Since the early 2000s, private infrastructure investing has gathered interest from institutional investors. This trend continues to accelerate as governments can no longer afford to build the roads, schools, hospitals, waste and water treatment plants, power distribution grids, etc. that are required for a successfully functioning economy. It’s estimated that more than $50 trillion will be spent in new infrastructure development across Canada by 2030.

Historically, Australian and Canadian investors—primarily pension funds—have dominated investment in infrastructure assets, accounting for 40% of historical allocations despite representing only 7% of total potential available capital. Canadian pension assets totalled US$1.6 trillion in 2013, while infrastructure allocations by Canadian plans totalled US$47.2 billion. This contrasts with U.S. pension assets, which were in excess of US$18 trillion also in 2013, and whose allocations to infrastructure were only US$25.4 billion, less than those made by Canadian pension plans.

On average, Canadian pension funds have allocated 4% of their pension fund assets to infrastructure, up from 2% in 2009. Among my clients, I see interest in infrastructure investing increasing, especially given continuing low interest rates. Like many other institutional investors, they’re primarily interested in core, income-producing infrastructure, though among those with more mature programs, more value-added strategies are being explored.

More recently, there have been some noticeable trends in infrastructure investing, both in terms of investor location and type. To date, pension funds have accounted for 72% of allocations made to infrastructure assets. Based on prospective allocations, sovereign wealth funds are expected to increase their “market share” from 13% of the total allocations to 40%, with a corresponding decrease in the percentage attributed to pension funds (45% versus the present 72%).

American state pension funds and Asian investors—primarily sovereign wealth funds from Japan, South Korea and China—have started to take an active interest in infrastructure investing. These two groups currently account for 20% of allocations, but based on surveys by Preqin, they are expected to increase these to 48% of total infrastructure allocations. Most notably, the Government Pension Investment Fund of Japan has committed 0.2% to infrastructure, though this translates into US$2.7 billion in investments over the next five years.

While many of the largest pension funds are moving toward direct investment in infrastructure assets, the majority of investment by small- and mid-size pension funds is through third-party fund managers. There has been a distinct bifurcation in the market over the past couple of years. Some of the largest infrastructure funds (fund sizes in the billions) have been the most successful in raising capital, while other groups have struggled to even make a first close, often due to uneven track records.

In the 2014 Global Alternatives Survey sponsored by Towers Watson and the Financial Times, alternative assets managed by the top 100 asset managers total US$3.3 trillion. Of this, US$120.6 billion relates to infrastructure, 52% of which was invested in European infrastructure and 26% of which was invested in North American infrastructure, with the remainder split between Asia-Pacific and other regions. Macquarie Group represented US$96 billion of the US$120 billion, according to the survey. Interestingly, the total amount of alternatives managed by the largest managers has remained flat compared to the 2012 figures, as has the amount of infrastructure assets managed by them. This suggests that increasing allocations are being managed either by internal teams or by more specialized infrastructure managers.

With the increasing interest in core, income-producing infrastructure, there is concern that there will be less pricing discipline by investors as competition increases, especially for the larger assets. Thus, for those entering the asset class, understanding the drivers of return and the investment strategy of the funds being considered will continue to be important.

Janet Rabovsky is a partner at Ellement. She has more than 25 years of experience in the industry. These are the views of the author and not necessarily those of Benefits Canada.
Copyright © 2019 Transcontinental Media G.P. Originally published on benefitscanada.com

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Charles Spina:

Because of the large number of variants, fiduciaries contemplating allocating funds to the Infrastructure sub-class of Alternatives for the first time, are changing the specific IP&Ps as they pertain to them, or are simply performing their prudent-if sometimes passive-oversight function, need to adopt an active due diligence mindset here in a way that does not apply to any other class.

Similar to the story of hedge fund investing, in which the term lost its original meaning, there is no longer such thing as a generalized risk/return profile for Infrastructure investments.

Each opportunity must be decomposed into its return, liquidity and risk variables. Local or offshore? Real asset management or fund of funds? Full or selective project life cycle plays? Hospitals, power generation or transportation assets? Standardized project models such as P3 and/or DBFM, or entirely in-house developed models? Whose valuation basis?

In the quest for nominal returns, such due diligence can be an all-too-convenient trade-off. The true asset write-down costs of such trade-offs are already emerging, and in the least tolerable places.

At a macro level, there is no disputing that Infrastructure is huge and growing. On the strength of its stellar project track record, for example, at least one major international constructor has re-positioned itself and staked its future accordingly, and will win big as a result.

At a micro level, the one investors need to be most concerned about, there will be losers. Pension fund managers simply can not afford to be on the losing side.

Monday, August 25 at 2:51 pm | Reply

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