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Canadian pension funds pull back on infrastructure deals as prices climb beyond reason

Canadian pension plans are among the world's biggest and most active buyers on infrastructure, including tunnels, airports, toll roads and energy networks.

TORONTO  — Canada’s biggest pension funds say they are walking away from more and more global infrastructure deals, citing concerns that intense competition for assets has driven valuations too far.

Canadian pensions facing down fierce competition to pursue global growth strategy

Kevin Van Paassen/Bloomberg

Hong Kong-based executives from the Canada Pension Plan Investment Board first introduced themselves to officials at Postal Savings Bank of China, one of the country’s largest retail banks, back in 2013.

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The shift could help cool global prices for tunnels, airports, toll roads, energy networks and other infrastructure as Canadian pension plans are among the world’s biggest and most active buyers.

Pension funds’ investment in infrastructure has risen since the 2008 financial crisis, as plunging interest rates and bond yields drove these players to seek steady returns elsewhere. Global equity and commodity turmoil has done little to dampen that interest and intense competition for a limited number of assets has been reflected in recent valuations.

Some investors, particularly in private equity circles, complain that the Canadian funds — dubbed “maple revolutionaries” because of the strategy of direct equity investments they pioneered in the 1990s — have a tendency to overpay.

Senior executives at the leading Canadian funds defend the merits of past infrastructure deals, but say they are worried prices no longer reflect the illiquidity of the assets, which cannot be sold quickly like stocks or bonds.

“The market is overheated. We have stepped out of the bidding for a lot of assets over the last two or three years,” a senior executive at one of Canada’s biggest public pension funds, who declined to be named, told Reuters.

Among recent deals with no Canadian participation, British rail rolling-stock owner Eversholt Rail Group was sold for US$3.8 billion to Hong Kong’s Cheung Kong Infrastructure Holdings (CKI).

Canadian funds still expect infrastructure to grow as a proportion of their overall investments because most plans have money rolling in and view infrastructure as a good match for long-term liabilities. But they say want to be more selective.

The market is overheated. We have stepped out of the bidding for a lot of assets over the last two or three years

Canada’s biggest 10 public pension funds have more than trebled in size since 2003 to more than $1.1 trillion in assets. A third of that is now held in alternative assets such as infrastructure, real estate and private equity.

Four Canadian pension funds now rank among the world’s top 10 infrastructure investors, according to Boston Consulting Group. At the end of 2014 the four funds had US$36.8 billion infrastructure assets under management, equivalent to 41 per cent of the total infrastructure assets held by the top 10.

One New York-based investment banker, speaking on condition of anonymity, said private equity firms that have lost an infrastructure auction to a Canadian pension fund often grumble they paid too much, referring to rival bids as “dumb money.”

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