Some infrastructure fund managers promised private-equity-like returns to investors in the frothy days before the financial crisis. But their failure has not deterred pension funds in North America, Europe and Australia from buying infrastructure stakes in the days since. These investors share a renewed focus on capturing stable income from the assets and communicate this in their meetings with managers.

“There are more conversations about long-term performance and a more conservative risk-and-return spectrum,” says Jason Peasley, head of infrastructure at AustralianSuper. Speaking from the $43-billion superannuation fund’s Melbourne headquarters, he says the phrase “excess leverage” is scorned in infrastructure circles. The fund seeks “equity-like” returns with less volatility from its investments in the asset class, he says.

Investors on both sides of the Atlantic also seek stable income from infrastructure assets instead of the capital growth that private equity managers aim for. Universities Superannuation Scheme (USS), the £32-billion UK pension fund, invests in infrastructure to try to secure income that is linked to inflation and matches its long-term liabilities, says Gavin Merchant, senior manager of alternatives at the defined benefit fund. Infrastructure accounts for about a fifth of the fund’s £5-billion allocation to alternatives. Merchant says the fund plans to increase its commitment to infrastructure in the coming years to between 5 and 7 per cent of its overall portfolio.

CalSTRS, the US$148.9-billion pension fund for teachers in California, also seeks stable, regulated assets providing an inflation hedge and matching its long-term liabilities. Diloshini Seneviratne, head of infrastructure at the Sacramento-based fund, says the investment team took more than two years looking at opportunities worldwide before making an initial allocation last year. It invested in the debut fund of First Reserve Corporation, a private equity firm, which targets energy infrastructure.

Seneviratne says CalSTRS is mulling an increase in its allocation to infrastructure to US$3.5 billion, or 2.5 per cent, of its portfolio. This would see infrastructure comprise half of CalSTRS’ US$1.61-billion investment in inflation-sensitive assets, which also includes global index-linked bonds and Treasury Inflation Protected Securities. CalSTRS aims for returns of consumer price index plus 5 per cent from infrastructure. Industry Funds Management (IFM), a Melbourne-based firm overseeing $30.2 billion, recently landed a mandate from CalSTRS to invest up to $500 million in global infrastructure. Chief executive officer Brett Himbury says institutional investors favour mature infrastructure assets in developed markets. But there is a shortage of deals that ultimately drives up the prices of assets on the market.

“We are seeing our clients increasing their allocations to infrastructure and we are seeing that globally,” Himbury says.

“In many parts of the world the risk-free rates are very low. If you combine that with a high level of capital flowing towards infrastructure assets, there is clearly a risk that prices may be bid up,” he says. “We have more capital than we have deals,” Himbury says.

IFM is owned by 32 industry super funds and manages more than $10 billion in infrastructure assets in an open-ended fund. Its Australian infrastructure fund has returned 12.48 per cent net of tax and fees since its inception more than 16 years ago.

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