Infrastructure assets have gone from boring to buzzworthy, as political promises open the way for new investments in hard assets by deep-pocketed institutions.
A record amount of money is being amassed for investment into ports, bridges and power lines around the world by infrastructure firms, according to alternative asset data provider Preqin, and governments around the world are taking notice. Investors like the lower volatility, long-term nature and steady returns of investing in infrastructure. And in North America, the sector is alive with talk of a building boom to come.
In the United States, the Trump administration's expressed desire to spend $1-trillion (U.S.) on transport systems and other infrastructure has spurred optimism about the country's growth prospects. But exactly what that will look like and how it will be financed is still unclear – as is the question of how much spending Congress will approve.
In Canada, there's a federal plan to create an infrastructure bank seeded with $35-billion, with the aim of attracting billions of dollars more from large institutional investors. And that's only one part of a multiphase spending spree that Ottawa is calling "the $186-billion long-term infrastructure plan" to repair and build new infrastructure. Many projects, such as the new Champlain Bridge in Quebec, will be designed, built, financed and maintained through government contracts with companies, called public-private partnerships (P3s).
The problem is that many of these plans are still lacking some key details or assurances for the private sector. Even so, investment banks and investors are jostling to position themselves to capture some of the action – in whatever form deals might take.
"Our clients don't just look at either Canada or the U.S. in isolation. They don't really care about the border," said Laith Qamheiah, who leads BMO Nesbitt Burns' Canadian infrastructure practice. "Most of them will look at projects in Canada and projects in the U.S., and so accordingly, we want to be relevant to them. We have to have those capabilities."
Already, investment banks play a considerable role in Canada when it comes to infrastructure. That includes running around the world after institutional investor clients such as pension funds that are seeking higher-yielding assets and doing deals in remote regions of the globe.
Banks also take part in P3s, which help build provincial and municipal infrastructure through outsourcing the project development and maintenance to the private sector over a designated lifespan. Bank financing plays a role in getting projects such as hospitals, prisons and schools off the ground. Among Canadian provinces, the P3 model has been most common in British Columbia and Ontario so far.
Moving into 2017, much of the focus will be on transit systems, such as new LRT lines, regional rail lines and bridges. These projects are larger in scope and value than the social-infrastructure projects, such as hospitals, and they take more time to complete. "Where we see the pipeline in 2017 and 2018 is a lot fewer projects, but a lot larger projects," said Sekhar Angepat, co-head of infrastructure finance at RBC Dominion Securities.
In terms of new financings, 2016 was comparatively light for new projects compared to 2015, when large projects such as the Champlain Bridge in Montreal and Toronto's Eglinton Crosstown LRT came to market. The latter was a project valued at about $5-billion with a significant financing component to it.
There's less clarity on where the federal government will land on the privatization of the country's ports and airports. Last year, it hired Credit Suisse AG and Morgan Stanley Canada Ltd. to study privatization options for eight major Canadian airports and 18 Canadian ports, respectively. That could generate a lot of cash for the government – one study from the C.D. Howe Institute said that the government could bring in between $7.2-billion and $16.6-billion through the sale of equity stakes in the country's major airports.
But bankers aren't counting on a piece of that deal flow. "It doesn't really feel like anyone's ready. Maybe you start the process, but you know, it's going to have to be one deal at a time. I do not anticipate they will come out and say 'here are eight airports, show me a bid.'" said David Dal Bello, head of Canadian power, utilities and infrastructure at RBC Dominion Securities.
Other regions such as the United Kingdom and Australia have implemented their own privatization plans, and investors around the world are willing to pay more for these quality airports, shipping ports and toll roads. Investment in global infrastructure assets climbed to an estimated $645-billion (U.S.) in 2016, according to an annual infrastructure report by Preqin, even as the actual number of deals stayed relatively static. The report noted that record levels of fundraising and the amount of capital sitting on the sidelines awaiting investment had pushed up competition, and also the price of assets.
For now, Mr. Qamheiah says he is fielding countless questions about Ottawa's proposed infrastructure bank, which the government plans to get up and running this year. And he said that people are trying to understand what role it will play, and whether it's going to inspire even more infrastructure spending in the coming years.
"Ultimately whatever form comes from the government is going to be in addition to the already significant spending that's happening at the provincial and municipal levels. So over all, our expectation is that there's going to be more activity over the coming years," he said.