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Counsel Views – Episode 27: Strong foundations

How infrastructure investments can help build strong and durable portfolios

Counsel Views, hosted by Stu Morrow, Chief Investment Strategist, RBC PH&N Investment Counsel, is an audio series aimed at bringing insights to clients from thought leaders and experts across Canada’s leading wealth management firm.

Episode guests: Andrew Hay: Head, Global Infrastructure Investments, RBC Global Asset Management Inc.

In this episode of Counsel Views, Stu welcomes Andrew Hay, Head, Global Infrastructure Investments, RBC Global Asset Management Inc. (RBC GAM) to discuss the importance of infrastructure investments for today’s investor. This asset class was previously the purview of institutional investors, such as pension plans, endowments and large money managers. However, as more investment options become available for retail investors, this fundamentally important area of the market is increasingly seen as a helpful component for a risk-appropriate portfolio, generating long-term capital returns which are often coupled with solid cash-flow production through dividends and distributions. Andrew and Stu also discuss a soon-to-be launched RBC GAM infrastructure fund, and how it will work to help build wealth for investors.

In his role as portfolio manager for the Infrastructure Fund series, Andrew is responsible for the development of a disciplined investment process, portfolio allocation strategy, deal sourcing, establishing strategic partnerships with high-quality investor organizations, investment due diligence and execution. Prior to joining RBC Global Asset Management in 2021, Andrew was Senior Principal Infrastructure with Canada Pension Plan Investment Board. He started working in finance and infrastructure in 2000.

View transcript

Stu Morrow:

Good day to all of our listeners and welcome back to another episode of Counsel Views.

Private infrastructure investing, an area I’ve been excited about for some time. It’s long provided institutional investors with sources of portfolio diversification, income and inflation protection. It’s only more recently that these types of investments have been more accessible to private high-net-worth investors here in Canada.

And as a brief background, infrastructure started as an asset class back in the mid- 1990s, but since 2008, private infrastructure markets have more than tripled in size with alternative or non-public investors now owning or operating a large proportion of the world’s economic infrastructure. In fact, more than USD$550 billion has been raised by unlisted infrastructure funds over the past 10 years. And I guess that’s really evidence of the sector’s growing importance in institutional investor portfolios, and the delivery of really strong risk-adjusted returns within this industry across varying market conditions and regions has continued to appeal to investors along with that inflation protection characteristic of the asset class.

So here with me to discuss private infrastructure investing in more detail and to outline what RBC brings to the table is my very special guest, Andrew Hay, Head Global Infrastructure Investments with RBC Global Asset Management. In this role, Andrew works closely with distribution partners to ensure that relevant strategies and delivery vehicles are developed across channels and geographies that meet RBC’s clients’ needs.

As part of his role as portfolio manager for the Infrastructure Fund series, Andrew is responsible for the development of a disciplined investment process, portfolio allocation strategy, deal sourcing, establishing strategic partnerships with high- quality investor organizations, investment due diligence and execution.

Prior to joining RBC Global Asset Management in 2021, Andrew was most recently Senior Principal Infrastructure with Canada Pension Plan Investment Board, and he started working in finance and infrastructure in 2000.

Andrew, welcome to Counsel Views.

Andrew Hay:

Stu, thank you very much for having me today.

Stuart Morrow:

Great. Great to have you here. Excited for our conversation. And, you know, I gave you a little bit of a brief introduction on your bio, maybe you can expand a little bit upon that. Tell us about your background in infrastructure and what led you to RBC Global Asset Management.

Andrew Hay:

Thanks, Stu. Happy to. My background in infrastructure and what led me to RBC Global Asset Management, GAM, I started my career in computer science and technology in the ‘90s, and I was drawn to infrastructure because of the operational appeal. I like understanding how things fit together, how things work.

After an MBA, I joined KPMG in 2000, and KPMG had an excellent corporate finance and advisory business in infrastructure, and this led to global mandates with both public sector, or government, and private sector clients. And through that period of time in the early 2000s, I saw the rise of institutional investors coming into the asset class. This included people like OMERS, or Ontario Teachers. I also saw the rise of funds, which included funds like Macquarie.

In 2006, I noticed that CPP Investments was building out its direct investing platform in infrastructure, and so I joined CPP in 2006. And I was able to grow the business with them in all aspects where we increased the exposure to the infrastructure asset class from less than $1 billion to over $30 billion. So a lot of work in the origination and due diligence side of the business, finding and cultivating those excellent deals. But then also on the asset management and value creation side where, with CPP, I would sit on the boards of a number of these companies.

Now, this expansion, this explosive expansion, was a fascinating time. We saw multiple cycles, countries, sectors, and we actually delivered a very strong return, strong performance for the beneficiaries and contributors to the Canadian pension plan.

