Institutional Investors & Infrastructure in the US · portfolio. Petya perhaps you can start us off here, and tell me a little about what your organisation defines as infrastructure

Institutional Investors & Infrastructure in the US Exploring and identifying appetite for investment in infrastructure

Endorsed by:

chair:Sarah Tame(ST)News Editor - Infrastructure Journal

Petya Nikolova(PN)Executive Director Infrastructure, NYC Retirement System

Julia Harris (JH)Managing Director,Public Financial Management

Vonda Brunsting (VB) Deputy Director of the Capital Stewardship Program, Service Employees International Union (SEIU)

Marietta Moshiashvili, (MM)Managing Director, Energy and Infrastructure Investments, TIAA-CREF

STGood afternoon and welcome to the latest webinar in the Infrastructure Journal webinar series, in which we’ll be discussing institutional investors and infrastructure in the US, and exploring and identifying appetite for investment in infrastructure. I am Sarah Tame, News Editor at Infrastructure Journal. I’ll be chairing the session this afternoon. With me today I have Vonda Brunsting, Deputy Director of the Capital Stewardship Program, Service Employees International Union (SEIU). Petya Nikolova, Executive Director and Head of Infrastructure, from the New York City Retirement System. Marietta Moshiashvili, Managing Director, for pension provider TIAA-CREF, and Julia Harris, Managing Director, at investment advisory PFM Group. I’d like to hand over to you ladies now, if you’d like to give me a brief introduction to what it is that each of you do at each of your organisations , Vonda if I can start with you?

VBSure. Good afternoon or good morning everyone. This is Vonda Brunsting, I’m the Director of the Capital Stewardship Program at SEIU. The Service Employees International Union has two million members in the US and we represent workers in the public sector as well as health care workers and property service workers. Our members participate in the public pension system in the US and also many are in different Taft-Hartley pension funds. My role in the Union is to work with those pension funds on issues around retirement security, as well as working with our trustees who are the fiduciaries who sit on the boards of the funds. My interest today is really in sort of furthering the work that we’ve done to encourage the pension funds in the US to look at infrastructure as an investment opportunity and we’ve provided a lot of education for our trustees as a way to get them comfortable with this new asset class and opportunity.

ST: Thank you Vonda. Petya.

PNGood morning/ good afternoon this is Petya Nikolova, I’m part of the New York City Retirement System, Office of the controller, which has one hundred and thirty billion assets under management. We

Institutional Investors & Infrastructure in the USExploring and identifying appetite for investment in infrastructure

Panel:

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advise the fire retirement system, the police, teachers, New York City employees and board of education. My role in the Organisation is that I run the infrastructure asset class. It’s a newly established program, it was adopted last December by our board and now we are working on building the portfolio.

STThank you Petya. Marietta?

MMThank you. My name in Marietta Moshiashvili and I’m a Portfolio Manager with Infrastructure Investments at TIAA-CREF. TIAA-CREF is one of the Fortune 100 Financial Services organisations, we have more than 90 years of experience providing financial services to our clients. And our clients are made up of more than 15,000 institutions. We’re one of only three insurance companies in the US, we’re rated AAA apart from S&P given the rating of US Government bonds, and infrastructure investments are a very important part of our portfolio, our investment strategy. TIAA-CREF has over 480 billion under management, starting our infrastructure strategy in 2008, and currently the portfolio may not be large compared to the rest of the assets under management, but is very important as I mentioned and we have big aspirations for the capital allocation of private infrastructure investment.

STThank you Marietta. And finally, Julia?

JHHi, good morning everyone, it’s Julia Harris from Public Financial Management, Public Financial Management is the largest Financial Advisory firm in the United States. We have over thirty offices staffed by almost five hundred people across the country. Our focus is in two parts; it’s on the financial advisory side on debt issuance, and privatisation strategies, as well as asset management. I am one of the co-chairs of the privatisation group, focusing mostly on health care and higher education, as well as infrastructure financing.

STThank you all and welcome, it’s great to have you all on the panel. Just to set the scene a little, there’s a growing need for infrastructure development in the US, and the Federal Government is advocating a push for infrastructure spending to spur economic growth. In 2013 the American Society of Civil Engineers gave US infrastructure a grade of D and warned that the country had serious problems with its infrastructure. And the problem much of the US faces is ageing infrastructure, road networks, bridges, rail networks, and various social infrastructure assets need upgrading. Though the question is who will pay for the upgrades – and one option is institutional capital, but what does US institutional investor appetite for infrastructure really look like and are the products and platforms that will allow them to invest available. That is what I’m hoping to find out in

today’s session. So to begin with, Julia, perhaps you can start us off and give me a brief description of the demands for infrastructure funding in the US and where the need is for infrastructure development.

