Two events in the past week have put North American transportation back in the conversation, highlighting one of infrastructure’s most promising sectors.
First, leaders from Mexico, Canada and the United States announced an agreement to replace the North American Free Trade Agreement with something that will keep the flow of goods and people across borders alive and well. That’s good news for toll road owners, who can expect to see revenues rise from a commercial transportation industry that will increasingly be needed.
The Canada Pension Plan Investment Board and Ontario Teachers’ Pension Plan probably breathed a sigh of relief, since they made an announcement shortly after the trade agreement confirming that they had acquired their second toll road in Mexico. Rodolfo Spielmann, CPPIB’s head of Latin America, told Infrastructure Investor that the asset’s potential lies in Mexico being “well-suited to continue growing its industries” as North American economies and value chains become more integrated.
“We’re very positive on Mexico for the medium to long term,” Spielmann said. “Mexico’s growing industries mean more vehicles on the road.”
The second piece of good news is that the Port Authority of New York and New Jersey is moving forward with a plan to modernize JFK International Airport using a public-private partnership. The Carlyle Group is leading a consortium of private investors to finance a project with an estimated $12 billion price tag.
That New York is moving forward with its second airport PPP (don’t forget the $4 billion LaGuardia project currently underway) will surely be looked upon by other state and local governments as a vote of confidence in the framework’s ability to deliver large-scale projects.
In fact, transportation continues to be a key sector for investors building out their infrastructure portfolios. Within the past two weeks, two US institutional investors that together manage nearly $500 billion dollars in assets reported strong infrastructure returns from portfolios geared toward transportation.
CalPERS, which has $4.3 billion invested in infrastructure, pulled in 20.6 percent net returns from the previous fiscal year with a portfolio that is 46 percent weighted toward transportation. Meanwhile, the Alaska Permanent Fund Corporation’s $2.6 billion portfolio returned 22.9 percent as of 30 June, with transportation investments again making up the lion’s share of infrastructure assets at 41 percent.
Now, we’re not oblivious to the record amount of capital moving into the asset class – as you can see in our newly published fundraising data, this truly is the golden age of infrastructure fundraising. But as is well known, interest in the sector is upping competition for all types of assets.
In fact, a recent survey conducted by US-based placement agent Probitas Partners confirms this, reporting that the greatest fear investors have about the asset class is the amount of money flooding in.
However, that doesn’t necessarily mean investors should start moving up the risk curve in ways where they’re biting off more than they can chew – or exploring new and less-proven sectors.
Transportation is one of the best examples of the infrastructure asset class you’re going to find. Roads, bridges, seaports and airports provide indispensable public services that keep economies running by moving people and goods. Their GDP-linked revenues churn cashflows reliably for decades down the road (no pun intended).
These latest developments show that North American transportation opportunities will likely increase in number and value. They should also remind politicians intent on turning back the clock that free and prosperous trade is a key reason why these assets are so attractive to investors, especially now that a wall of capital is flooding the asset class.
In a world that increasingly seems to turn by wireless signals and electric charging, putting wheels on pavement still seems to be one of the best ways to drive forward.
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