While Canadian and Australian pension funds are set to increase their investments in infrastructure assets in the years ahead, their European counterparts are slow to recognize the benefits of this asset class, potentially missing out on additional returns they could achieve for their clients.
A discussion on infrastructure at the World Pensions Council in Paris showed funds such as Canada’s C$110 billion Ontario Municipal ERS; the C$270 billion Caisse des Dépôts de Quebec; and Australia’s A$175 billion Australian Super fund now have a significant portion of their assets, between 10 and 20 percent, invested in infrastructure assets.
That compares to exposures of 5 percent or less by European funds such as the Dutch 400 billion euro APG/ABP and Denmark’s 110 billion euro PFA, whose investment tactics are seen as a model for mainstream pension funds in Europe and the US. The differences were highlighted in a recent study by the World Pension Council.
Europe held back by conservative lawmakers and regulators
The study referred to private infrastructure investments in the digital realm and in developments linked to the fourth industrial revolution. The study described Australia and Canada as “examples of global leadership in infrastructure investment”. In other countries, it said, some of these sectors and industries can still be perceived as excessively “illiquid” or “too risky” for pension investors, inspired by “criticisms sometimes laid at the door of infrastructure and tech assets generally by conservative lawmakers and financial regulators.”
The study is of particular interest to Luxembourg, recognized as a global hub for infrastructure investments with its conducive legal environment for long-term alternative investments by institutional investors such as pension funds.
“Canadians and Australians were first in these new markets,” said Brice Lainé, senior investment director at Caisse des Depots - Banque de Territoires at the conference, at the conference. “They’re very trendy people. So the French, and Europeans, are following the trends. And you will notice that this trend is accelerating.”
Nic Sherry, chair of the Australia’s A$6.5 billion TWUSuper fund, explained the pension fund industry down under has grown so much in recent decades that it now needs to look elsewhere in the world, and at other types of assets. “The government has run out of things to sell. We have moved into new assets, greenfield sites,” he said, referring to several UK airports that his fund now owns, including Manchester and Stansted.
The strong development of Australian asset management firms such as Macquarie also is driven by investments in real assets, often stemming from privatisations. In the last 35 years, Macquarie surged from a one-man office in Sydney to a A$737 billion asset management firm. At the same time, Australian pension funds also boomed.
Luck or ingenuity?
“Some say it was luck in Australia. A coincidence of factors. Others call it the extraordinary ingenuity and foresight of Australians,” said Nicholas Sherry, referring also to the fast growth in the pension industry down under, which now amounts to 160 percent of GDP. “We’re now at the phase where some of our funds are so large, mega funds we call them in Australia, with hundreds of billions of dollars. They’re bringing expertise in house to actually enter into these deals themselves. The issue of expertise and knowledge is really critical.”
Australia’s funds now are building new assets in specific markets, such as solar and wind, and telecommunications. “They’re not just buying interesting assets, actually establishing the businesses, providing in many cases, seed capital to experts,” Sherry said.
Steven Marshall, managing partner at Montreal-based private capital fund Cordiant, explained that the infrastructure investments they offer in the digital space offer solid cash flow. “The attraction of this asset class is very much that they have blue chip clients, governments, mobile operators. Those clients want long term contracts, of course, formatted contracts, with escalation clauses. That drives a very sustainable growing cash flow stream over a long period of time with low risk counterparties, which makes it very interesting and compelling,” he said.
Plumbing of the Internet
Marshall’s fund, listed as a Real Estate Investment Trust in London, invests in mobile telecom towers, fibre optic networks and data centres. “If you want to use a simplistic phrase, we consider this a plumbing of the internet, the actual physical assets that are actually needed in order for us to really access the internet.”
During 2020, asset owners saw losses on credit funds, on private equity and on real estate, while infrastructure actually grew by 8.6 percent. In 2021 it continued to improve its returns to 10.7 percent. “By practical example this shows the resilience of this particular asset class,” Marshall said.
With his background in telecom real estate, he now serves Cordiant, a fund bought from the Ontario teachers pension fund in 2016. Since then, Cordiant’s partners have continued to invest in multiple aspects of infrastructure, in particular digital, but also some agriculture. The fund for instance helps Brazilian farmers embrace a renewable energy infrastructure.
Additional capital investment foreseen
Looking ahead, Marshall highlighted Ontario Municipal ERS’ ambitions to double its total investments in infrastructure to 25 percent of its total invested by 2027. “That 5 percent does not sound much, but when you look at the size of that fund, it clearly is massive. They’re actually looking at doubling their portfolio from 32 billion Canadian dollars to 65 billion by 2027.”
Marshall said Cordiant itself expects to invest some additional 600 million dollars annually up to 2035. “It’s a massive, massive amount of additional capital investment that is foreseen to be invested in this asset class.”
With his background in telecoms, Marshall is well versed in the wide range of aspects that investors here need to consider. Technology expertise is a must, which makes due diligence more expensive than with other types of real assets and comes in addition to geopolitical aspects and inflation economics that also need to be considered.
“You have to understand what is the underlying asset you’ve got on your balance sheet, that’s something really important,” said CDC’s Lainé. “There is a tremendous amount of work to be done in contract fundamentals; it is a cascade of contracts with all the activities encompassed within a single activity. That really is a core reality of this asset class.”
As a result, the investment fees are higher but so are the potential returns. “The fees are higher,” said TWUSuper’s Sherry. “There’s no doubt about that. But again, our evidence shows that the return after this fee is pretty cool.”
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