JHSure. As you see on slide two, there’s just a huge need for capital investment across the United States, we’ve been working with State Municipal Governments for our company for over thirty years. I’ve been in the business for over 19 years, and in the past, we’ve really only looked at debt issuance to help with our infrastructure needs. The business of infrastructure investing in the US is still really new in the developing class, but we have seen a tremendous shift even over the last year. We’re finding our clients and Governments across the board who have embraced the concept and demonstrated willingness to really explore private capital across all asset classes. For example there’s more than thirty DOT’s that have passed privatisation legislation, like in Florida, Texas and Virginia which have healthy track records of deals that other states were hoping to emulate. We’re also seeing a tremendous amount of movement in the student housing field, water and waste water, and transit is becoming much more attractive with the opportunity to leverage TIFIA loans. I think what we’re finding with our clients, is that there are still issues, I mean, its routinely now part of our analysis when we work with them that we do look at alternative funding methods such as privatisation. But I think that we will need to move further and create more deal flow is a couple of things. One is more deal standardization; we’re finding that’s necessary to really create a pipeline

...we have big aspirations for the capital allocation of private infrastructure investment.


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of investable opportunities. The return expectations of many funds are still somewhat high for our clients. Especially, you know, they’re still thinking about their ability to issue debt and what their class to capital is. The complexity of the deals; I mean they’re still very difficult to structure and to manage once they’re structured. And of course, the political risk, which as my other panellists on the line know is always an issue regarding when these institutions will actually look at a possible transaction. But we are seeing lots of movement like I said, Allentown is a perfect example of a transaction we’ve been working on. So we are seeing a great amount of movement, I can’t necessarily say that there’s going to be huge deal flow over the next year or two, but we continually are looking at this with our clients and they’re open to the thought of alternative financing methods.

STGreat thank you Julia. So we know that there is the demand for infrastructure, and that institutional investors are starting to look at infrastructure and that the market is looking at alternative sources of funding. But now let’s look at it from an institutional investor point of view, and what do investors define as infrastructure and why is it an important part of their investment portfolio. Petya perhaps you can start us off here, and tell me a little about what your organisation defines as infrastructure and why it’s an important part of the investment portfolio.

PNWe have taken a broad approach to

defining infrastructure, in other words, energy is part of infrastructure for us, renewables are a part of infrastructure, transportation, social infrastructure, P3’s; however what we focus more on, and what we’d like to see from these infrastructure assets is certain characteristics such as stable and predictable cash flows, monopolistic characteristics, essentiality of the services that the assets are providing. Therefore if you have a power plant that is a merchant power plant then probably that’s not part of our definition of infrastructure. The reason why we adopted infrastructure policy and even an important part of our portfolio, is that although there is somewhat limited data on correlation, the data shows there is a lot of correlation between infrastructure and the rest of the market therefore providing diversification benefits for the portfolio. Also, it’s important for us that we expect infrastructure to provide inflation protection. Also important is the fact that there is a match between long term liabilities and the long term cash flows from infrastructure. So I’d say these are the three most important characteristics and benefits that we see as having infrastructure in our portfolio.

STOk, Marietta do you have anything to add there, what’s your point of view on

that?MMI fully agree; one of the reasons why we have committed to the platform of private equity type infrastructure investing is because of our institutional knowledge and experience in energy and project finance markets. We’ve been at most a fixed income investor, and then we’ve been a bond investor and co-investor with a lot of our good fund managers. But what the management of my company wanted to achieve is a direct investment platform in infrastructure assets for a number of reasons that were already mentioned. I would also probably add, that in addition to providing diversification, there was also a need to have more predictability of the funding, more control of the entry and ability to exit these investments, extending the duration versus having a finite life associated with these investments so we do have a direct match to our long term liabilities, and link to inflation and lowering the volatility of our portfolio. I think based on the skill sets internally that we also have lessons learned, as well as very positive experiences on the debt side that were needed to be transferred to the equity side of the inflation. We’ve noticed a lot of managers on the financial side and also strategic players define different assets as infrastructure. To our surprise there were a few opportunistic assets that were deemed to be infrastructure for us, while it’s a very diverse asset class, clients find that there needs to be certain characteristics that defined whether the asset is matching

...our clients and they’re open to the thought of alternative financing methods.


...there is a match between long term liabilities and the long term cash flows from infrastructure.

