Pension Funds and Infrastructure

Transcription

1 Pension Funds and Infrastructure May 22, :50 to 4:40 p.m. 1 CPE Moderator: Dennis Lockhart, Director of Finance, Road Commission of Oakland County, Michigan Speaker: Jill Eicher, Visiting Scholar, Stanford Global Projects Center

2 The Implications of Direct Infrastructure Investing by Public Pensions for State & Local Governments J ILL EICHER GFOA Annual Conference May 22, 2016

3 Today s Discussion Direct Infrastructure Investing Driving Forces Challenges Cooperative Initiatives Implications for State & Local Governments

4 What Is Infrastructure?

5 Infrastructure From An Engineering Perspective Inland Waterways Transit Levees Hazardous Waste Aviation Solid Waste Dams Wastewater Adapted from ASCE 2013 Energy Roads Drinking Water Public Parks & Recreation Rail Bridges Ports Schools

6 Infrastructure From A Pension Fund s Perspective Representative Investable Sectors in US Infrastructure

7 What is Direct Investing?

8 Traditional Agency Model for Deploying Pension Capital Pension Fund Agent Asset

9 Direct Investment Model for Deploying Pension Capital Pension Fund Asset

10 New Paradigm for Deploying Pension Capital Traditional Agency Model Direct Investment Model Pension Fund Agent Asset Pension Fund Asset aka Fund Manager Intermediary Middleman Passive/Outsourced Active/In-house

11 Progressing Towards Direct Investment Pension (LP) Pension (LP) GP Fund GP Fund Pension (CI) Pension Asset Asset Asset Traditional Model Co-Investment Model Direct Investment Model Increasingly Direct Deployment

12 History of Direct Infrastructure Investing Ontario Teachers Pension Plan Ontario Municipal Employees Retirement System Canadian Pension Plan Alberta Investment Management British Columbia Investment Management

13 Examples of Direct Investments by US Public Pensions

14 Dallas Police and Fire Pension System (Assets: $2.7 B) LBJ Highway, Dallas (2009)

15 California Public Employees Retirement System (Assets: $278.9 B) Indiana Toll Road, Chicago Skyway to the Ohio Turnpike (2015)

16 Direct Investing Adoption Steady Growth Projections Increasing Popularity of Co-investment Opportunities

17 Direct Investment Deployment by Country Source: Preqin 2016

18 Five Largest Pension Investors in Infrastructure Pension Fund Allocation to Infrastructure National Pension Service Canadian Pension Plan 12.2% 10.7% Ontario Municipal Employees Retirement System Ontario Teachers Pension Plan 10.4% 9.0% Australian Super 6.7% Source: Preqin 2016

19 Driving Forces of Direct Investing Costs Control Advantages of Scale Investment Performance

20 Cost Comparison Standard Private Equity Fees 1.5% - 2.0%

21 Cost Comparison Standard Private Equity Fees 1.5% - 2.0% Internal Management Costs 0.3% - 0.5%

22 Cost Comparison: Internal vs External Management Standard Private Equity Fees 1.5% - 2.0% Internal Management Costs 0.3% - 0.5% External Management Fees x Internal Costs

23 Control Gained through Direct Investing Focus On Investments, Not Agents Hold Indefinitely/Sell Strategically Better Protect Portfolio Assets Align Interests

24 Advantages of Size in Infrastructure Investing Access to Best Opportunities Partner with Like-Minded Investors Can Stay The Course

25 Investment Performance Comparison Fund Direct 5-Year Annualized Returns 1.0% 11.42% Source: Compiled Annual Reports

26 2015 Direct Infrastructure Investment Performance Results Ontario Teachers Pension Plan 21.4% Borealis 17.3% (Ontario Municipal Employees Retirement System) Canadian Pension Plan 16.5% Industry Benchmark: MSCI Global Infrastructure Index (5.4%) Source: Compiled Annual Reports

27 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Aligned with business interests of Fund Manager Aligned with investment objectives of Pension Fund

