Infrastructure investments

Ontario Proposes Rule Change That Would Let Pension Funds Put Larger Slice of Assets in Infrastructure

Under current rules, Ontario pension funds can only invest up to 30 percent of assets in infrastructure investments.

But the Ontario Ministry of Finance is proposing an amendment to that regulation, which would raise the cap on infrastructure.

The proposed change would exempt Ontario public infrastructure projects from being counted toward the 30 percent infrastructure cap – allowing pension funds to exceed 30 percent as long as they were investing in local infrastructure projects.

From the Financial Post:

The Ontario Ministry of Finance has proposed that pension plans be permitted to take a greater stake in infrastructure projects.

Currently, the Pension Benefits Act limits pension plan investments to a 30% equity stake in the securities of most public companies. Exemptions to the “30% rule” do exist for real estate corporations, resources companies, investment corporations and others. The proposed investments would add “infrastructure corporations” to the list of exemptions.

“Many stakeholders have advocated the elimination of the 30% rule [entirely] over the years,” notes a recent Goodmans Update.

Despite such a recommendation from the Ontario Expert Commission on Pensions in 2008, the federal government, whose rules are incorporated into the PBA, has taken the position that it will not change the 30% rule “for prudential reasons.”

But in the 2013 Ontario Economic Outlook and Finance Review, the provincial government announced that it would modify the Rule by exempting infrastructure projects. The proposed amendment would apply to a host of “physical structures and associated facilities by or through which a public service is provided in Ontario” provided the infrastructure is located exclusively in the province.

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“As with the current exemptions for real estate, resource and investment corporations, a pension plan administrator could only benefit from the exemption to the 30% Rule if it filed with the Superintendent a prescribed form of undertaking by the infrastructure corporation,” Goodmans advises.

The amendment is currently in a comment period, which ends January 9.

It can be found online here.

Surveys: Institutional Investors Disillusioned With Hedge Funds, But Warming To Real Estate And Infrastructure

Two separate surveys released in recent days suggest institutional investors might be growing weary of hedge funds and the associated fees and lack of transparency.

But the survey results also show that the same investors are becoming more enthused with infrastructure and real estate investments.

The dissatisfaction with hedge funds — and their fee structures — is much more pronounced in the U.S. than anywhere else. From the Boston Globe:

Hedge funds and private equity funds took a hit among US institutions and pension managers in a survey by Fidelity Investments released Monday.

The survey found that only 19 percent of American managers of pensions and other large funds believe the benefits of hedge funds and private equity funds are worth the fees they charge. That contrasted with Europe and Asia, where the vast majority — 72 percent and 91 percent, respectively — said the fees were fair.

The US responses appear to reflect growing dissatisfaction with the fees charged by hedge funds, in particular. Both hedge funds and private equity funds typically charge 2 percent upfront and keep 20 percent of the profits they generate for clients.

Derek Young, vice chairman of Pyramis Global Advisors , the institutional arm of Fidelity that conducted the survey, chalked up the US skepticism to a longer period of having worked with alternative investments.

“There’s an experience level in the US that’s significantly beyond the other regions of the world,’’ Young said.

A separate survey came to a similar conclusion. But it also indicated that, for institutional investors looking to invest in hedge funds, priorities are changing: returns are taking a back seat to lower fees, more transparency and the promise of diversification. From Chief Investment Officer:

Institutional investors are growing unsatisfied with hedge fund performance and are increasingly skeptical of the quality of future returns, according to a survey by UBS Fund Services and PricewaterhouseCoopers (PwC).

The survey of investors overseeing a collective $1.9 trillion found that only 39% were satisfied with the performance of their hedge fund managers, and only a quarter of respondents said they expected a “satisfying level of performance” in the next 12-24 months.

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The report claimed this showed a change in expectations of what hedge funds are chosen to achieve. Investors no longer expect double-digit returns, but instead are content to settle for lower fees, better transparency, and low correlations with other asset classes.

Mark Porter, head of UBS Fund Services, said: “With institutional money now accounting for 80% of the hedge fund industry, they will continue seeking greater transparency over how performance is achieved and how risks are managed, leading to increased due diligence requirements for alternative managers.”

