Canadian pension funds pull back on infrastructure deals as prices climb beyond reason

TORONTO  – Canada’s biggest pension funds say they are walking away from increasingly more global infrastructure deals, citing concerns that intense competition for assets has driven valuations too much.

Canadian pensions facing down fierce competition to pursue global growth strategy

Hong Kong-based executives in the Canada Pension Plan Investment Board first introduced themselves to officials at Postal Savings Bank of China, among the country’s largest retail banks, back in 2013.

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The shift could help cool global prices for tunnels, airports, toll roads, energy networks and other infrastructure as Canadian pension plans are among the world’s biggest and most active buyers.

Pension funds’ purchase of infrastructure has risen since the 2008 financial crisis, as plunging interest rates and bond yields drove these players to find steady returns elsewhere. Global equity and commodity turmoil has been doing little to dampen that interest and intense competition for a limited number of assets continues to be reflected in recent valuations.

Some investors, particularly in private equity circles, complain that the Canadian funds – dubbed “maple revolutionaries” due to the means of direct equity investments they pioneered within the 1990s – tend to overpay.

Senior executives at the leading Canadian funds defend the merits of past infrastructure deals, but say they are worried prices no longer reflect the illiquidity from the assets, which can’t be sold quickly like stocks or bonds.

“The market is overheated. We’ve stepped out of the bidding for a lot of assets over the last 2 or 3 years,” a senior executive at certainly one of Canada’s biggest public pension funds, who declined to be named, told Reuters.

Among recent deals with no Canadian participation, British rail rolling-stock owner Eversholt Rail Group was sold for US$3.8 billion to Hong Kong’s Cheung Kong Infrastructure Holdings (CKI).

Canadian funds still expect infrastructure to develop as a proportion of the overall investments since most plans have money rolling in and examine infrastructure as a good match for long-term liabilities. However they say desire to be more selective.

The market is overheated. We have stepped from the bidding for several assets during the last 2 or 3 years

Canada’s biggest 10 public pension funds have more than trebled in size since 2003 to more than $1.1 trillion in assets. A third of this is now locked in alternative assets for example infrastructure, real estate and private equity.

Four Canadian pension funds now rank one of the world’s top 10 infrastructure investors, according to Boston Consulting Group. After 2014 the four funds had US$36.8 billion infrastructure assets under management, equivalent to 41 per cent of the total infrastructure assets held by the top 10.

One New York-based investment banker, speaking on condition of anonymity, said private equity firms which have lost an infrastructure auction to some Canadian pension fund often grumble they paid an excessive amount of, talking about rival bids as “dumb money.”

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For example, last year’s acquisition by Canada’s CPPIB and Hermes Infrastructure of the 30 per cent stake in Associated British Ports for around US$2.4 billion valued the company around 20 times earnings in contrast to multiples of Ten to twelve that investors say are typical for that sector.

But recent prices do not necessarily mean buyers are paying too much said Dougal Macdonald, the head of Morgan Stanley Canada, that has advised on the number of deals involving Canadian pension funds.



“In a low rate environment, target returns across virtually all asset classes came down. It is simply a resetting of returns for the best assets,” he said.

Canadian pension funds typically look for nominal returns of six to eight percent from infrastructure, several percentage points above the things they would expect from fixed-income investments. Bankers note that private equity finance funds often seek returns of 20 per cent or more, meaning pension funds can afford to pay more.

Still, Canadian executives said their funds should do not be drawn into bidding wars included in competing consortia.

“You’ve reached try and avoid auctions simply because they can get crazy. If you’re just walking around with an open cheque book in these markets you’re going to pay too much,” said another executive and among Canada’s three largest pension funds, who declined to be named because of the sensitivity from the issue.

The executive said Canada’s largest funds should co-operate more frequently. However, such “club deals” remained rare for that top three – the CPPIB, the Caisse de dp?t et placement du Qubec and also the Ontario Teachers’ Pension Plan.

In the past they often found themselves competing against each other in addition to foreign rivals which include South Korea’s National Pension Service, Dutch pension fund APG, Australia’s Future Fund, private equity and some sovereign wealth funds.

Among recent deals, Nsw Premier Mike Baird hailed a “stunning result” for the Australian province after a consortium including the Caisse decided to pay US$7.5 billion for an electricity network this past year, significantly more than analysts expected.

The group saw off competition from other investors such as the CPPIB along with a unit of some other Canadian pension fund. The Caisse said at that time it was confident buying met its investment objectives.

Canadian funds are also involved with a takeover battle for Australian port and rail giant Asciano, with Brookfield Asset Management bidding against a consortium that includes the CPPIB.

Asciano’s shares are trading below both groups’ offers but at 34 times their earnings still look expensive compared with its nearest rival Aurizon, valued at 13 times its earnings.

“There’s lots of money chasing assets,” an executive in an Ontario-based fund said. “The main thing would be to maintain our discipline.”

? Thomson Reuters 2016