The California State Teachers' Retirement System, the second-largest public pension fund, has made what it called one of the largest single U.S. fund management commitments to infrastructure, investing up to $500 million.
Infrastructure has emerged as a separate asset class to private equity in the last decade, offering lower returns but also stable cash flows that are hedged against inflation and are underpinned by physical assets such as roads and pipelines.
With interest rates at historic lows and inflation not seen as an immediate threat in developed markets, infrastructure fund managers have found it more difficult to make average returns of just above 10 percent appealing to investors.
But infrastructure typically has a longer investment horizon than private equity, which tends to flip assets within three to seven years, and so appeals to pension funds looking to match their long-term liabilities with long-term assets.
"What the recent economic crisis demonstrated was the need for greater diversification in our investment portfolio, in areas that would also serve as a hedge against inflation," Harry Keiley, chairman of the CalSTRS investment committee, said in a statement on Tuesday.
CalSTRS, which ranks behind the California Public Employees Retirement System, said it had awarded a commitment of up to $500 million to Industry Funds Management to invest in a portfolio of core infrastructure assets in North America and Europe across a range of sectors, such as transport and regulated utilities.
The first $300 million will be invested immediately, with the second tranche of $200 million expected to be invested within the next 18 months, CalSTRS said.
Headquartered in Melbourne, IFM manages more than $31 billion in assets, much of it on behalf of the 32 Australian superannuation funds that own it. Australian pension funds are the world's largest investors in infrastructure, with their cash powering infrastructure M&A deals around the world.
(Reporting by Greg Roumeliotis in New York; Editing by Lisa Von Ahn)