Pension Funds and Infrastructure

Pension Funds and Infrastructure May 22, 2016 3:50 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

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

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

What Is Infrastructure?

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

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

What is Direct Investing?

Traditional Agency Model for Deploying Pension Capital Pension Fund Agent Asset

Direct Investment Model for Deploying Pension Capital Pension Fund Asset

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

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

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

Examples of Direct Investments by US Public Pensions

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

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

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

Direct Investment Deployment by Country Source: Preqin 2016

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

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

Cost Comparison Standard Private Equity Fees 1.5% - 2.0%

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

Cost Comparison: Internal vs External Management Standard Private Equity Fees 1.5% - 2.0% Internal Management Costs 0.3% - 0.5% External Management Fees 10 14 x Internal Costs

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

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

Investment Performance Comparison Fund Direct 5-Year Annualized Returns 1.0% 11.42% Source: Compiled Annual Reports 2008-2012

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

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

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

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

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

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

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

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

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

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

Cooperative Investment Strategies International Models Queensland Motorways, Queensland, Australia

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

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

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

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

Thank You GFOA Annual Conference May 22, 2016