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the definition. And they include the demand, the high barriers to entry, inflation linked cash flows and high degree of regulation. And because of that we’re actually very focussed on developed markets, and I think we would consider emerging markets if we have local partners those would be more of an opportunistic approach in opportunities. But we’ve also found that now there are certain characteristics that are pretty unique to a lot of our investments, even though they range from transmission lines to compacted power, to regulated utilities, or transportation infrastructure.

STThank you Marietta, and Vonda, I mean from the point of view of your members and the clients that you represent, what’s their viewpoint of what is infrastructure?

VBWell I don’t know if I have much to add to the definitions that were offered, but I would say that just to follow up on Julia’s comment that we have seen a huge increase in interest and finding new ways to finance infrastructure, from the perspective of the labor movement, you know there’s an economic interest in creating jobs which infrastructure offers. So I think that what we’re looking for from institutional investors and from our pension funds, is how do we find a balance between providing the returns and the characteristics that people have mentioned, and really meeting the needs of our larger set of stakeholders. And so we want as we find the financing mechanisms to finance infrastructure, certain public accountability which would guide these projects, you know make sure that there’s regulation in place and transparency, and then also making

sure that the stakeholders are protected – workers are able to retain their rights in the workplace. Then also the public sector doesn’t suffer from any efforts to privatise or change the way that these assets are run. So I think that you know it’s a challenging prospect to a sort of move, and we’re seeing it happen very quickly, into this new financing mechanisms but I think that the challenge for us is on the pension fund side to meet the opportunity really and have the returns and the stability and the long term cash flow that would provide the diversification of the funds they’re looking for. At the same time, you know look at the wider set of stakeholders that really would benefit from increasing our ability to move ourselves away from that ‘D’ and get the infrastructure needs of this country met. But at the same time protecting the public and workers while we do that. STThat’s an interesting point.

JHI just wanted to follow-up on something

Vonda said which I think is really interesting and which I think really shocks our clients is that, when you do projects like this, the transparency that is created, or, the increased transparency is really shocking to them that this is something that you know, is going to be in the public eye is going to be scrutinised, and that’s a double edged sword for our clients, but, I think it’s really interesting. I think that’s part of the reason why, part of the reason why the Chicago Infrastructure Trust was created, many of the Chicago transactions monetisation’s were really done and the public didn’t really get to speak out on it, and not only the public but the city councils, so I mean I think that many of our clients are really surprised by the fact at how transparent these transactions are and have to be in order to be successful – I just wanted to follow up on Vonda’s comment.

STThat’s really interesting, and I wonder if we can move on to talk about a bit more in detail the challenges that are facing investors that want to invest in infrastructure – I mean Vonda you bought up some interesting points there so is there anything else that you feel is particularly challenging.

VBWell I think that from the perspective of the pension funds the challenge is trying to really ramp-up both the capacity and the resources of the fund – many of them don’t have staff even, I mean Petya I think it’s great that she’s in New York City and having people like her with the capacity at the staff level of the fund to really go out and look for deals and to evaluate them and do due diligence is important and I think the trustees is one of the

I think that from the perspective of

the pension funds the challenge is trying to really ramp-up both the capacity and the resources of the fund – many of them don’t have staff even...


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areas that we’ve been working to try and get them up to speed and really develop a skill set there for them as a board member to make a decision about these. I think that the other challenge is really around the financing structure – and what we saw years ago was a private equity fund model where throughout privatisation the different managers would pool money and buy these assets out. Then return structure really didn’t meet the needs and the risk of what the pension funds were looking for. And so I think there’s been a lot of movement as well on that front to find new ways to finance some of these opportunities. And I think that the work that has been happening on the West Coast with the West Coast infrastructure exchange is very hopeful and it really points to I think one of the other opportunitIES on this front and that is for pension funds and stakeholders to work collaboratively. So on the West Coast, the States of California, Oregon, Washington, and also the Provence of British Colombia are collaborating with this exchange working with elected officials, government agencies and the pension funds to figure out how to you know really open up the deal flow as well as to come up with the financing and then sort of pool on the resources on the technical side as well in order to sort of meet the demands on the West Coast, and I think that the collaborative approach looking at this from a regional basis is very hopeful, and hopefully one that we can also emulate in other parts of the country.

