Canada’s pension plans have invested in Latin
America infrastructure assets for years. In the past decade or
so, equity has been their preferred form of investment, taking
stakes directly and indirectly in water utilities in Chile,
renewable energy projects in Brazil and Mexico and toll roads
in Chile, Costa Rica and Mexico, to name a few. But they have
remained mostly idle on the debt side, preferring to put their
money to work where they can better measure returns, based on
years of operating results.
That looks set to change. Canada’s largest
public pension plans are expected to provide increasing amounts
of debt financing for public-private partnerships (PPPs) in
Latin America’s infrastructure sector, with
government guarantees ensuring more predictable returns.
Infrastructure firms typically look to borrow money at the
start of a project, to finance construction. Investors that
back a project with debt at that point run the risk of
construction being delayed or halted entirely, jeopardizing
returns. Equity stakes in firms or vehicles with an operating
history offer greater certainty.
"If you look around, there are a lot infrastructure projects
in Peru, Colombia and Argentina. There are 15 to 20 PPPs that
are going to need long-term financing, but most international
banks lately find it challenging to go beyond seven or 10
years," one banker says. "The pension funds are the best
equipped to do this. They have long-term money and
they’re going to look at infrastructure."
The big four — Canada Pension Plan Investment
Board (CPPIB), Caisse de dépôt et placement du
Québec (CDPQ), Ontario Teachers' Pension Plan (OTPP) and
PSP Investments — have more than $700 billion in
assets under management. Adding other pension funds with active
infrastructure investments, such as British Columbia Investment
Management Corporation (bcIMC), Ontario Municipal Employees
Retirement System (OMERS) and Alberta Investment Management
Corporation (AIMCo), the total assets under management approach
Even a small percentage of that pool of assets represents a
chunky allocation for Latin American infrastructure.
Canadian pension plans are not likely to abandon the steady
philosophy that has guided their investments up to now. Unlike
fellow Canadian investor Brookfield, which likes to buy assets
when others stay well away, the pension funds prize certainty
and predictability over above-average returns.
"They’re smart money," the banker says of the
North American pension plans, not just the Canadians.
"They’re not just going to move very quickly into
But little by little, they are shifting focus.
Rashad Kaldany, who directs CDPQ’s investment
strategy in emerging markets, says the pension plan is
gradually investing in infrastructure debt.
Most of CDPQ's Latin American infrastructure investments are
in equity. It has made an aggressive play in Mexican
infrastructure through equity investments, for example, taking
a 51% stake in a trust that it formed with local institutional
peers in 2015. CDPQ has invested 17.9 billion pesos ($900m) in
the vehicle. It has also made a 3 billion peso direct
investment in a toll-road joint venture with local construction
But recently, CDPQ has started to buy sovereign and
sub-sovereign bonds. The pension fund is still a year or two
away from buying corporate bonds or providing loans, though:
"It’s a gradual transition," Kaldany told
LatinFinance at an infrastructure forum hosted by the
Inter-American Development Bank (IDB) in April.
That transition could be about to take a big step forward.
The Quebec City-based pension fund was looking to join
commercial banks Banco de Crédito del Perú (BCP),
ING and Santander in a 14-year, $250-million syndicated loan
led by Brazil’s Itaú BBA for the
Pacífico 2 toll road concession in Colombia, market
sources told LatinFinance in February. Local lenders
Banco de Bogotá and Davivienda previously put up 400
billion Colombian pesos ($139 million) in local-currency
financing for the toll road.
Kaldany declined to comment on the possible loan in
Colombia, or on direct debt financing for PPPs and concessions
in Latin America on the whole. He did, however, tell a panel at
the IDB event that CDPQ does not even look at transactions
where it cannot put hundreds of millions of dollars.
Bank capital tightens
Canadian pension funds' increased attention on financing
Latin American infrastructure comes at an important time. New
banking regulations like the Basel III accord have pushed up
the cost of capital for commercial lenders. As a result, banks
have been forced to reconsider long-term loans for
infrastructure, turning instead to mini-perms that can be taken
out in the bond market, says Gema Sacristán, the chief
investment officer of the Inter-American Investment Corporation
(IIC), which is part of the IDB Group.
That opens the door to other investors — such
as pension funds. Indeed, some in the market expect US and
European pension funds, including the Dutch and Norwegians, to
also pick up their participation in infrastructure in Latin
Sacristán sees three pockets of financing that can
fulfill the need for long-term financing: institutional
investors, local and international debt funds, and high net
worth individuals. "The Canadians are very interested, and
we’re working with them," she says of
institutional investors. "What are the Europeans doing? Not too
much. US investors are doing a bit more."
Tried and true
Institutional investors, such as pension funds, investment
managers and insurance companies, have the potential to supply
much-needed financing, concluded a report by the IDB and
consulting firm Mercer. But these investors have trouble
assessing the commercial viability of infrastructure projects
in emerging markets.
That means that while infrastructure project debt may be a
growth area for Canada's pension fund investors, they are
expected to keep up their direct equity investments,
"There are plenty of opportunities to invest in existing
assets and reap the benefits," says Alejandro Olivo, an analyst
at Moody's, adding that he expects the funds to continue their
M&A strategies in Latin American infrastructure.
Bribery scandals have tarred many M&A opportunities in
infrastructure, especially in Brazil. But Canada’s
pension plans have steered clear of projects with reputational
risks and they are likely to maintain the same discipline,
despite the allure of higher returns, Olivo says.
"We still see a number of private participants that are
willing to invest [in the distressed assets]," he says.
Such discipline, however, will not leave the Canadian
pension plans out of the M&A market. They understand what
the different markets need in terms of infrastructure
investments and they cultivate fruitful relationships with
local partners, Olivo says.
"When you look at their equity investments in the region,
they continue to grow at impressive rates, especially in the
current environment, when strong domestic players are fewer and
fewer," he says.
Even CDPQ’s seemingly novel approach to debt
financing is not as risky as it appears.
Colombia’s 4G toll road concessions program
involves availability payments from the government called
vigencias futuras, which guarantee a minimum level of
revenues, regardless of whether a toll road meets its traffic
projections or not.
Not all Canadian pension investors are interested in
shifting their investment strategies in Latin American
infrastructure. One that has its sights firmly set on equity
stakes is OPTrust, which manages assets from the OPSEU Pension
Plan. The fund, which trails the big four with a mere $19
billion of assets under management, prefers to find reliable
partners in the local markets, rather than go it alone, Hugh
O’Reilly, its chief executive, says.
"We write checks in the $100-million range. We operate in a
different context than some of our larger peers. We rely on
partners," he tells LatinFinance.
OPTrust holds a stake in the Spanish infrastructure
concessions company Globalvia, which operates toll roads in
Mexico, Chile and Costa Rica. Globalvia’s other
shareholders are the Dutch pension fund PGGM and the
Universities Superannuation Scheme (USS) from the United
"Our model is direct investing, and we view Globalvia as a
direct investment," O’Reilly says. "We take the
mistakes from developed markets and learn from them for
As O’Reilly puts it, OPTrust is "not in a race
to get money out the door" but it wants to be "proactive" and
not get bogged down by examining all the pitfalls in the
market, such as the Odebrecht scandal. "Making a judgement on
an entire region based on one company is not a good way to go
about business," he says. "Bad things happen."