TORONTO – Canada’s biggest pension funds say they are leaving from more and more global infrastructure deals, citing concerns that intense competition for assets has driven valuations too far.
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, one of the country’s largest retail banks, back in 2013.
Continue reading.
The shift may help cool global prices for tunnels, airports, toll roads, energy networks along with other infrastructure as Canadian pension plans are among the world’s biggest and many 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 done little to dampen that interest and intense competition for a small group of assets continues to be reflected in recent valuations.
Some investors, specifically in private equity finance circles, complain that the Canadian funds – dubbed “maple revolutionaries” due to the strategy of direct equity investments they pioneered in 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 more reflect the illiquidity of the assets, which can’t be sold quickly like stocks or bonds.
“The market is overheated. We’ve stepped out of the bidding for several assets during the last two or three years,” a senior executive at one of Canada’s biggest public pension funds, who declined to become named, told Reuters.
Among recent handles 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 grow like a proportion of the overall investments because most plans have money rolling in and examine infrastructure like a good match for long-term liabilities. However they say want to be more selective.
The marketplace is overheated. We have stepped out of the bidding for several assets during the last 2 or 3 years
Canada’s biggest 10 public pension funds convey more than trebled in dimensions since 2003 to more than $1.1 trillion in assets. Another of that has become locked in alternative assets for example infrastructure, real estate and equity.
Four Canadian pension funds now rank among the world’s top ten infrastructure investors, based on Boston Consulting Group. At the end of 2014 the four funds had US$36.8 billion infrastructure assets under management, equivalent to 41 per cent from the total infrastructure assets held through the top ten.
One New York-based investment banker, speaking on condition of anonymity, said private equity investors that have lost an infrastructure auction to some Canadian pension fund often grumble they paid an excessive amount of, referring to rival bids as “dumb money.”
Related
- Canadian pension plans turn bold: Funds employ risky formula in low interest rate worldCPPIB invests $678 million in Chinese bankThree Canadian pensions to pay US$2.8 billion for operator of Chicago Skyway toll road
-
-
-
For example, last year’s acquisition by Canada’s CPPIB and Hermes Infrastructure of the 30 percent stake in Associated British Ports for about US$2.4 billion valued the business around 20 times earnings in contrast to multiples of Ten to twelve that investors say are normal for that sector.
But recent prices do not necessarily mean buyers are paying an excessive amount of said Dougal Macdonald, the top of Morgan Stanley Canada, which has advised on a number of deals involving Canadian pension funds.
“In a low rate environment, target returns across almost all asset classes have come down. It is simply a resetting of returns for the right assets,” he explained.
Canadian pension funds typically look for nominal returns of 6 to 8 per cent from infrastructure, a few percentage points above the things they would expect from fixed-income investments. Bankers observe that private equity funds often seek returns of 20 percent or higher, meaning pension funds are able to afford to pay more.
Still, Canadian executives said their funds should avoid being drawn into bidding wars included in competing consortia.
“You’ve got to try and avoid auctions simply because they can get crazy. If you’re just walking around by having an open cheque book in these markets you’re going to pay an excessive amount of,” said another executive with one of Canada’s three largest pension funds, who declined to be named due to 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 the Ontario Teachers’ Pension Plan.
In yesteryear they frequently found themselves competing with each other as well as foreign rivals which include South Korea’s National Pension Service, Dutch pension fund APG, Australia’s Future Fund, private equity plus some sovereign wealth funds.
Among recent deals, Nsw Premier Mike Baird hailed a “stunning result” for that Australian province following a consortium such as the Caisse decided to pay US$7.5 billion to have an electricity network this past year, much more than analysts expected.
The group had seen off competition from other investors including the CPPIB along with a unit of another Canadian pension fund. The Caisse said at the time it was confident the acquisition met its investment objectives.
Canadian money is also involved with a takeover battle for Australian port and rail giant Asciano, with Brookfield Asset Management bidding against a consortium which 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 at an Ontario-based fund said. “The important thing is to maintain our discipline.”
? Thomson Reuters 2016