MMThis is Marietta Moshiashvili with TIAA-CREF. I fully agree with some of the commentary right now, I also want to say that we all realise the US infrastructure market is in very

early stages of development and as such we’re all going through growing pains – you’re absolutely right on the resource comment where these are very heavy resourced asset class from the perspective of analysis, even screening, underwriting and closing of these transactions. We also haven’t seen a lot of the deal flow in the US market, that goes kind of in circles for a lot of institutional investors say whether they should be committing a lot of resources to this asset class. From our observations a lot of platforms that have been established in the pension fund community, we’re almost forced to go outside if they were established in North America they had to be really looking at Western Europe, Australia, because there wasn’t enough of the deal flow in North America and despite the fact that we have almost 33 States right now, passing through PPP legislation, we really haven’t seen a lot of places acting on them.

STThanks Marietta. And Petya, did you have anything to add there?

PNI would like to further develop one point that Vonda made which is essentially she talked about PF style investing of some of the funds and I think the challenge that we’re facing is essentially how do you access, especially core infrastructure, which lends itself to lower returns? And when you have the fund model clearly that’s an additional layer of fee. Now what else can you do? Both Marietta,

and Vonda talked about the expertise that is required to go and analyse the deals at an asset level, in other words being more direct. And I think that’s a huge challenge – how do you access infrastructure and what returns makes sense, what fees makes sense for this return. For us we are still in the beginning of the programme as I mentioned, and the way to go would be initially to funds but we will be thinking about potentially co investments as a way to gain more control over the portfolio and also have a more cost efficient structure.

STThanks Petya. We’ve had a question from the audience actually which I think sits in quite nicely here, in terms of talking about what kind of investments you make to make sense for your return, and what are your guys perspectives on greenfield projects verses existing projects with established cashflow and I mean Petya perhaps you can address that first of all?

PNSure. The way our policy works is that we would invest in different strategies core, value add opportunistic, and greenfield infrastructure would fall into the opportunistic market for us and we would seek higher returns comparative to the brownfield. So, we would invest in both, more limited in greenfield or opportunistic more generally speaking. But we do understand construction risk, so this won’t be a barrier; we are not saying

...the collaborative approach looking at this from a regional basis is very

hopeful, and hopefully one that we can also emulate in other parts of the country.


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we are not going to invest, we’re just going to undertake the necessary due diligence to understand how our fund managers as I mentioned initially would be investing to funds, how our fund managers are mitigating construction risk or any development risk that there may be in a particular deal.

STMarietta, do you have a similar outlook on that?

MMYes, we have been involved with the fixed income investor and construction of various projects so we’re very comfortable with construction risk. We would not be taking development risk however but a portion of our portfolio does have greenfield risk, and again this is more of a portfolio approach, we find that there may be a good opportunity to answer the core infrastructure space at the greenfield point if you have sufficient mitigation through reputable parties involvement and contractual arrangements. We have a variety of assets in our portfolio, however we are focused on delivering the current yield to our participants over time so obviously different projects have different duration of the construction risk as well. I just also wanted to maybe comment on some of the things that have already been mentioned, in respect to whether we should source the transactions on a direct platform basis or through funds and co investment models, it’s really a complex decision that needs to be decided by each institution, and each institutions senior management because when you have a co

investment model there is less of a control over the financing structure that you would have or the time of the exit because usually you would have to give up the right to hold the investment longer term. You would have to be probably dragged with the controlling shareholder that you are co investing with. And whether you’re investing directly or paying somebody a fee, the key I think is in funds investing as we discovered is to make sure that the fees that are being charged by the management are actually used for finding the advisor. Finding and paying the sources versus having a process centre. So whether you do it directly or outsource it the process has to be comparable.

STOk. Thanks Marietta. That brings us quite nicely now to talk about these Government lead infrastructure platforms, in terms of how institutional investors can access infrastructure opportunities, but also how on the supply side sponsors can access alternative sources of financing. The Chigaco Infrastructure Trust earlier this year issued its first RFQ to private bidders for social infrastructure P3. That’s the first example of this kind of platform. Vonda’s obviously mentioned the West Coast Infrastructure Exchange as well. Perhaps Julia if you could talk us a little bit through the Chicago Infrastructure Trust, and what this platform means as a way of trying to get private institutional capital into infrastructure.

