In May 2015 the California Public Employees’ Retirement System announced it was partnering with Australia’s Queensland Investment Corp. (QIC) to invest A$1 billion ($764 million) in Asia-Pacific infrastructure. This investment could ultimately increase the giant U.S. pension fund’s $2.1 billion infrastructure portfolio by a third. While the $279 billion Calpers can afford to invest big, the real news is that infrastructure in U.S. pension fund portfolios may finally be gaining traction after years of struggling to play as meaningful a role as at their Canadian and Australian counterparts.
As America’s infrastructure continues to crumble, signs that new, private means of rescuing these assets may finally be taking hold has spurred QIC to plant its flag in New York City. The government-owned firm, a specialty asset manager originally founded to service one Australian public pension fund, has joined the ranks of European, Australian and Canadian pension investors who have set up a New York outpost to gain access to U.S-based investments. But unlike Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and Ontario Municipal Employees’ Retirement System (OMERS) — which invest purely on their own behalf — QIC is also seeking mandates from U.S. investors such as Calpers.
“We’re not a big global player like BlackRock or Blackstone,” says Damien Frawley, a former professional rugby player who joined QIC in 2012 as CEO after seven years filling that role at BlackRock Australia. “So we need to be very targeted in terms of who we engage with.”
QIC has more than 90 clients globally and A$74 billion in real estate, private equity, infrastructure and other assets. Its New York office, which was established in late 2014, is its third site in the U.S. but only its first to raise capital, not just deploy it. The Los Angeles and San Francisco offices, opened in 2010 and 2011, respectively, were set up to invest in U.S. private equity and real estate.
Founded in 1991 to manage globally sourced assets for the state of Queensland’s defined benefit pension, QIC started with three funds: multi asset, real estate and liquid strategies. In the early 2000s fund officials decided to compete in the open market. The feeling was, if this effort were successful, it would justify having high quality management that needed to pass rigorous due diligence processes. In addition, the Queensland government benefits from QIC’s diversified client base, say fund officials. The revenue doesn’t hurt either. At the end of June, QIC reported one of its strongest financial years to date, with a net profit of A$99.9 million, sending a A$56.5 million dividend to the state Treasury in Brisbane.
QIC took on its first nongovernment Australian client in 2001 and its first international client the following year. By 2004 it had 50 clients, which included Australian superannuation funds, schools, universities and other institutions. Then in 2005 QIC launched a private equity fund, followed the next year by an infrastructure vehicle.
“Infrastructure wasn’t an asset class 15 years ago,” notes Vittorio Lacagnina, hired in 2014 to be responsible for originating, executing and managing assets across North America and Europe from the New York office. Lacagnina, who gained his infrastructure investing ex-perience at New York–based SteelRiver Infrastructure Partners and its predecessor firm, Babcock & Brown, is well aware that the asset class is a tough sell in the U.S.
According to Stanford University’s Global Projects Center, 11 other pension funds besides Calpers have deployed $5 billion to overseas infrastructure investments over the past five years, while collectively investing less than $800 million domestically. That results in a 2.8 percent average allocation for the 28 U.S. public pension funds that have invested in infrastructure compared with much larger allocations of 14 percent by AustralianSuper, the country’s largest pension fund, and 19.4 percent by OMERS.
Jill Eicher, pension infrastructure collaborative program director at Stanford, who formerly led the $4 billion Small Business Lending Fund at the U.S. Treasury, bemoans the lack of opportunity for public pension funds to allocate their dollars to U.S. infrastructure. She lays the blame at the feet of “our entrenched agency capitalism” or, put another way, the public finance officers who run transportation offices in cities and states as well as public pension funds that are encouraged to use intermediaries rather than co-invest directly, as do pension funds in Canada and Australia. “There’s no appetite to pay an in-house public finance officer or pension official millions less” than the current system in the U.S., says Eicher.
Lacagnina recognizes the challenges ahead of him, starting with the long U.S. history of funding bridges, tunnels and highways through the municipal bond market with attractive tax advantages. While he isn’t advocating a complete overthrow of the muni market, QIC’s infrastructure expert notes its inefficiencies: “That creates a situation where infrastructure is mostly procured by the public sector, which results in delays and is often not up to the standards one expects from the project.”
Another downside of traditional U.S. public building projects, continues Lacagnina, is a notable lack of uniformity. Every state is managed in a different way and every state department of transportation has a different view. The partnership approach that QIC favors is based on risk transfer between the public and private entities, acknowledging which one is better equipped to take on which risks.
“That’s where the pension equation comes in,” explains Lacagnina, pointing to a potential primary source of capital for these projects and Eicher’s raison d’etre. In their turn, pension funds need a series of cash flows that match their long-term liabilities, as well as the hedge that comes with an asset whose revenue model is tied to inflation.
Despite its attractiveness globally, infrastructure still has not taken off among U.S. plan sponsors, notes Bradley Morrow, head of research for the Americas at New York–based consulting firm Willis Towers Watson. “Six years ago everyone thought the U.S. would be the next market for infrastructure,” he explains. Part of the reason for the slow growth can be ascribed to its low return expectations and the municipal bond market, as well as cultural factors. Americans, QIC’s Frawley says, just don’t like the idea of selling their highways and ports to foreigners.
In a hopeful sign for QIC and larger, more entrenched managers, a mixed bag of toll roads and bridges in Texas, Virgina, Ohio and North Carolina have been making their way into private hands. Some are the result of extreme circumstances, such as the Indiana toll road bankruptcy that enabled its May 2015 purchase for $5.7 billion by IFM Investors, a 20-year-old consortium of 30 Australian superannuation funds. “There will be more investments across infrastructure, given the state of repair of some of these assets,” says Julio Garcia, head of North American infrastructure at IFM, a $44 billion manager that opened its own New York office in 2008. Among its 70 U.S. pension clients IFM counts the California State Teachers’ Retirement System, the Illinois State Board of Investment and the School Employees Retirement System of Ohio. In the past, IFM has both partnered and competed with its Aussie mates at QIC.
Since the start of 2016, QIC has been beefing up its investment muscle, adding New York–based Eric Belman, a former nuclear engineer who most recently led GE Power’s global M&A strategy, and Jim Christensen, former CIO of Telstra Super. QIC investors — especially infrastructure-mad Aussies — approve of the U.S. initiative. “Organizations like QIC have proven to be better owners than the government,” says David Elia, CEO of Hostplus, an Australian superannuation fund with 95,000 members and more than A$17.5 billion in retirement assets.
QIC believes the time is right for the U.S. to shift its infrastructure ownership to the private sector — and to U.S. public pension funds. “The U.S. is beginning to take a broader view,” says Frawley.
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