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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.
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.
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 percent 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."
For example, last year's acquisition by Canada's CPPIB and Hermes Infrastructure of a 30 percent stake in Associated British Ports for about US$2.4 billion valued the business at around 20 times earnings compared with multiples of 10 to 12 that investors say are typical for the sector.
But recent prices do not necessarily mean buyers are paying too much said Dougal Macdonald, the head of Morgan Stanley Canada, which has advised on a number of deals involving Canadian pension funds.
"In a low rate environment, target returns across virtually all asset classes have come down. It is simply a resetting of returns for the right assets," he said.
Canadian pension funds typically look for nominal returns of 6 to 8 percent from infrastructure, a few percentage points above what they would expect from fixed-income investments. Bankers note that private equity funds often seek returns of 20 percent or higher, meaning pension funds can afford to pay more.
"CLUB DEALS" AND BIDDING WARS
Still, Canadian executives said their funds should avoid being drawn into bidding wars as part of competing consortia.
"You've got to try and avoid auctions because they can get crazy. If you're just walking around with an open check book in these markets you're going to pay too much," said another executive with one of Canada's three largest pension funds, who declined to be named because of the sensitivity of the issue.
The executive said Canada's largest funds should co-operate more frequently. However, such "club deals" remained rare for the top three - the CPPIB, the Caisse de depot et placement du Quebec (Caisse) and the Ontario Teachers' Pension Plan.
In the past they often found themselves competing against each other as well as foreign rivals that include South Korea's National Pension Service, Dutch pension fund APG, Australia's Future Fund, private equity and some sovereign wealth funds.
Among recent deals, New South Wales Premier Mike Baird hailed a "stunning result" for the Australian province after a consortium including the Caisse agreed to pay US$7.5 billion for an electricity network last year, significantly more than analysts expected.
The group had seen off competition from other investors including the CPPIB and a unit of another Canadian pension fund. The Caisse said at the time it was confident the acquisition met its investment objectives.
Canadian funds are also involved in a takeover battle for Australian port and rail giant Asciano, with Brookfield Asset Management bidding against a consortium that includes the CPPIB.
Asciano's shares are trading below both groups' offers but at 34 times their earnings still look expensive compared with its nearest rival Aurizon, valued at 13 times its earnings.
"There's a lot of money chasing assets," an executive at an Ontario-based fund said. "The important thing is to maintain our discipline."