Alpha Edge Recognition - Alpha Generation: Infrastructure Investing
This year, Allocator Intel is recognizing leaders in the allocator community, acknowledged by their peers, for exceptional leadership in the key areas of portfolio construction in the Alpha Edge Recognition Awards.
Nominated for Alpha Generation for his work in Infrastructure Investments, Daniel Joye oversees Infrastructure Investments at the Los Angeles County Employees Retirement Association (LACERA). During his four years at the $74 billion public pension fund, he has deployed about $3 billion to new investments, progressively moving the infrastructure allocation from a purely public equity exposure into private infrastructure investments.
A French and American citizen, Daniel attended the École Navale, the French naval academy, where he received a Master of Science in electrical engineering and computer science, subsequently serving in the French Navy as a Lieutenant. In addition, he received his MBA in Finance at The Wharton School. Daniel has spent most of his career overseas in London on the buy side, including at Morgan Stanley Capital Group, independent commodity trader Vitol, and BP Trading, where he focused on energy investments. After relocating to Los Angeles from London for his wife’s job, Daniel joined LACERA in 2019 to help develop the nascent private infrastructure program. The following is edited for length and clarity.
Can you share an overview of what your portfolio looks like today?
I look after infrastructure, which is 5% of the roughly $74 billion of the fund. When I joined in 2019, the board had approved an infrastructure program, and LACERA was using infrastructure public market equities as a placeholder. Generally, it’s an area where our allocation has increased; we were previously at 3%. Since I started at LACERA, we have been progressively deploying capital into private markets and reducing our public infrastructure equities exposure.
Our infrastructure allocation is comprised of two risk categories: core and non-core. Typically, core investments tend to be open-ended funds between $300 million and $600 million per commitment, while non-core allocations tend to be between $150 million and $250 million, usually taking higher risk compensated by a higher return. We have also made multiple co-investments and are looking into club deals.
What are some of the most significant changes that occurred over the last few years?
We’ve been deploying circa $1 billion in capital per year, so the portfolio has been constantly evolving. In the process of building out the portfolio, each incremental investment has to be more deliberate than the previous one in order to be additive to the overall portfolio: We try to balance pace of deployment with sector, geographical and risk exposures that are complementary to the portfolio.
What are some of the factors that influence you when evaluating investment opportunities?
Our structure review, which is approved by the board, is our roadmap for building out the allocation. Based on the board’s roadmap, infrastructure’s role in our portfolio is to diversify, hedge against inflation, and generate income: Those are the table stakes for us to consider an investment.
In concert with our roadmap, we need to thoroughly analyze the risk exposure of each of our investments:
- Are we getting compensated for the risk we are taking?
- What are the alternatives in terms of risk/reward in private markets but also public markets?
- Does the investment diversify our portfolio or overweight risk in a sector or geography? In the latter, do we want that overweight?
- Do we have proper inflation protection through the revenue drivers? Is it contractual or more of a macro inflation hedge?
- Does the partner who is executing the strategy have deep industry knowledge and an edge in the market?
When you’re working with strategic partnerships with asset managers, what are some of the intangibles that you look at?
Of course, one of the first things we look at is the track record as firms and individuals, and part of that track record can be the amount of time they spent at a company specialized in their investment area. Have they benefited from a bull market? Do they have experience investing through a recession? What amount of risk were they taking and were they getting compensated for that risk? What is their industry knowledge on the sectors they are investing in? For example, how familiar are they with power markets if they are investing in energy transition strategies? Do they have previous experience in the specific power markets they are dealing in (CAISO, PJM, German power, et cetera)? How do they manage their commodity risk? Do they have the in-house expertise to value and extract the optionality around their assets? Ideally, the manager team is composed of a combination of competencies that are complementary.
An important part of our diligence is going through a deep dive on their assets and investment process. You want to make sure that your partner has a thoughtful and repeatable process. That entails going through the diligence material the deal team used to underwrite investments. We try as much as possible to put ourselves in the deal team’s shoes and understand how they were thinking about risk/reward, market opportunity, exit strategy, major downside risks and upside potential. We want to make sure that good IRRs and exit multiples are underpinned by a robust underwriting. We also like to see managers sense check and triangulate any underwriting assumptions. For example, when they are underwriting their growth numbers it is great to see a bottom-up analysis combined with a top-down approach then sense checked by the team.
What are some of the opportunities that you’re looking at in the next 12 to 24 months?
We have been deploying broadly across our four infrastructure sectors over the past four years: energy/utilities, telecom, transport, and social. Energy is our largest sector exposure, so tends to garner most of our attention. Although we have been making energy transition investments since I joined, more recently new legislation like the IRA or the European SFDR has added beneficial tailwinds. We are actively researching these potential new opportunities affecting solar, wind, battery storage, hydrogen, SMRs, carbon capture, etc.
In terms of geographies, we are mainly looking at North America and Europe with a sleeve for developed Asia.
What would you say is your office’s greatest accomplishment?
When I started, we had no private infrastructure assets; we were all in public. Now, people know LACERA as an infrastructure investor. We put ourselves on the infrastructure map; however, this couldn’t have been possible without the strategy of the LACERA Board and investment team. I think our real assets allocation has been greatly accretive to the pension fund, as it has been an invaluable diversifier over the past couple of years.
What do you do in your spare time?
My wife and I have three young boys, so during “their” spare time I try to tire them out, so they aren’t jumping around the house, which means some sort of outdoor physical activity, usually hiking or swimming. When we go on vacation, we generally go to France to visit my father who lives there. Most recently, we went to the Mediterranean to spend some time boating, fishing, biking, and swimming.
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