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Rich Country Bridges Too Pricey for Canada’s $291 Billion Fund

Rich Country Bridges Too Pricey for Canada’s $291 Billion Fund

(Bloomberg) -- The head of Canada Pension Plan Investment Board sees little opportunities in the country’s infrastructure projects -- or in other developed countries for that matter.

"We have benefited from the rise in valuations in infrastructure over the last 10, 12 years but it’s really hard now to get more money invested in developed-market infrastructure because everything’s priced to perfection," Mark Machin, chief executive officer of the C$392 billion ($291 billion) fund, said in an interview Wednesday in Toronto. "In most things we were outbid around the world."

There’s very little risk priced into the projects for regulatory or tax changes, Machin added. The few opportunities where the pension fund can be competitive is generally in relation to its current investments or something closely related.

One infrastructure project that might fit those parameters is Highway 407, north of Toronto, which has gained roughly 10 times in value since the government first sold it in 1999. CPPIB already has a 40% stake in the highway but Machin declined to comment on the highway and whether it would match the C$3 billion price that OMERS pension plan is paying for a 10% slice from SNC-Lavalin Group Inc. CPPIB has the right of first refusal to bid, along with Ferrovial SA which has said it’s interested.

Roads, bridges and other major infrastructure is crumbling or in dire need of expansion in Group of Seven countries along with the developed world. Prime Minister Justin Trudeau’s government set up the Canada Infrastructure Bank to help tackle the country’s infrastructure deficit, an arm’s-length, government-financed lender tasked with investing up to C$35 billion in projects in the country over the next decade alongside private-sector partners.

Private Markets

Many Canadian pension funds shy away from investing at home, saying projects are too small or not lucrative enough. The exception is the Caisse de Depot et Placement du Quebec, whose mandate also includes supporting economic growth and in Quebec and borrowed C$1.28 billion from the infrastructure bank to help finance a light-rail network in the Montreal area.

CPPIB has moved further into private investments in its fiscal year ended March 31, including private equity and credit and infrastructure, which helped it add C$32 billion to its assets.

"Our plan is that our real assets portfolio, our credit and fixed income portfolio will grow while public equities will continue to come down," Machin said.

CPPIB reported on Wednesday it had a 8.9% return on investments for the last fiscal year, above the 6.6% benchmark return CPPIB has created for comparative purposes. This incremental outperformance was worth C$6.4 billion, Machin said.

Publicly traded equities represented 33% of the portfolio, down from 39% from the previous fiscal year. Private equity is now 24% of the portfolio, up from 20% from the previous year. Credit investments expanded to 9.1% of the portfolio from 6.3% the year before.

Trade Tensions

In its private equity portfolio, CPPIB reported returns of 5.7% in Canada, 18% in foreign equities and 11.8% in emerging markets. Returns for global real assets included 6.4% in real estate and 14% in infrastructure.

CPPIB reduced Canadian equity holdings to 2% of its asset mix from 2.4% last year to make room for additional emerging market equities.

Machin said the best way to protect itself from the tensions from the U.S. and China trade war is by being broadly diversified.

"One of the challenges with the first and the second largest economies in the world going at each other is that it just generally reduces overall global growth and it has ripple effects across just about every major economy in the world," he said. "We’ll continue to increase our exposure in emerging markets, that’s the direction that we’re heading."

Still, there could be some indirect beneficiaries if China’s exports slow.

"Presumably Brazil should be a beneficiary of exports as some of China’s capacity is taken up, Machin said. "It’s going to be sort of indirect for us right now, it’s just going to be logistics, real estate, and we’ve looked at some of the food-related companies that would be big exporters, but we haven’t found the right opportunity yet."

After selling green bonds in both Canadian dollars and euros in the last fiscal year, the fund could opt for this instrument again to adjust its risk.

“The pricing for our green bonds was fantastic, we probably will do more because we’ll have more use for the money and the markets are surprisingly strong,” Machin said.

To contact the reporter on this story: Paula Sambo in Toronto at psambo@bloomberg.net

To contact the editors responsible for this story: Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, ;David Scanlan at dscanlan@bloomberg.net, Jacqueline Thorpe

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