JHOh right, great. So, PFM is the pro bono

adviser to the Chicago Infrastructure Trust. It’s a project that we’re really excited to be part of and to be working on for the City of Chicago and with the Trust Board members. Just to take a step back, we find it a really important development in Chicago and across the Country, it has great broad political support within the city and it’s a great opportunity to really institutionalize the infrastructure bank concept on a local level. And we know it’s being watched, we’re getting inbound calls from all of our clients to say this is something that we should do, and how does it work. Now that being said, we’re kind of in the throes of really trying to figure out the structure and how it works and how it relates to the city council, what projects it will take on, will these projects come to the infrastructure trust – there’s still a lot of issues that need to be worked out and it’s a little too early to tell what the end structure will look like. Right now the current projects are energy efficiency projects that have emanated from the city. That there are great needs for the city. But we’re also getting inbound unsolicited ideas from different funds, different firms, different people, so it’s really been a challenge to try to figure out the structure and how, what the process looks like. So, we’re really excited, we’re really encouraged, I wish I had more news to tell you on how the standardised process is going to work but we’re currently in the middle of that. We did issue an RFI, I think it was about six weeks ago. We’re meeting with bidders to talk about it, to get their input. And I think that once we get our first transaction under our belts, we’ll have the process down and it will be a lot easier for us to I guess to comment on how it works and how we see it working in different cities and different states around the country.


...we’re very comfortable with construction risk.

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STGreat, thanks Julia. And how do you think this could work in other states. Talking hypothetically, do you think this is a model that could be transferred to other states, and is this a viable way of facilitating institutional investment into infrastructure?

JHI do, and I think if not for which is a whole another topic that we haven’t talked about is actually the trust investing in their own projects, which lets put aside for a moment – I think that what it does is what I discussed before is it really creates a transparent process that the public is aware of and that’s completely vetted. And I think that is critical in making sure that this new and developing asset class has a model by which is standardized, with how the deals are done are standardized and so that the public really understands how they work and what the benefits are. I think in the past P3 has just been a very scary word for many of our citizens, they see it as a grab of an asset, that the entity loses control of. But there are so many parts of it that could be so beneficial to cities and states with the risk transfer and you know many businesses that really cities and states don’t necessarily need to do that are really not part of their core mission. So I do think that for that reason alone it’s an idea and a concept that could and should be emulated by other cities and states.

But once again like I said once we have a format and a process it will be a lot easier just to pick that up – it won’t be the same everywhere, but at least we’ll have some structure and like we said before, P3 in the United States is still new and a developing asset class. This will help standardize it and make it I think more accessible to many other places over the country, and which is in the end I think will help with deal flow and pipeline which is what my colleagues on the phone really need in order to be successful in the United States in infrastructure investing.

STYes. That’s great, and it will be interesting, Marietta, Petya, Vonda, to hear from your point of view from the investor side – do you think these sorts of initiatives, these sorts of platforms will help you to access infrastructure as an asset class.

VBThis is Vonda speaking. I guess, not so much from the investment perspective but just from the public good – I think what Julia mentioned about the public process is really important and why everyone watches Chicago so carefully, because I think people are very, they’re deeply suspicious of – some are – of P3’s and there have been some, you know, disasters is maybe too strong of a word but some haven’t worked out so well. In my neighbourhood, I live in Brooklyn, there’s an effort to sell the local hospital, as well as the library, both of which the land would be used for private development condos. People see that sort of thing happening around them and wonder what’s happening to our public property, our public assets. And how do we go through this transition in the US that we protect our schools and hospitals, our roads, our bridges, our

parking meters, our parking garages, get the repairs needed and them built for the next century, built for the new hopefully sustainable economy of the future at the same time not turn it all over to the private sector which is viewed with some suspicion. So I think that’s the challenge in front of us and I guess to put the pressure on Chicago why it’s being watched so carefully and hopefully it does serve as a mile for other parts of the country.

STGreat, thanks Vonda. Marietta please go ahead.

MMMarietta Moshiashvili. I wanted to say that I fully agree with some of the commentary made about standardization of the process. We actually have a benefit of learning from other developed markets. Obviously the PFI model in the UK and other countries like Australia and Canada having PPP models established in a lot of even social infrastructure subsectors that have higher political risk in the US. We’re careful in analysing reputational and political risk every time we get involved, as an equity investor in infrastructure assets. That if there is a way, that out of the positives and the negatives that can establish a standard model prior to any particular institutional involvement that’s only a positive as is being perceived from our standpoint.

STGreat, and Petya did you have anything to add there?

PNI would just take all the comments that were made and I think it’s a little bit early to say how the Chicago Infrastructure Trust will develop but I

I think in the past P3 has just been a very scary

word for many of our citizens...


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hope it does serve for a model.

JHIt’s Julia – so do we!

