Top Lessons in Infrastructure Investing

Black-chess-pieceIt’s been over a year since Canadian Investment Review launched the interactive discussion and learning tool, CIR Online Debates and over the next few weeks, we’ll review the debates taken place to-date and give members and potential members some information on what’s to come.

The inaugural debate took place in April 2009 and focused on investment in infrastructure. The pro side said infrastructure investment was the perfect asset class for pension funds, with steady returns and fixed income-like characteristics. The con side felt the returns didn’t outweigh the risks when it comes to fiduciaries, or the fee structure involved. The question was, what are pension funds considering this type of investment to keep in mind?

5 Things We Learned from the Debate

1. Moderator, Bradley McLellan, partner with WeirFoulds set the scene by educating plan sponsors of the modes of investment; directly, whether through ownership and operation or through private finance, co-investment or investing in private or publicly traded infrastructure funds.

2. Pro Gayle McDade, senior manager with Alberta Investment Management Corp. opened by stating how infrastructure is highly capital-intensive with high operating margins, low operating and business risks and predictable cash flows from mature assets.

3. Con Bruce Grantier, retired managing director of pension assets at Scotiabank agreed but verified investment is especially hard for smaller to medium-size funds; those without dedicated resources to earn these returns and who may not have the ability to pay for management and interest fees as well as the accompanying taxes.

4. Guest analyst Francois Gingras, director of asset mix and risk with Ontario Teachers’ Pension Plan confirmed Grantier’s point and provided context on opportunities to invest and how they often require large investments and a solid balance sheet. “Large pension assets can offer timely financing facilities…or collaboration in consortium with other pension plans, reducing idiosyncratic risk by sharing exposure to a company.”

5. Second guest, Asieh Mansour, chief economist and strategist with RREEF Alternative Investments clarified that no asset class was immune to the acute financial crisis and synchronized global recession. “The state of events has left institutional investors facing many challenges. But the dislocation in the financial markets provides attractive opportunities across the many asset classes, including infrastructure. Institutional investors, searching for higher-yielding, inflation-hedging and relatively more stable asset classes, have flocked to the infrastructure space globally.”

Now Looking Ahead…

While it may be more difficult for plan sponsors initiating infrastructure projects to obtain the financing they need, but infrastructure projects are attaining financial close and are proceeding. “New opportunities are arising in emerging markets as a result of the global liquidity crisis, which has caused a significant vacuum in the financing of new infrastructure projects,” according to David Creighton, president and CEO of Montreal-based Cordiant Capital. New builds equal new opportunities.

Based on these opportunities, it’s important to note Africa and how they have $980bn in infrastructure requirements over the next 10 years (including power and telecom). An area where plan sponsors may not have ventured before is becoming more and more prevalent.

Stay tuned for Part II of this series, A Year in Review: Active vs. Passive Management.