Meanwhile, the USB survey also indicated investors are looking to increase their allocations to infrastructure and real estate investments. From Chief Investment Officer:

“Despite the challenges of devising investment structures that can effectively navigate the dynamic arena of alternative markets, asset managers should remain committed to infrastructure and real assets which could drive up total assets under management in these two asset classes,” the report said.

“This new generation of alternative investments is expected to address the increasing asset and liability constraints of institutional investors and satisfy their preeminent objective of a de-correlation to more traditional asset classes.”

The report noted that despite waning enthusiasm for hedge funds, allocations aren’t likely to change for the next few years.

But alternative investments on the whole, according to the report, are expected to double by 2020.

Infrastructure Investments Becoming Big Part of Canadian Pensions

Infrastructure investments are becoming increasingly common endeavors for public pension funds. That’s true around the world, but nowhere is the trend more pronounced than in Canada, where the average pension fund has doubled its allocation to infrastructure since 2009. As reported by Benefits Canada:

Historically, Australian and Canadian investors—primarily pension funds—have dominated investment in infrastructure assets, accounting for 40% of historical allocations despite representing only 7% of total potential available capital.

Canadian pension assets totaled US$1.6 trillion in 2013, while infrastructure allocations by Canadian plans totaled US$47.2 billion. This contrasts with U.S. pension assets, which were in excess of US$18 trillion also in 2013, and whose allocations to infrastructure were only US$25.4 billion, less than those made by Canadian pension plans.

On average, Canadian pension funds have allocated 4% of their pension fund assets to infrastructure, up from 2% in 2009.

More recently, there have been some noticeable trends in infrastructure investing, both in terms of investor location and type. To date, pension funds have accounted for 72% of allocations made to infrastructure assets. Based on prospective allocations, sovereign wealth funds are expected to increase their “market share” from 13% of the total allocations to 40%, with a corresponding decrease in the percentage attributed to pension funds (45% versus the present 72%).

Funds in the United States might not be in on the game yet, but insiders say they expect state-level pension funds to significantly boost their allocations to infrastructure investments. More from Benefits Canada:

American state pension funds, as well as Asian investors[…]have started to take an active interest in infrastructure investing. These two groups currently account for 20% of allocations, but based on surveys by Preqin, are expected to increase these to 48% of total infrastructure allocations. Most notably, the Government Pension Investment Fund of Japan has committed 0.2% to infrastructure, though this translates into US$2.7 billion in investments over the next five years.

It’s a very interesting trend, and one that likely won’t reverse course in the near future. The exception may be smaller funds, who will have more trouble navigating direct investments in infrastructure. They’ll have to hire third-party managers, and that may not be appetizing to some funds who are becoming increasingly allergic to fees and investment expenses.

Photo by Kyle May via Flickr CC License

Ontario Teachers’ Fund Sets Sight On Airport As It Looks To Increase Infrastructure Holdings

The Ontario Teachers’ Pension Plan is looking to expand its infrastructure holdings by up to $6 billion, or 33 percent, and the fund’s first move will likely be to buy an airport. From Reuters:

Canada’s Ontario Teachers’ Pension Plan is seeking to buy the rest of Britain’s Bristol Airport in a deal worth up to 250 million pounds ($424.6 million), a source closely monitoring the situation said on Monday.

The pension fund, which already owns 49 percent of the regional airport, has the right of first offer for the 50 percent owned by Australian asset manager Macquarie Group.

Macquarie, the world’s largest infrastructure asset manager, was sounding out buyers for its holding, British newspaper The Sunday Times reported.

Ontario Teachers’ Pension Plan is eyeing the stake as it seeks to expand its infrastructure holdings from $12 billion to around $18 billion. The deal could take place this year, the source said.

“Given the right of first offer, Ontario Teachers is likely to purchase the stake, but this will of course be based on an appropriate valuation,” the source said, adding that discussions have not commenced but are expected to start “very soon”.

European airport deals typically attract a valuation of 15-17 times core earnings (EBITDA).

The Teachers’ Plan originally invested in the airport in 2002, and it increased its stake in to 49 percent in 2009.

Bristol Airport is the ninth-busiest airport in Britain.