With capital increasingly scarce and institutions paring down the number of GPs on their rosters, managers are courting state pensions by offering “fund of one” deals to target smaller, local investments. 

Barings has been partnering with state pensions to target lower-middle-market local infrastructure investments, an often overlooked part of the sector. Recently, the MassMutual subsidiary partnered with the $70 billion Maryland State Retirement and Pension System to launch a $250 million real assets program for middle-market deals and emerging managers. The focus is on the energy transition, digital infrastructure, and transportation. The program includes $50 million earmarked for in-state infrastructure and Maryland-based emerging managers.

Mina Pacheco Nazemi, who heads Barings’ diversified alternative equity team, told Institutional Investor that she sees a “lot of opportunities” in the lower-middle market “to invest in a scalable manager that will generate better risk-adjusted returns.”

Pacheco Nazemi’s team helps institutions find infrastructure investments “in their own backyard.” In turn, the manager has been able to deepen its ties to state allocators and expand its middle-market footprint.

As Maryland SRPS’ outgoing CIO Andrew Palmer said in a statement, this isn’t “a pooled investment with multiple stakeholders who may have differing objectives,” but rather a “focused, collaborative effort between SRPS and Barings, aligned on a common goal.”

This type of direct investment partnership has become more popular in just six months. Barings has raised nearly $1 billion from institutional investors for its diversified alternative equity program, which invests in smaller PE and infrastructure. Barings has made similar deals with Alaska Permanent and Michigan Retirement’s $300 million small emerging manager program.

Supporting emerging managers naturally aligns with smaller companies. It’s a space too small for giants like Brookfield Asset Management and Blackstone, yet often too complex for the lean teams at many institutional investors to navigate. That’s where a firm like Barings steps in, serving as “an extension of staff” that can provide a “global perspective.”

“It’s such a win-win, and in this kind of environment, states need to be thinking more about how to bolster their local economies,” she said.

Other managers are seeing these funds of one in private markets become a preferred structure for large plans. Stable Asset Management CEO Erik Serrano Berntsen told II that large asset owners often want more control over the investment strategy by setting certain guidelines “such as geographic focus or size of the deals.”

“They can also have more granular control over the liquidity profile of their assets and improved fees or transparency,” he added. Serrano Berntsen agreed that infrastructure represents an interesting opportunity “given their uncorrelated returns for investors.”

Like Barings, Stable also owns stakes in investment firms, and invests in other private markets such as structured equity and royalties.

With more investors cutting down the number of managers that they work with and considering new firms, Pacheco Nazemi argues that more asset managers should invest in their clients’ home states. “Other CIOs and comptrollers need to think strategically especially since there’s less private market dollars to go around,” she said. “People are tapped out on their allocations.”

Barings' diversified alternative equity team is looking to partner directly with more allocators. “We’re open for business,” Pacheco Nazemi said, pushing back against the “stigma” that focusing on local emerging managers means sacrificing alpha-generation. “This is a return-oriented portfolio full stop,” she added.