What are your views on the current investment climate for the infrastructure asset class?
- Competition is becoming more and more important with an increasing allocation to the infrastructure asset class. This puts pressure on pricing especially on core infrastructure;
- The European markets continue to offer an important deal flow and there remains a wide pool of capital available for investment in these markets. It ranges from strategic operators, to managed funds, and direct investments from pension funds, sovereign wealth funds and increasing Asian interest as we can see from the Sutton and East Surrey Water or Wales & West transactions. We have also seen Latin American interest in European assets;
- There is ongoing pressure on European corporates to strengthen their balance sheets. Disposal of lower return non-core infrastructure assets are happening, with proceeds used to reduce debt;
- The infrastructure sector is seeing a significant number of recapitalisation and refinancing transactions;
- There is a visible pipeline of opportunities even though the timing of some privatisation processes is somewhat unclear;
- First generation infrastructure funds are coming to maturity; underlying assets are expected to come to market;
- Australian markets: 1) important PPP programme; 2) Attractive market but competitive; 3) We see more greenfield projects arising in this market.
What strategy is most attractive right now for investors?
As far as our infrastructure portfolio goes, we have a direct investment approach. Over the years, the direct route has allowed us to build long-term partnerships with industry leaders and the results have been there. The assets we chose to invest in fit closely our risk-return appetite and although the direct route is challenging and becoming increasingly competitive, we feel this is a good strategy for us.
At the global scale, however, the Caisse is also exposed to infrastructure assets through debt and listed companies.
Based on their objectives, strategy, resources and capabilities, other investors may favour different strategies.
Which sectors and geographic regions are expected to present good investment opportunities in the next 12 months?
At the Caisse, we prioritise opportunities that closely match our investment criteria and our strategy. Clearly, we know that over the next few years, growth will come mainly from emerging markets: with the rise of the middle class in these markets, urbanisation will create a substantial demand for all types of infrastructure, from transportation to telecommunications, to water purification to drinking water distribution, not to mention access to quality healthcare, modern teaching institutions, etc. As a result, many investment opportunities are expected to arise in these developing markets over the next decade. However, we must continue to keep in mind that the further away from home we venture, the more important it is for us to have solid partners who have sound knowledge of the local market.
Developed countries also offer attractive opportunities for investors, because in these markets, mature infrastructure assets require reinvestments in order to be revitalised and updated. Furthermore, the public-sector deleveraging taking place in the global arena also generates opportunities for institutional investors who can play a heightened role in the financing of large-scale infrastructure projects and even taking over assets from certain banking institutions facing the new liquidity rules (Basel III) that may also find themselves limited in their ability to finance such major projects. There are definitely attractive investment opportunities to be seized in Europe and in North America, especially in the energy sector.
One thing is clear: regardless of the region, fundamental research and in-depth knowledge are absolutely key to finding quality assets and making the right investments at the right time and in the right markets. And if, on top of this, you find the right local partners, you’re in business!
How is Infrastructure performing against other asset classes?
Infrastructure differs from other asset classes by virtue of its ability to generate stable, predictable returns over long periods. The holding period is often more than 10, 15 or 20 years and the returns are established under contractual agreements with government bodies that commit to firm payments over those periods provided that specific performance criteria are met. Regardless of whether the economy is strong or not, people still need drinking water, energy, roads and public transportation systems. These last few years, infrastructure has also benefited from low interest rates.
From the investor’s standpoint, infrastructure is also attractive because it provides a certain protection against inflation. It is an asset class that performs well over the long term and that enables interests between the company’s management team and, for example, a pension fund, with long-term obligations to its clients, to be well aligned.
Going forward, will investors be increasing, decreasing or maintaining their level of investments in infrastructure?
Considering the very low interest rates and high market volatility, institutional investors are increasingly gravitating toward less-liquid assets to generate more stable, predictable long-term returns. In the markets, there is currently heightened interest for private equity, real estate and infrastructure. At the Caisse, for example, our investments in infrastructure, real estate and private equity are expected to increase from 25 percent to over 30 percent of our overall portfolio by 2014. Other reports indicate that sovereign funds and pension funds, unlike before, now have set target allocations in their portfolios related to infrastructure and real estate.
As the amounts invested in this type of asset are more substantial than, for example, amounts that are typically invested in equity markets, more and more institutional investors are working in partnership. In the years to come, we expect to do more and more transactions alongside other Canadian pension funds and global institutional investors.
Background: The Caisse
Caisse de Depot et Placement du Quebec was created in 1965 by an Act of the National Assembly of Quebec to manage funds contributed to a newly created universal pension plan, the Quebec Pension Plan. In the decades that followed, many other public bodies became depositors, increasing the pool of capital overseen by the Caisse. The Caisse is recognised as one of Quebec’s leading financial institutions and is now the largest institutional fund manager in Canada. It invests a lot of its capital directly, as well as into funds.
CDP is an active direct investor in infrastructure and has also made a number of commitments to unlisted infrastructure funds targeting the energy, renewables, water, and transport sectors.
In November 2011, CDP purchased a 16.5 percent stake, worth $850 million, in the Colonial Pipeline, a major oil and gas pipeline which runs along the US Gulf coast. This was followed by a partnership with Plenary in February 2012 to invest A$139 million across five operational public-private partnership projects in Australia, marking its first investment in the region.
In April 2012, CDP announced plans to invest on a limited basis in emerging infrastructure. Its $6 billion infrastructure portfolio, comprised almost entirely of direct investments, is primarily invested in Europe with the balance in North America. The pension fund also cites interest in growing its infrastructure portfolio to above 5 percent in the coming years.
In July 2012, the pension fund, together with Utilities Trust of Australia made a binding offer of A$1.25 billion for Hastings Diversified Utilities Fund, an Australian gas pipeline operator. This offer was further increased to A$1.29 billion in mid August of the same year.
Source: Infrastructure Research & Analytics