28 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Aligned with business interests of Fund Manager No Aligned with investment objectives of Pension Fund Yes

29 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Deal Experience & Investment Acumen Gained Aligned with business interests of Fund Manager No Accrues to Fund Manager Aligned with investment objectives of Pension Fund Yes Accrues to Pension Fund

30 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Deal Experience & Investment Acumen Gained Investment Talent Aligned with business interests of Fund Manager No Accrues to Fund Manager Outsourced, high cost Aligned with investment objectives of Pension Fund Yes Accrues to Pension Fund In-house, at a fraction of the cost

31 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Deal Experience & Investment Acumen Gained Investment Talent Return on Investment Aligned with business interests of Fund Manager No Accrues to Fund Manager Outsourced, high cost 20-25% to Fund Manager Aligned with investment objectives of Pension Fund Yes Accrues to Pension Fund In-house, at a fraction of the cost Pension Fund realizes 100%

32 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Deal Experience & Investment Acumen Gained Investment Talent Return on Investment Fiduciary Relationship Aligned with business interests of Fund Manager No Accrues to Fund Manager Outsourced, high cost 20-25% to Fund Manager Fee-driven contract Aligned with investment objectives of Pension Fund Yes Accrues to Pension Fund In-house, at a fraction of the cost Pension Fund realizes 100% Ownership interest in a revenue-generating asset

33 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Deal Experience & Investment Acumen Gained Investment Talent Return on Investment Fiduciary Relationship Co-Investors Aligned with business interests of Fund Manager No Accrues to Fund Manager Outsourced, high cost 20-25% to Fund Manager Fee-driven contract Various unaligned interests Aligned with investment objectives of Pension Fund Yes Accrues to Pension Fund In-house, at a fraction of the cost Pension Fund realizes 100% Ownership interest in a revenue-generating asset Like-minded investors

34 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Deal Experience & Investment Acumen Gained Investment Talent Return on Investment Fiduciary Relationship Co-Investors Aligned with business interests of Fund Manager No Accrues to Fund Manager Outsourced, high cost 20-25% to Fund Manager Fee-driven contract Various unaligned interests Aligned with investment objectives of Pension Fund Yes Accrues to Pension Fund In-house, at a fraction of the cost Pension Fund realizes 100% Ownership interest in a revenue-generating asset Like-minded investors Additional Revenue Opportunities No Yes

35 Value Proposition of Direct Infrastructure Investing Fund Direct Investment Time Horizon Follow-on Investment Opportunity Deal Experience & Investment Acumen Gained Investment Talent Return on Investment Fiduciary Relationship Co-Investors Aligned with business interests of Fund Manager No Accrues to Fund Manager Outsourced, high cost 20-25% to Fund Manager Fee-driven contract Various unaligned interests Aligned with investment objectives of Pension Fund Yes Accrues to Pension Fund In-house, at a fraction of the cost Pension Fund realizes 100% Ownership interest in a revenue-generating asset Like-minded investors Additional Revenue Opportunities No Yes Scale Benefits Accrues to Fund Manager Accrues to Pension Fund

36 Challenges in Acquiring Direct Investment Capacity Public Policy Issues Over-reliance on Agency-Driven Practices Lack of Cooperation

37 Cooperative Investment Strategies International Models Queensland Motorways, Queensland, Australia

38 Cooperative Investment Strategies US Models Mahoning Creek Hydroelectric, Armstrong County, PA

39 Implications for State & Local Governments Small pension funds at an increasing disadvantage in more and more competitive financial markets that reward scale

40 Implications for State & Local Governments Small pension funds at an increasing disadvantage in more and more competitive financial markets that reward scale Even large US pension funds pooling assets to increase competitiveness

41 Implications for State & Local Governments Small pension funds at an increasing disadvantage in more and more competitive financial markets that reward scale Even large US pension funds pooling assets to increase competitiveness Direct investing driving global cooperative initiatives

42 Question for You would taxpayers benefit from public pensions acquiring direct infrastructure investing capacity?

43 Thank You GFOA Annual Conference May 22, 2016