And that’s what really what drew me to RBC GAM. I love the client focus element of the culture here, putting our clients first, and I wanted to create something that is helpful and valuable to people.

And secondly, it’s the entrepreneurial nature of creating a new business within an established platform. We’ll talk a little bit more about RBC GAM and the private markets platform. But those are the things that drew me to Infrastructure here at RBC GAM.

Stuart Morrow:

Very, very interesting background. Obviously you come highly qualified, Andrew, to talk about private infrastructure investing and maybe, maybe give us a bit more on, you know, kind of what I sort of led as a teaser into this new asset class to RBC. What infrastructure investments look like and how do they fit into a diversified portfolio?

Andrew Hay:

Yeah, thanks, Stu. So what infrastructure looks like and then thinking about portfolio fit and diversification. The way I—the way I describe this to my family is that infrastructure is usually something that you can point at from the car as you’re driving past. It sees large, tangible assets. On the transportation sector side, you can think about things like toll roads or bridges. You can think about rail, ports, airports. On the utility side, you’re thinking about electricity networks or power generation, and obviously renewable power generation or low carbon has become an important element, especially over the last decade. But fundamentally you’re thinking about those large, tangible assets.

And what that gives you quite naturally is very high barriers to entry, so you’re investing a lot of money to create something that is often monopolistic at the end of the day. So you only need one pipe carrying water into your home or one electricity line or one telephone line. And because these things are often natural monopolies—it only makes sense to have one of them—they’re closely regulated. They’re regulated by government or other public sector entities to prevent things like unfair pricing.

What this gives, though, is a very large asset base, a stable and predictable cash flow over time that is often linked to macroeconomic value drivers. So things like population growth, GDP growth, often we see revenue linked to inflation as you’d mentioned earlier. And so these are the fundamental characteristics of an infrastructure business.

With each of these, I want to get away from the sector and think about the risk profile within each sector. And the way that I usually get there is understand how the business makes money at the core. And then that helps inform risk profile and fit.

What I’d mentioned on the fit with the portfolio part of the question, the diversification that you can bring, is traditionally there are two different access points into infrastructure. The first is through the public markets with the listed markets. The second is through private markets. Let me talk about each of them.

On the listed equity side, it’s certainly easy, easier, to buy a few stocks in infrastructure companies. But although that’s easy, the downside is it has a very high correlation with equities, with listed equities, and so you don’t get the same portfolio benefit when you’re thinking about portfolio construction.

The private markets asset class tends to be illiquid, illiquid meaning best suited for a very long-term hold period, but it has a much lower correlation to listed equities, which gives you a better lever when you’re thinking about portfolio construction. And when I think about the platform, as we’re designing here, we’re looking at a core or core-plus risk profile. This is the low end of the scale for infrastructure.

A core/core-plus risk profile allows you to fund an exposure to infrastructure by either selling fixed income or equities, depending on what you’re trying to accomplish. You put these points together, and what you can do is you can either increase your return within your overall portfolio without changing the risk profile, or you can decrease your risk profile without affecting your return. And it’s these reasons why some of the world’s largest institutional investment organizations have moved to an explicit allocation to private infrastructure assets.

If I look at the, the so called Maple 8, the large eight Canadian pension plans, they’ve committed more than $200 billion to this asset class of 2 trillion AUM. So, roughly 10% of the total assets under management.

Stu Morrow:

It’s significant enough, and we know from the public pension plan perspective how important this has been as a source of stable cash flows, as you said, but also portfolio diversification away from traditional or public markets as well is also the benefit that we want to stress here.

Maybe, I know you’re gearing up to launch a new infrastructure fund at RBC Global Asset Management. Can you give us a preview of the fund? Maybe give us an idea of what you’ll be invested in, how you source those types of deals, how risky is it, and what would investors expect in terms of forward-looking returns?

Andrew Hay:

Yes, of course, Stu, and thanks for the opportunity to talk about it.

Let me start with the timeline part of the answer. I’m really glad to say that in my first year with RBC Global Asset Management, we have concluded the approval process. So what we have done is we’ve fundamentally ensured that we have a compelling value proposition for our clients, what we’re doing is, is unique in the market and will bring value to our clients. So, I’m really excited about that.

What we’re doing right now in the fall is shifting to the fundraising side. So working with your group, a number of other groups, and making sure that this fund meets the needs of your platforms and your clients. And that fundraising will take place over the later part of 2022 and the early part of 2023.

That leads us into the next part of actually deploying or making the investments. That’ll happen in 2023. So that’s the overall timeline that we’re working with.

And on that fundraising and deployment part, it’s really important that we’re not looking to have the world’s largest fundraising number. What we’re doing is we’re looking to raise the right amount of money that we can prudently and responsibly invest in a one-year period, so we can get that money put to work. This is an open- ended fund, or an evergreen fund, and so it will be—eventually it’ll be open for subscriptions and redemptions on a quarterly basis.

