Thursday’s news that several Canadian pension funds are in the running to purchase up to three U.K. airports was a blip on an otherwise dark radar screen for the infrastructure asset class. Considering the staggering amounts being pledged around the world for infrastructure spending as a stimulus measure, does the proposed deal indicate a flight to hard assets or is it business as usual?
The 2009 federal budget contained almost $12 billion in infrastructure spending and the provinces have kicked in their own amounts where they can, creating a vast pool of capital waiting to be spent— preferably, on “shovel-ready” projects. However, since such ventures typically move at glacial speeds, the effects of such investments likely won’t be felt for some time.
Leona Fields, manager of York University’s pension fund, has her doubts about a flight to hard assets among Canadian pension funds. “I’d say ‘flight’ is a little extreme,” she remarks. “Things move slowly in this world, so there is never a flight. However, more funds are considering the asset class than a year ago.”
Fields feels that the stimulus money in the budget won’t do much to change the investing habits of the big pension funds, as they are already global players. “It will be good for Canada, as there won’t be any shortage of investors or projects to invest in, but I think it may have only a minimal impact on any infrastructure investment plans Canadian pension funds are considering.”
The pension funds mentioned in the possible airport deal—OMERS, Teachers’ and the Canada Pension Plan Investment Board—come as no surprise to Chris Kautzky, a senior investment consultant with Hewitt Associates in Vancouver and a member of Hewitt’s global infrastructure team. He explains that large Canadian pension funds have been at the forefront of this asset class for a long time.
“It’s the usual suspects,” he says. “Investing in infrastructure, including airports, is very much an ongoing trend—particularly for these plans.”
Kautzky points out that a confluence of factors has actually resulted in less action for the asset class as of late.
“The pace has slowed down for a number of reasons—namely, that funds are focusing on other aspects of their portfolios at the moment,” he adds.
Another issue that institutional investors face is the illiquid nature of the asset class, he explains. In a tight credit environment, it becomes difficult to raise the cash needed to make such an investment. “However, given the underlying characteristics of the asset, I expect the trend to pick back up, as it remains an asset class that makes a lot of sense for pension plans in particular.”
As for infrastructure spending in Canada, Kautzky says that while it may possess some attractive characteristics, most institutional investors are concerned about diversification, which is often addressed by investing globally or in multiple regions with different managers using different approaches.
“We have seen less institutional investment here in P3s (public-private partnerships) than in the U.K., for example, where there is a strong P3 market,” he says. “This may spur some greater interest, but that remains to be seen.”
Kautzky is skeptical of the use of infrastructure spending as a means of short-term economic stimulus. “There is a significant gap between what is needed and what is currently being built,” he explains. “Given the nature of these projects, that gap is not going to be addressed in the next few years.”
Still, he says that while activity in the asset class is relatively low now, it is trending upward—driven, he says, by a desire to balance assets and liabilities, a general awareness that the larger funds have been allocating assets to infrastructure and a growing availability of ways for smaller plans to get a piece of the action.
“You don’t need to hire a team like the large plans have done in the past,” he says. “It can be done cost-effectively for smaller plans.”
However, as with any asset class, new entrants to infrastructure investing need to understand the risks—notably, the difference between “greenfield” projects (those still on the drawing board) and “brownfield” projects (those already in operation). The former type carries far more risk, according to Kautzky.
“When you’re making an initial move into an asset class, you want to be cautious,” he says. “You may want some exposure to greenfield in your portfolio, but there is a bias away from it. There is a preference to look at assets that have been in existence for some time so one can get an idea of usage over time and get more confidence in expected investment returns.”
Infrastructure also requires leverage, which is difficult and costly these days. “There’s a concern that the dust needs to settle before one can get a better handle on making an allocation to infrastructure.”
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