CPPIB chief calls for infrastructure privatisation

David DenisonThe chief executive of the C$117 billion ($111 billion) Canada Pension Plan Investment Board, David Denison, has urged the Canadian government to keep pace with the privatisation of assets in other jurisdictions such as the UK, Australia and to some extent the US, as it looks to increase beyond the combined $16.1 billion already invested in real estate and infrastructure.

In a speech at the 2009 Schulich Perspectives Lecture, Denison said there were lots of opportunities to invest in attractive commercial real estate in Canada, but infrastructure opportunities existed in only a few jurisdictions.

“Although there is significant need for infrastructure investment around the world, there remains a fundamental disconnect between economic requirements and the ability of investors to commit billions of dollars to fund infrastructure. This is a policy question,” he said.

“We believe that Canadians could also be more receptive to privatisation initiatives if they knew these investments would help support their future pensions.”

The 23-person CPPIB infrastructure group, which manages $5.9 billion in a global portfolio, is targeting investments of $300 to $600 million most likely through a consortium of strong, competitively-advantaged, like-minded partners.

The focus is on brownfield assets, as opposed to greenfield where there is some construction risk, with monopolistic characteristics domiciled in locations with strong, predictable political, legal and regulatory environments.

While Denison said real estate and infrastructure investments remained an important and significant part of the investment program, the fund uniquely does not put asset allocation targets around its investments.

“It is our view that fixed allocations can often compel investing regardless of market conditions. They can also result in perhaps making the best incremental infrastructure investment, for example, that might not be the best incremental overall investment opportunity for the fund, and as well sometimes lead to sub-optimal decisions in order to re-balance the portfolio to the fixed weights. We think our practice of breaking down infrastructure and real estate according to their underlying risk and return attributes and constructing the overall portfolio in a similar manner leads to more informed investment decisions.”

Key investment criteria for investing in direct property and infrastructure are the level and relative certainty of the future cash flows and the price to acquire them.

“We certainly don’t consider either real estate or infrastructure as a homogeneous asset classes. In our view, hotels should clearly not be treated the same as a core office building from an investment or portfolio construction perspective.”

The fund takes a total portfolio view to investing, focusing on the risk/return characteristics of the investments rather than traditional asset labels – this approach means there are allocations broadly to equities (55.8 per cent), fixed income (30.7 per cent) and inflation-sensitive assets (13.5 per cent).

While it sets no target asset allocation, as at September 30 the asset mix was 44.6 per cent to public equities, 11.2 per cent to private equities, 30.7 per cent to fixed income, 5.6 per cent to real estate, 3.1 per cent to inflation-linked bonds and 4.8 per cent to infrastructure.

Denison also said the fund sees opportunities to acquire high quality real estate assets at attractive prices especially in the US, UK and Australia as a number of trends play out including the time delay between the onset of the economic downturn and its impact on tenant demand is just now becoming evident.