LA firefighters’ pension fund approves $627mn first foray into infrastructure

August 16, 2024 (Preqin News) – The Board of the Los Angeles Fire and Police Pensions fund (LAFPP) unanimously approved an initial 2% allocation to infrastructure, believing it will offer significant diversification, better downside protection, income generation, and higher returns than commodities over the long term.

The new allocation means $626.6mn will be allocated to infrastructure, based on latest AUM of $31.3bn, while the plan's 2% commodities allocation will be eliminated.

‘The current commodities stock exposure does not align with the initial investment thesis of commodities being an inflation hedge. Investing in infrastructure may provide the plan higher expected returns in periods of stable and falling inflation and would have a lower correlation to public equities,’ said RVK, LAFPP’s investment consultant, in a review of the fund’s real asset allocations.

The Board also agreed to increase its allocation to private real estate from 7% to 8.5%. ‘With this new structure, we will be a little less sensitive and be able to capture higher returns through the illiquid market,’ Bryan Fujita, CIO of LAFPP, said in the board meeting.

‘Even though it’ll be raising fees a little bit, we think that’s going to be more than offset by the higher return of the portfolio and make the portfolio a little more stable over time because of that diversification.’

LAFPP now has a 28.5% allocation to private markets, including a 15% target to private equity, and a 3.0% allocation to private credit. LAFPP’s investment return for 2023 was 7.8% and the fund has generated an 8.4% return over the last 10-year period, exceeding the 7.0% required to meet current and future obligations for members. Over the five-year horizon, the recommended real asset structure would have outperformed the previous exposure structure by 0.6%.

Two-thirds of infrastructure investors surveyed for Preqin’s Investor Outlook: H2 2024 said interest rates were the key challenge for return generation in infrastructure. Higher rates have been cited as the top issue since 2022, growing from 57% to 67% this year. Higher interest rates have affected infrastructure more than other asset classes due to the more leveraged structures.

On a positive note, just 3% of investors believe performance will worsen over the next 12 months, down from 18% in 2022. Over a quarter of respondents (29%) expect performance to improve compared with 17% in 2023, likely because of the potential for rate cuts.

LAFPP isn’t the only US pension plan looking toward private capital. Earlier this year, the Board of CalPERS approved an increase in exposure to private markets from 33% to 40% of its portfolio, resulting in an extra $33bn allocated to alternatives.

The average weighted institutional allocation to private markets rose from 15.1% in 2019 to 19.6% in 2023, according to Preqin’s Institutional Allocation Study 2024. Within this shift towards alternatives, commitments towards infrastructure rose from 1.3% to 2.1% of the total portfolio. Allocations to private equity (including venture capital) grew the most, rising from 4.3% to 6.9%, while private debt remained flat at 0.9%. The average allocation to hedge funds dropped from 6.4% to 6.0%.

_{The opinions and facts included within the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin providing the information in this content accepts no liability for any decisions taken in relation to the above.}