STLet’s talk about investment strategy. We’ve talked about how there’s a demand for alternative sources of financing, and that institutional investors are interested in funding infrastructure, but now – and looking at what defines infrastructure – but it would be interesting to know what are the strategies of institutional investors. Is there a pressure first of all to invest within the US, or within your own state? I know that some of the Californian pension funds have chosen to put large allocations of investments into Californian Infrastructure. Perhaps Petya, that’s a question I can ask you. Do you feel there is a pressure to invest within the US, or within the state of New York itself?

PNOur problem is a global one. I think that the issue with investment in the US is that there is still not enough deal flow. In New York we still lack P3 legislation, and although there are some deals in the market that have been very well publicised, there’s not enough for an institutional investor to deploy capital. And in addition to that as an institution we are investing to funds so it will be difficult for us to invest in project basis for the reasons already discussed, more specifically resources. So I think that in terms of strategy, that’s why we have a global program, so that we could invest and generate the returns for our pension systems that we need otherwise again there is just not enough deal flow.

STYes. Ok, Vonda, I wonder what your view is on that. I know you mentioned those projects in Brooklyn, and there’s obviously a need for development of US infrastructure. Do you think that there is almost a necessity that pension fund money from the US should go into US infrastructure?

VBWell I think that the way that the Californian fund, CalPERS in particular, well CalSTRS as well, have approached this probably the best way – and that is they have a global programme but they are seeking out Californian specific investment opportunities, and so I think the challenge is the way to do both. And then the challenge on top of that as you know Marietta mentioned is that we really don’t have, we’re in this transition phase, we really don’t have the opportunities to invest yet so we can get all ready to do it but then there also has to be deals that meet the needs of the pension fund and so the challenge over the next couple of years is for us to sort of build up a programme here in the US. But I think that you’re going to find the funds are going to look to do both. And I think that the pressure, it’s interesting to hear talk about “oh a national infrastructure bank”. Other related government parties are trying to figure out how to deal with the lack of funding in the US. There’s always this sort of interest in going to the pension funds. Like, “oh, we should be ready to go. They should be ready to do it. It’s such a great idea”. But then there’s just no structure setup in place

to do that. I was sort of interested to hear, last weekend met with a group of South African trustees from the pension funds there, and they have the same thing. The government there has said “oh, the pension funds should be investing in our infrastructure needs in our country”. So I do think that probably globally the pressure is there, but the structures haven’t been built up yet, and hopefully they will be able to meet that kind of demand. So ideally, you would find pension funds being able to invest in their own states but not exclusively. So I think you’re going to have to continue to look for that diversification.

STYes. And Marietta did you have anything to add on that point?

MMI think these are great points people have mentioned already. I think there needs to be a desire by Government officials to also change some of their approach to how they are running RFQ’s and RFP’s, to encourage institutional capital to participate in other processes if they would like to do that because we’ve obviously seen some development in the UK, where there is an on-going dialogue between government officials and pension funds that are local in the UK. I’m not so sure we have a lot of that in the US – we’re obviously starting to observe that, but I think that it would be great to establish some mechanism by which there would be a continued dialogue so that there would be a facilitation of participation. Because right now I

I think that the issue with investment in the US is that there is still not enough deal flow.


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think a lot of it is designed for strategic players, the construction companies that would be equipped to deal with that.

STOk, great. If we could delve a little bit deeper into the investment strategy. So we’re saying there needs to be a mixture of investment in the US in certain states in particular and also further afield – one question we’ve had from one of the listeners is “what sort of characteristics do US pension funds look for in possible emerging market infrastructure partners?” I mean, what are the main concerns if they’re looking to invest in emerging infrastructure projects in emerging markets. Marietta perhaps you can start us off there?

MMSure. In general every time you have local investment teams investing outside of the country, there is a question on hedging that’s typically asked of us, and it’s very hard to hedge these assets because these are equity investments and you really, well you have protections, but you really don’t have as much predictability as you have with the bonds. That these particular distributions and returns will be coming over particular points in time. So as you consider emerging markets the classification becomes a little more unique, obviously just because there is less opportunity to hedge any exposure, even if it’s just on the invested capital basis, and when we consider emerging markets

we also try to look beyond the local expertise and needs for infrastructure we also try to understand the ability to approach the court system in that market, the transparency, the accounting standards, and also our relationships. We would not approach any opportunities without having a local partner that we trust, that we have done business with because we’re not on the ground in those countries. But a lot of contracts that we know are executary contracts so at the end of the day we all have to have a comfort level that those will not be rejected.

STOk great. And Petya, you said you have a global mandate. From your point of view what things need to be taken into consideration, and what are the main concerns when you’re looking at emerging market places.

