Martin Day, partner at Toronto-based Caledon Capital Management, called infrastructure a “booming” market that’s drawing ”lots of new capital” from investors. Of the C$5 billion ($4.5 billion) in alternative assets that the firm advises or manages on behalf of eight institutional investors, including New Mexico Educational Retirement Board, about two-thirds is infrastructure—up from just a third two years ago, said Day. The asset class covers a broad array of investments, from the purchase of toll roads and toll bridges to water and power utilities.
Both U.S. and Canadian institutional investors show growing interest in infrastructure, accessed both through funds as well as alongside sponsors in co-investments. U.S. investors typically tuck infrastructure into a ”real assets” allocation, Day said, while Canadian investors often carve out a separate allocation for infrastructure. Some of the money flowing into infrastructure comes from the ratcheting back of allocations to fixed income, where recent returns have been disappointing. Infrastructure holds the promise of generating stable, gross returns of 10 percent to 15 percent that aren’t particularly correlated to traditional asset classes. They also can hedge against inflation.
Big Canadian institutional investors such as Ontario Municipal Employees Retirement System, where Day was a managing director, Ontario Teachers’ Pension Plan and Caisse de dépôt et placement du Québec already have “very significant” infrastructure programs with target allocations in the 10 percent range or higher, said Day. Now interest is spreading to small and medium-sized plans in Canada, and every few weeks it seems like another investor creates a new allocation, Day said. Within the last year, at least three pension plans in New Brunswick have done so, including the Canadian Union of Public Employees, which represents more than 600,000 workers across Canada in healthcare, education and other areas of public service.
As in private equity, many institutional investors prefer co-investments to fund investments as a way to save on fees and to have more control over the makeup of their portfolios. Caledon Capital often goes into general partner relationships expecting to see “significant” co-investment opportunities, and the firm can write a check of $200 million to $300 million if the right deal comes along, Day said. The firm also sees significant co-investment deal flow from sovereign wealth funds, pension funds, corporations and others doing infrastructure deals on their own.