Infrastructure, Private Equity for Smaller Plans

Coverage of the 2010 Investment Innovation Conference.

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1267134_confederation_bridgeAs Canadian institutional investors look for innovative investment solutions to meet their long-term funding objectives, private market investments in private equity and infrastructure stand out as extremely compelling options to complement existing portfolio investments. Both private equity and infrastructure are classic examples of “innovation:” the application of an existing concept in a novel way in order to meet a specific, consumer-driven need. In this instance, the investor-driven need is for proven, sustainable and understandable strategies that can efficiently and cost-effectively deliver incremental long-term returns relative to conventional public market investments.

Neither private equity nor infrastructure is a new idea, a new black-box trading strategy or a new derivative instrument dependent on some complex mathematical formula or set of backward-looking assumptions. Profiting from the ownership and operation of private companies and merchant ventures predates the formation of the modern stock market in the  17th century, as does the concept of earning income from the control and operation of essential assets such as toll roads, bridges and ports.

For both private equity and infrastructure, the current “innovation” arises from the systematic application of private market investment strategies to institutional investment portfolios. No longer is private company ownership the exclusive preserve of wealthy families. No longer is the financing and ownership of essential assets reserved to agencies of the modern state (as the successor to the feudal barons who controlled the medieval ports, roads and canals). As leading institutional investors such as the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan have clearly demonstrated, attractive long-term returns can be generated from private equity and infrastructure investments. These global leaders and other large Canadian plans have significant allocations to private markets strategies and have built large, sophisticated teams and systems to pursue their investment objectives.

Stuart WaughFor smaller plans, a second important “innovation” comes in the form of new private equity and infrastructure implementation options that enable them to participate like their much larger counterparts despite lacking the capital to build a diversified portfolio of direct investments, the resources to hire and retain a large internal team and the portfolio management systems and expertise required to effectively handle the complex, time-consuming administration of a private markets portfolio. Over the past decade, specialist private equity and infrastructure managers and advisors have developed pooled fund and custom, segregated account solutions for small/mid-sized institutional investors that provide diversified exposure to attractive investments globally, while dealing efficiently with the cross-border tax, reporting and valuation issues inherent in building and managing a portfolio of long-duration unlisted assets. Successful managers/advisors have built global teams, successful track records and a compelling value proposition that can deliver attractive net returns to investors despite the complexity of accessing and managing private investments.

Innovation comes in many forms. However, the hallmark of any successful innovation, whether the iPod and Blackberry of our generation or the great innovations of the past, is that the particular solution has been motivated by, and developed in order to meet, a specific consumer need. Thanks to the innovative private market platforms developed by investor-focused managers, Canadian institutional investors of all sizes now have additional options available to them as they seek to diversify away from the public markets and gain access to the long-term value creation opportunities available through hands-on, active ownership of private companies and core infrastructure assets.

Stuart D. Waugh is managing director and managing partner, Northleaf Capital Partners.

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One of the issues no one talks about regarding infrastucture for pension plans is how these assets are valued and whether these values are appropriate for setting funding rates for plans. This probably isn't much of an issue when the proportion of assets invested this way is small, but with larger funds expanding their allocation to infrasturcture and private equity, this is an area that requires more scrutiny.

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