And I think that’s so important from a design perspective, because it allows us to mirror the long life perpetual nature of the capital with the long life nature of value creation in this asset class. But it also gives investors a very important access point to buy in or sell out of an illiquid asset class. So that’s sort of timeline and top-line structure.

The other choices that we’re making is a core/core-plus risk profile, and we talked about that earlier. In today’s market, that means target gross returns in a range of 7% to 10% over a long term.

We’re looking at things that are global in nature, the so-called OECD member countries, and meaning developed markets. These are lower-growth regions, but more proven, rule-of-law regulation partners, management teams. I think of them as Canada, the United States, UK, Western Europe, and Australia being some of the key OECD member countries that I think will lead to deal flow in the early stages.

We’re looking for diversification across all sectors. We talked about the importance of diversification earlier. But I think the other element that’s really important is not getting narrowly boxed into a sector that could always bump into headwinds. And so supply chain constraints through the COVID period has meant that certain investable opportunities have dried up for the last two years, and we want to have visibility to pick from the very, very best of a wide variety of choices of investments for our investors.

And then finally, looking to participate in both the mid-cap space, the medium-size space, and the large-cap space. But in both cases with experienced and aligned co-investment partners, a consortium investing model is very typical for infrastructure because a lot of these deals are very large in size and scale. So it’s a little bit of the when and the what.

You asked about deal sourcing, and I think this is such a great question. We’ve been very fortunate to see investment opportunities come into us directly, into myself, into the team here. But not just that. We can rely on the RBC network. When I was covering Australia for CPP, it was incredible to see RBC Capital Markets had an incredibly strong infrastructure business, advisory business, in Australia. But that’s true of RBC around the world. So the RBC network provides great deal flow.

And then finally, also, co-investment partners. As we get the word out of exactly what we’re looking at, what’s on strategy and off strategy, that filtering and refinement process works quite naturally within our network of investment partners.

So the deal flow comes from all of those sources. And I’ve been gratified to see good deal flow, even in the last year. Even though we don’t have capital to deploy, people are willing to invest the time in us in helping us understand their vision for private investments in this asset class.

On your point about the risk profile, how risky it is, this is going to be a private markets strategy, which does mean lower volatility from valuation date to valuation date than the public markets. It is also generating a mix of capital appreciation and yield, which is nice. So that that yield gives you some proof points of the performance of the underlying assets. Having said that, there is a feature in the fund where you can automatically reinvest the yield in the fund, which is nice.

Fundamentally, the private markets class has an illiquidity or complexity premium associated with it, so it’s intended to be held for the long term. But the RBC scale we think will allow us to offer a quarterly access point in terms of subscriptions and redemptions that I think makes this incredibly attractive for, for especially individual investors who haven’t had as many options to get access to this asset class as have the institutions. So all this to say that I think this is a very useful addition to a traditional portfolio. Certainly I’ll be adding it to my personal portfolio.

Stuart Morrow:

That’s great. Very, very exciting news Andrew and glad to hear that you’ll be personally invested alongside your own fund. And I know how busy you’ve been over the last year, and especially more recently preparing for this fund to launch and making sure all the T’s are crossed and the I’s dotted.

So absolute pleasure speaking with you today. Thank you for taking the time to speak directly to PH&N Investment Council clients.

Andrew Hay:

Stu, thank you for the time today, the questions and the opportunity.

Stuart Morrow:

Anytime. And for all of our listeners, please feel free to reach out to your RBC PH&N Investment Counsellor for more information related to private infrastructure investing, private assets in general, and find out how this solution may be suitable for your portfolio.

Take care. Bye for now.


This Counsel Views podcast, episode 27, was recorded on October 11, 2022.

Stuart Morrow is the Chief Investment Strategist of RBC Phillips, Hager & North Investment Counsel Inc. (RBC PH&N IC). All opinions of Stuart Morrow and his podcast guests are solely their own opinions and do not reflect the opinion of RBC PH&N IC nor of any of its affiliates including RBC Global Asset Management Inc. (RBC GAM). This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. This podcast is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is no guarantee of future results. Interest rates, market conditions, tax rulings and other investment factors are subject to rapid change which may materially impact analysis that is included in this document. This information is not investment, tax or legal advice and should only be used in conjunction with a discussion with your RBC PH&N IC Investment Counsellor and in consultation with qualified tax and legal advisors before taking any action based upon any information contained in this podcast. Neither RBC PH&N IC, nor any of its affiliates including RBC GAM, nor any other person accepts any liability whatsoever for any direct or consequential loss arising from any use of the information contained in this podcast.

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