One of Canada's largest pension plans teamed up on Thursday with Japan's pension funds and some of its major conglomerates to help raise $20-billion (U.S.) for the world's largest infrastructure fund to invest in assets such as roads and airports.
While a handful of the world's biggest pension funds have the capacity to lead their own investments in infrastructure assets, the initiative represents an unprecedented effort to cut out asset managers as middle men in infrastructure investment.
Ontario Municipal Employees Retirement System (OMERS) said on Thursday it, along with Japan's Pension Fund Association and a consortium led by Mitsubishi Corp., Japan's largest trading house, had committed a total of $7.5-billion toward the new fund.
Infrastructure funds have traditionally been sponsored by investment banks, private equity firms and independent asset managers. If successful, the new fund could have major implications for the infrastructure asset management industry.
Much of the world's infrastructure is struggling to meet the needs of a growing and aging population. The Organization for Economic Co-operation and Development estimates $53-trillion of investment, equivalent to an annual 2.5 per cent of global gross domestic product, will be needed to meet demand over the coming decades.
Dubbed Global Strategic Investment Alliance (GSIA), the new fund will invest in assets such as railways, ports and gas pipelines that have a value of more than $2-billion each and are located primarily in North America and Europe.
The initiative is led by OMERS, which administers the pensions of 420,000 public sector employees in Ontario such as police officers, fire fighters and teachers, and has more than $55.1-billion in net assets under management. It's infrastructure arm, Borealis, is a serial acquirer of infrastructure assets and its portfolio includes the Detroit River Rail Tunnel linking Michigan to Ontario and a high-speed rail line in Britain.
"Based upon the feedback in the market, we anticipate welcoming a number of other forward-thinking pension plans and other long-term institutional investors from around the world into the GSIA over the next 12 to 18 months," Jacques Demers, strategic investments chief executive for OMERS, said in a statement.
OMERS has committed $5-billion to the fund, Japan's Pension Fund Association has committed $1.25-billion, and Mitsubishi's consortium, which includes Mizuho Corporate Bank Ltd. and Japan Bank for International Cooperation, has also committed $1.25-billion. GSIA's fundraising target is $20-billion.
Infrastructure has emerged as a separate asset class to private equity in the last decade, offering lower returns but also stable cash flows that are hedged against inflation and are underpinned by physical assets such as roads and pipelines.
Infrastructure typically has a longer investment horizon than private equity, which tends to flip assets within three to seven years, and so it appeals to pension funds looking to match their long-term liabilities with long-term assets.
But the developing world sees little of such infrastructure fund investment. Political risk and patchy regulation often drive pension funds to skip on emerging markets, despite their attractive demographics, for the safety of infrastructure assets in Europe and the United States, which have a track record. GSIA will be no different.