PNA lot of the reasons are similar to what Marietta just described. We would look at the political stability of the country, track record of the regulatory system there, how the court system has performed, if our fund managers are going into this market what is the history, the track record they have there, do they have a local partner and as Marietta mentioned hedging is an important consideration although I would expand on that consideration to non-US markets generally although currencies are clearly more stable in the OECD countries.

ST

Ok, and does anyone have anything to add on that point? Ok so I’ll move on then. In terms of energy versus infrastructure, what kind of investment strategy are US pension funds looking at? Are we mainly looking at trying to meet the demand of rebuilding aging infrastructure within the US, or are we also looking at energy opportunities, or is that considered to be outside of what would be within investment mandate for pension funds? Marietta what’s your view on that?

MMWe include energy infrastructure as part of our infrastructure strategy, at the end of the day it will have to meet characteristics that I talked about and they relate to the stability of the cash flow and predictability. We also have an energy platform. We are priding ourselves on the fact that we are collaborating between energy and infrastructure platforms. This was done on purpose, because from our experience our contracts obviously work, especially in the developed market. Having said that we don’t want to have a risk of termination of the contract over time if in fact there is a question about business arrangement or longevity of the contract or economic or energy related reasons. So we usually collaborate with our energy platform on whether particular contracts make sense over the longer term. But we have invested in contracted power, we’ve invested in – as part of the infrastructure strategy I should say – we’ve invested in contracted power that have volumetric guarantees. So we definitely consider energy infrastructure to be part of our strategy.

STOk. And does anybody have anything

...what sort of characteristics do US pension funds look for in possible

emerging market infrastructure partners?


11

to add on that point? Well I’ve had another interesting question from the audience. And this kind of looks more at the infrastructure debt side of the business, which I think is quite interesting and it comes into how that is differentiated from the fixed income asset class, and the question we’ve had is “Is long term floating rate project finance debt a possible institutional infrastructure asset class, if the yield targets can be met, and if so how do such loans fit into alternative versus fixed income buckets.” Petya could you give us your views on that point?

PNSure. From our point of view the way we would potentially invest in debt - which our policy gives us the opportunity to do - would be again to funds at this point. Debt funds have been emerging over the last few years and from that perspective yes, it is possible that we would invest in debt, there is nothing to prevent us from that, and there are some options in the market. The challenge would be, as you implied, the return. We need to meet a benchmark, and the question would be whether or not this investment would meet this benchmark, clearly depends on whether or not the debt is senior or mezzanine so the return profile would be different as well. Also another way to look at it is from a risk

perspective. As I mentioned we are at very early stages of our program but if we have made investments in equity maybe there will be a role for that to provide a more stable stream, more stable return, although it’s a lower return given the risk.

STOk, and Julia, a question for you, does that meet with the demand on the supply side? Are your clients looking for pension funds to provide this long dated floating rate financing?

JHYeah, I mean, like we’ve talked about. Our clients are very new in the process. We want to know what the overall cost of capital is for them in the end but how that happens in not something that we’re as concerned about. Once we get all the stakeholders on board, we can hammer out a concession agreement. What we’re looking for at the end of the day is a number. Or, a profit share, or a revenue share over time. So once again, our clients are looking to compare it to their lowest cost to capital, which really doesn’t necessarily make sense given all the risk that they’re transferring, but our clients are just really looking to see what the number is at the end of the day and how parties get there is not something that we’re as concerned about.

STOk. And unless anyone has anything to add on that point I’ve just had another interesting question. Oh please do go ahead Marietta.

MMThis is Marietta. I want to say that part of our strategy - and has always been - that we can structure our investments

in different forms, and those would be though on the fixed income, fixed rate basis. We could be a mezzanine debt provider we could even be a senior debt provider, if it’s a below investment grade opportunity we could structure in a preferred equity basis or convertible equity basis. The reasons behind that is understanding the risk profile of each particular investment and design the best risk return model for our portfolio. We also have a group that does investment grade rated project financing – we’re more of a fixed income and fixed rate lender because of the nature of our liabilities. Floating rate question typically pops up and usually for developers and the sponsors, and so now as equity rate participants we can understand the benefits of having a floating rate debt, because of the optionality of the prepayments. However, having said that even where the rates are today we also see a lot of demands for the fixed rate financing over the longer term.

STOk great. Now we’re coming towards the end of the session now, so I’d just

Debt funds have been emerging over the last few

years and from that perspective yes, it is possible that we would invest in debt...


We could be a mezzanine debt provider

we could even be a senior debt provider, if it’s a below investment grade opportunity we could structure in a preferred equity basis or convertible equity basis.

