Direct equity is the best way to access infrastructure investments, according to Rossitsa Stoyanova, who is a director responsible for total portfolio management at the Canada Pension Plan Investment Board (CPPIB).
The €188 billion Canada Pension Plan Investment Board, one of the largest pension funds in the world, has an infrastructure programme of about CAD 20 billion (€14 billion), or about 7% of the portfolio.
During the EDHECinfra Forum in London, Stoyanova explained that the fund invests in infrastructure only through direct equities. She pointed out that infrastructure debt wasn’t an interesting asset class as the fund, which has a high risk tolerance, steered clear of investment-grade bonds which would deliver low returns.
‘Our strategy from the very beginning was to go direct. At CPPIB we manage CAD 275 billion (€188 billion) and we are growing, therefore we have the luxury to have a direct infrastructure investment team,' she said.
However, she added that when they started out in infrastructure back in 2004, they invested through Macquarie funds in order to gain more knowledge about the asset class. ‘That's usually our approach: we start with a fund with an expertise which we can learn from. Nevertheless, the intention has always been to go direct.’
There is another main reason behind the CPPIB’s decision to approach infrastructure it that way. ‘It's difficult to find the right alingment with asset managers in infrastructure as they need an exit [option], while we are there for 20-30 years and don't assume a quick exit. Also, when you hold an asset for that long you want to have some control over it.’
Stoyanova said that the large size of CPPIB helped the fund to access infrastructure directly. However, the size has also been an obstacle when it comes to investing in some niche areas and diversifying their holdings.
'Our size has actually been a challenge for us, especially in private assets. Some investments such as social infrastructure are too small as investing in that kind of projects would take up relatively large resources. Our sweet spots are between CAD 500 million (€340 million) and CAD 2 billion (€1.3 billion).'
She added that the scheme likes to hold 30% or more of a single asset in order to gain some control and be represented on the board.
At present, the CPPIB is looking to expand its portfolio especially in emerging markets.
‘Our portfolio consists of 16 large assets. Geographically, most of our assets are in the UK; we have assets also in North America, with a big concentration in Canada, as well as in Australia. Finally, 23% of the portfolio is in developing countries and we expect this to grow further.’
The scheme wants to increase its presence in EMs for two reasons: projected long-term GDP growth and demographics. But Stoyanova also sees challenges when it comes to the availability of infrastructure projects in the region.
‘Our favourite countries are Chile, which I wouldn’t call an emerging economy, Peru, and India.’
'As a fund we haven't done greenfield projects, and we know emerging markets have a big need of them. At the same time, it's a challenge to find there some stable brownfield projects which we could invest in. However, we have an office in Sao Paolo and India and we are expecting to find some interesting investment ideas there.’