Public pension funds piling more money in infrastructure

U.S. public pension funds are steering more money into infrastructure, joining a larger trend of private infrastructure funds raising big money over the last two years.

In its 2023 annual report on public-private partnerships and infrastructure investment, the Reason Foundation found that infrastructure investment funds raised $149 billion last year, marking the second consecutive year of record-high figures.

U.S public pension funds are playing a relatively small but growing role in the trend, said the report’s author Robert Poole, Reason’s director of transportation policy.

“It’s a quiet revolution,” Poole said of U.S. public pension funds allocating more money toward infrastructure, much of which flows out of the U.S., where most assets are publicly owned.

“We’re seeing, every month, new allocations made to infrastructure investment funds for small pieces of [pension] portfolios,” Poole said. “Assuming things work out for them with higher overall earnings, this could blossom into something much larger.”

Investing in infrastructure is considered an effective way to diversify portfolios and hedge against inflation and other economic challenges that have weakened the equity and bond markets.

In its recent 2023 outlook, IFM Investors noted the sector is enjoying strong momentum from recent U.S. infrastructure laws that promise more projects as well as the need to decarbonize and upgrade assets across the globe.

North American public pensions only have about 2% of their money invested in infrastructure, and it’s not popular enough yet to be its own asset class, said Kyle Mangini, IFM Investor’s global head of infrastructure, in a recent interview. IFM is an Australia-based fund manager made up of pension funds that owns the Indiana Toll Road, among other assets.

“It’s still not a standalone asset class like the rest of the world. But it’s getting there,” Mangini said. “We’ve had a lot of success in attracting investors to join us. As American funds have had a good experience at seeing the benefits of this in their portfolio, they will continue the allocation.”

The Reason report includes a list of pensions that last year allocated more money to infrastructure, including the Los Angeles County Employees Retirement Association, the Alameda County Employees’ Retirement Association, the Texas Municipal Retirement System, the State Universities Retirement System of Illinois, the Teachers Retirement System of the State of Illinois, and the Arkansas Teachers Retirement System.

Some of the largest funds, like the California Public Employees’ Retirement System, have their own dedicated infrastructure investment teams, but most plans do not, Poole said.

U.S. public pension funds traditionally allocate money to infrastructure funds, not to specific assets or projects, most of which in the U.S. are publicly owned, Poole notes in the report. That means much of the money flows to non-U.S. assets.

“That could be changed by revising federal and state P3 policy to facilitate more [design-build-finance-operate-maintain] concessions,” the report said.

On that front, the states of Tennessee and Illinois are the among the latest to pass P3-friendly laws. The Tennessee legislation will help cement the southeast’s role as a leader in P3s, particularly with toll roads.

“We haven’t had new states for several years passing these kinds of P3 legislation, but the past five months have been a big change,” Poole said.

Transportation remained the most popular sector, accounting for 72% of the funds’ infrastructure investment in 2022 and 64% of the projects they financed, Poole said.

The amount of private money eager to finance infrastructure is “a big deal,” Poole said. “Even a lot of state departments of transportation don’t really understand the growing role of private infrastructure finance.”

For the first several months of 2023, investment appears to have fallen, although that could because the funds have a lot of so-called dry powder, which is money raised and not yet allocated, Poole said. Of the $820 billion in assets under management by the funds, roughly $380 billion was dry power, he said.

“Overall, how the year is going to turn out is a big question mark,” he said.

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