12

like to kind of do a quick roundup on what your views are on how we can really move things forward now and really create a market where institutional investors can get involved in investing and funding infrastructure. Perhaps Marietta I can continue with you and hear your views on how we can really move the conversation forward now.

MMI think this platform and this type of dialogue is very helpful for each of us to learn about aspirations of each institution. What we’re trying to do is to have on-going dialogue with other financial investors that would be considering infrastructure as an investment from the private equity perspective. We also would like to encourage the dialogue between the public sector and private investment sector given some of the particular challenges we’ve discovered in trying to get, to be on equal footing with strategic players competing in bidding for those projects. So I think those two things would probably go a long way, and also understand whether the transparency that everybody talked about is starting to be established with different forms of trust, and actually go forward with more states and on a federal level where there would be more of a model that institutional investors could relate to and be comfortable with.

STGreat, thanks Marietta. And Vonda, if I could come to you next.

VBSure, I think that what I have to say is just really a continuation that you know, we’re really at the stage now where,

we’ve established the need and it’s clear in everybody’s minds. There’s all sorts of opportunities out there, and I think pension funds are looking for a lower risk type of investment and long term which this meets. And so the question is how do we get past this – you know, we’ve never done this before – to build up on our own expertise. So the dialogue between a federal level of government and as well as state and local government are the key stakeholders including the labour movement and the public sector and then, you know, bringing in the private sector and the way that they know how to finance deals and figure out how to do something that we haven’t done before really. I also think, that from the institutional investor perspective there’s a whole side of people work around the pension funds that need to step up, including the consultants and other services providers. And so, it’s a challenge. If we sit back and say “oh, gosh, it doesn’t really fit with what we’ve done in the past” or, “we’ve never done it before” I think we’re all going to lose out and there isn’t sort of a new opportunity but I think the challenge we haven’t met yet and it’s going to require a whole lot of new innovative strategies and structures that I think are illustrated by the West Coast Infrastructure Exchange and the Chicago Trust and others that have been sort of experimenting. And we can learn from I think our brothers and sisters that have done this around the globe, in Canada, Australia and in Europe, and figure out what the US model is going to look like.

STGreat thanks Vonda, and Julia?

JHYes, I agree with that. What Vonda said, what we’re finding too is, the engineers, like the CH2M HILL - they’re on the ground right. They’re already taking risk, and they know what projects are being worked on so we’re finding that there’s a lot of strategics getting involved in water, waste water, because the engineers are already there working with our clients. We’re trying to facilitate dialogue. We had the head of the trust meeting with different infrastructure funds and private equity firms in New York to try to figure out, understand what each particular fund is looking at, what their sweet spot is, you know how much equity they’re looking to put in and I think that, I do believe that over the next few years as we continue these dialogues, we continue the dialogues with the public officials – create the transparency with the citizens that there will be deal flow. I’m really encouraged this past year as opposed to many years where we just saw the capital need. We’re actually seeing clients want to talk about alternatives. That being said, this is not something that we go in and recommend for every client that we have. We always go in and do a study with them up front to show them what the policy risks are, what the policy considerations that they need to make, and what they mean in terms of dollars to them. So I think as we continue to work with our clients and to start the discussions early I do think that we will get to a process, it might be slightly different in each sector as well as slightly different in different parts of the country given P3 legislation, I do think that we will get there.

STGreat, thanks Julia, and finally Petya if


13

you could give us a few brief remarks.

PNI think two main things. One, the dialogue between the public and private sector, so that there is a sufficient deal flow for the private capital to invest in institutional, or other capital. And number two, continuing the dialogue among the pension funds and other stakeholders there is an increased education, awareness and also ability to access the infrastructure asset class.

STGreat, thanks Petya. We’ve come to the end of the session now, and I think you would all agree that this has been really really interesting talking point and we could have gone on for hours as there’s so much to talk about in this space. And I think it’s a really exciting market at the moment, and it will be interesting to see what the next year or so brings. If you’ve enjoyed this session, please join us for our Institutional Investor Forum in New York in June. If you’d like more details on that you can contact our events director Jessica Taylor, her details are [email protected] or visit http://bit.ly//IIR-US . For today I’d just like to say thank you to our panellists, who have made this a really engaging debate. So thankyou Vonda, thank you Marietta, Julia and Petya. Thank you very much.

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European Utilities M&A: Outlook & Analysis

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Institutional Investors & Infrastructure in the US · portfolio. Petya perhaps you can start us off here, and tell me a little about what your organisation defines as infrastructure

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