For investors, infrastructure can feel like tackling a home renovation — a big project with hidden costs, uncertainty and a time frame that’s often subject to change. It’s not for the faint of heart and is probably best left to a professional. Coincidentally, both are areas where Canada, whose housing boom has prompted numerous renos, has particular expertise.
The U.S. infrastructure investment gap has been the topic of policy discussion and white papers for decades. By 2020 the country must invest $3.6 trillion to stop its internal plumbing from falling apart, according to a March 2013 report by the American Society of Civil Engineers, which gave U.S. transportation, water and environment, energy grid and public facilities a grade of D+. Infrastructure projects are extremely expensive. In its latest list of the 100 most strategically important projects worldwide, Washington-based industry group CG/LA Infrastructure put their total value at $642 billion, with the 13 North American projects worth a combined $77 billion.
Thanks to their outsize capital base, long investment horizons and need to match assets and liabilities, institutional investors are a natural fit for infrastructure. Given the pressures on government resources and regulatory cutbacks to bank balance sheets, “nontraditional lenders such as insurers and pension funds are poised to take a larger share of the infrastructure investment pie,” Standard & Poor’s said in a January report. Global institutions could provide as much as $200 billion in financing annually, the authors estimated, though they admitted that would be an ambitious increase.
Most institutional investors, defined benefit pension funds, foundations, endowments and insurers allocate an average of between 2 and 4 percent of total assets to infrastructure, according to London-based research and consulting firm Preqin. (Sovereign wealth funds and superannuation schemes invest a bit more.) The S&P report suggests raising that average by about 2 percentage points.
“This is an exciting and attractive asset class,” says Irene Mavroyannis, New York–based head of Hastings North America, a division of Australia’s $6.65 billion Hastings Funds Management. The firm has specialized in infrastructure since it was launched in 1994, making it one of the most experienced managers in the space. Deal selection is key: Mavroyannis says Hastings focuses on lower-risk core investments. “It has to be a long-dated contractual asset or a regulated, or partially regulated, asset,” such as a utility company or a highway, she explains. Through last June, Hastings’ flagship Infrastructure Fund had posted an 11.16 percent annualized return since its 1994 inception.
But as S&P points out, infrastructure presents several obstacles for institutions. Among them: political risk, regulatory restrictions and return expectations. Fees are another sticking point. Typically, infrastructure return expectations are lower than for private equity, so investors balk at paying private equity–style fees. For big alternative-investment managers that can offer private equity and hedge funds with 2 percent management and 20 percent performance fees, infrastructure is relatively unimportant. Still, Blackstone Group and KKR & Co. run dedicated infrastructure funds. In March, Blackstone announced that it’s launching a water infrastructure fund.
Some institutional investors have played the infrastructure game for decades. Of the ten institutions that allocate the most, according to Preqin, four are Canadian and two are Australian. The two countries share a history of infrastructure investment that includes their institutions and asset managers. These firms tend to invest in infrastructure directly or through specialized outfits.
The Ontario Municipal Employees Retirement System, the $58.8 billion, Toronto-based pension fund, has a 24 percent allocation to infrastructure. Omers invests through subsidiary Borealis Infrastructure, which launched in 1999. Borealis started joining forces with other institutional asset owners in 2010 to develop a large capital pool for giant infrastructure projects. Members of the Global Strategic Investment Alliance include Development Bank of Japan, Mitsubishi Corp. and the Pension Fund Association of Japan; so far the group has committed $11.25 billion.
Borealis focuses on energy, transportation and social infrastructure such as schools and health care. Among its investments are Net4Gas, a gas transmission system operator in the Czech Republic, and Finnish energy distributor Caruna. With calls from the World Bank Group and others for institutions to help fill the so-called infrastructure gap, Omers and friends should have plenty of projects to keep them busy. • •
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