund.”

The infrastructure program will invest up to 25 percent of the allocation — or 1 percent of retirement system assets — in listed infrastructure, with the remainder going to private infrastructure. The listed infrastructure portfolio will be benchmarked to the Macquarie Global Infrastructure Index. Texas ERS expects to begin making commitments to listed infrastructure managers immediately.

The private infrastructure portfolio, meanwhile, “is on track to be fully committed by the end of 2015 and is projected to be fully invested by fiscal year-end 2019,” Texas ERS notes.

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