A relatively new asset class, infrastructure is growing and seeing more segmentation—a process that offers Canadian investors an increasing number of opportunities both at home and abroad.
“If you think about DB plans, there are many good reasons why they might invest in infrastructure, not the least of which is to get away from the equity market” and the volatility associated with it, said Janet Rabovsky, director of investment consulting services with Towers Watson, speaking at Benefits Canada’s recent Benefits & Pension Summit in Toronto. Infrastructure is also a good match for a pension plan’s liabilities, she added.
But investors haven’t always had this opportunity—in the not so distant past, governments used to finance infrastructure themselves, using tax revenue. However, today, governments have more expenses, such as healthcare, and more debt. “Third-party, institutional investment in infrastructure” has been filling that vacuum, so over the last 10 years, investing in infrastructure has become more professional, Rabovsky added.
And with that has come market segmentation. “There’s a lot more specialization and a lot more geographical focus,” said Jamie Storrow, managing director with Northleaf Capital Partners, speaking at the same conference. Today, for example, it’s common to see a European manager that deals only with renewable power, Storrow explained.
What’s available?
The spectrum of infrastructure investments includes debt as well as core and opportunistic assets, which are equity investments. Opportunistic assets typically offer the highest returns and the greatest amount of risk, while debt offers the lowest returns and the greatest security.
Debt includes loans for financing projects and the duration of these bonds can be from five to 25 years, Rabovsky explained.
Core infrastructure includes assets such as regulated utilities, schools and hospitals. “The majority of our clients who initially invest in infrastructure [favour core assets],” Rabovsky explained.
Opportunistic infrastructure is essentially made up of opportunities where assets need to be built or improved or management has to be changed. “Some people don’t want to take that risk,” Rabovsky said. An example would be developing a power plant or a water treatment plant in Nigeria. It would offer higher returns, but the risk would be great, too—including the possibility of the plant never being built due to corruption, Rabovsky explained.
Global highlights
Across the OECD, Australia and the U.K. are the leaders when it comes to investing in infrastructure because they were the first to carry out privatization programs with utilities and airports, Storrow explained. Canada, on the other hand, focuses on smaller assets. “There wouldn’t be private ownership of airports here” or of utilities, he added.
Within Western Europe, the U.K. has the greatest diversity in terms of assets, including renewable energy, rail lines and the utilities sector, Storrow explained.
Japan is also an important player with its big solar program right now, he added. “The shutting down of nuclear facilities is making them rethink their energy mix.”
Given this complexity, investors need to select different countries and assets depending on what they want to get exposed to, Storrow said. And this is exactly what many have been doing. “This is a very international community—you can have a Spanish construction company working on an Australian asset with a U.S. pension fund,” Storrow explained.
All the articles from the event can be found on our special section: 2014 Benefits & Pension Summit Coverage.
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