Obama’s Infrastructure Push: What Does It Mean for Institutional Investors?

(September 8, 2011) – With President Barack Obama proposing a national infrastructure push in his speech before Congress Thursday evening, institutional investors will be closely watching what programs eventually emerge from Washington.

One potential option: an infrastructure bank. A bank – which many commentators expect would provide relatively small amounts of public capital and loan guarantees in order to entice private investors into infrastructure investments – is not a new idea. It has, however, emerged as a leading contender in the effort to boost the economy and a lagging job market in the United States.

If President Obama’s expected plan can pass through a sharply divided Congress, some infrastructure investment experts believe that it will be good for the US economy – as well as for large pensions and other infrastructure investors.

“It’s unclear whether it’s a bank, or different proposals to add additional capital to existing programs – but regardless, the principle of the federal government supporting states and municipalities in further investing in infrastructure – improving maintenance and standards, and expanding it – is great,” says Mark Weisdorf, CEO of the Infrastructure Investments Group at J.P. Morgan Asset Management and former head of Private Market Investments at the Canada Pension Plan Investment Board (CPPIB). “It’s good for three reasons. One, it will help create jobs in the short term. In the medium term, it will make [America] more productive and competitive. Third, with respect to investment opportunities, the administration and many state and municipality administrations have for some time been saying that any investment in infrastructure by governments should attract more private-sector capital.”

From the standpoint of asset owners, Weisdorf also sees benefits. “There is a fourth reason as well,” he adds. “The reality is that infrastructure is perfect for pension plan and institutional investors. Its characteristics include low-volatility, and relatively predicable and growing cash flows whose returns are very diversified, and that are a great match to institutional investor liabilities. There are also inflation protection benefits.”

In terms of which infrastructure sub-sectors he likes, Weisdorf is bullish on regulated utilities, gas infrastructure, and water/waste-water assets. “We like regulated utilities for two reasons,” he says. “We see slow growth in the economy in the next decade, and in this environment, these assets generate reasonably attractive risk-adjusted returns. Also, we see the prospect for rising interest rates and inflation – not in 2012, necessarily – but when they start to increase, you’re going to have regulators pass on those costs to consumers in terms of increased rates.” Because of recent discoveries of shale gas in America, as well as the high price of oil, he also sees infrastructure relating to this trend as a good investment for pensions. “Oil will stay high in price, and because of shale gas and other natural gas discoveries, the price will stay low. The US may even become an exporter given the size of the discoveries. As a result, we see a need for gas pipelines.”

Whether President Obama’s plans can in fact pass through Congress is far from certain, of course. Representative Eric Cantor (R-VA) – a leading House Republican who in recent months has sharply opposed the President’s agenda – expressed doubts Thursday regarding the infrastructure bank idea, telling a Christian Science Monitor roundtable that “I am one who agrees with the notion that an infrastructure bank is almost like creating a [Fannie] and Freddie for roads and bridges,” referring to the mortgage-guarantee giants that faltered badly during 2008 and that had to be rescued by the federal government. Yet infrastructure bank or not, such investments are a favorite of large institutions – and are likely to remain that way.

[This article has been edited from its original format.]