Bring us your dullest assets - prisons, schools, hospitals, roads
The future is bright for owners of some of the world's most boring assets - infrastructure plays such as toll roads, prisons, schools and hospitals.
Brick-and-mortar infrastructure, a favourite holding of the pension fund crowd and an asset class that's ignored by just about every other flavour of investor, is expected to return 10 to 15 per cent annually over the next five years, according to a study of the sector released Wednesday by a London, England-based specialty financial consulting firm called bfinance. The performance forecast comes from a survey of global players in this space - most of whom own or manage more than $1-billion of infrastructure assets - done by London-based bfinance executive Vikram Aggarwal.
Why get excited about low-double-digit returns, after fees, from owning a prison? After all, didn't Canadian stocks turn in 31-per-cent performance last year?
Well, yes, 2009 was a good year to be overweight equities. But you may recall that 2008 wasn't quite as much fun.
The beauty of infrastructure is that these assets turn in dependable, inflation-linked returns, year after year, with little or no correlation to what's happening in public markets.
The only catch is that historically, these returns have been single digit. For example, the Ontario Teachers Pension Plan, with $8-billion of airports, container terminals and timber in its infrastructure portfolio, earned a respectable 4.3 per cent annual return on these holdings over the past four years. That handily beats a benchmark for this sector that was up 3.2 per cent annually since 2006.
The opportunity, according to Mr. Aggarwal, lies in the once-in-a-lifetime confluence of unprecedented construction commitments from cash-strapped governments. Projects that have never before been funded by private sector players are expected to need a dose of institutional cash to get built.
"All fiscal stimulus packages have, as a core component, massive amounts of infrastructure spending," said Mr. Aggarwal, who just returned from a cross-Canada consulting tour that featured 17 sessions with pension funds and other institutional players. He said: "Clearly, not all these projects will be profitable, or have a profit component, but some will make a great deal of money for their owners."
The assets attracting the most institutional interest, due to the perception that these projects offer the greatest upside, include what's known as "social infrastructure," which you and I think of as toll roads, prisons, hospitals and even sports stadiums.
Mr. Aggarwal is the first to acknowledge that there are potholes ahead for owners of assets such as toll roads. Political risks are always an issue in this sector. And the bfinance consultant said that in 2008, investors learned that returns from infrastructure can suffer in step with public market meltdowns.
And no two projects are ever quite the same; a deft touch is required from investors.
"There will be dispersion in performance," said Mr. Aggarwal, which is consultant-speak for the concept that some infrastructure-focused fund managers will shoot the lights out, and others will stink.
However, if bfinance has the right call on infrastructure, and the sector turns in 10-per-cent-plus returns over the next five years, hard-pressed pension funds and other institutional investors could get a welcome boost from their most boring holdings.
Versant leaving Calgary
A year after making a splashy debut in the oil patch, investment dealer Versant Partners is quietly closing down its Calgary office to focus on other sectors.
Toronto-based Versant entered the energy sector in a big way last April by merging with Calgary-based Petersen Capital, a boutique corporate finance house founded by Brian Petersen. As part of that union, Mr. Petersen became Versant's head of investment banking.
Great expectations were never met - a tribute to the intense competition between investment dealers in Alberta. Veterans of the oil patch have been known to refer to Calgary as the most over-banked city in the world. Mr. Petersen left employee-owned Versant two months ago - though he continues to work on a number of projects with the firm.
This week, Versant announced plans to wind down the Calgary office and exit the oil and gas sector. CEO Michael Jams said the dealer decided to focus its resources on areas where it has "core strengths," including technology, special situations, biotech and growth industrial companies.
There are a number of established Calgary-based employee-owned dealers, including FirstEnergy Capital and Peters & Co., that would compete directly with Versant. In addition, the bank-owned domestic dealers have shown they are willing to compete for smaller financings, traditionally the turf of boutique dealers.
See Andrew Willis's Streetwise Blog at ReportonBusiness.com
