GLOBAL – A new report published by the OECD has highlighted the lack of restrictive regulation as one of the advantages to domestic infrastructure investment for Australian and Canadian pension funds.
The report by Georg Inderst and Raffaele Della Croce, comparing the experience of Canadian and Australian investors in infrastructure, outlined different approaches to the asset class.
It explores how the "Canadian model" and the "Australian model", which has evolved over time and moved away from publicly listed markets, "pose a challenge to the 'private equity model', dominant in Europe and the USA".
Both Canadian and Australian institutions have been investing in the asset class since the 1990s and have the highest allocations to infrastructure around the globe.
They have similar trust-based pension systems, a lack of restrictive regulation, a mature public private partnership market and stable political environments.
But important differences characterised the two markets. Some larger Canadian funds have adopted a model of direct infrastructure investment, while Australian investors have tended to outsource to open-ended infrastructure funds or used 'aligned' asset managers.
The Canadian market has largely avoided privatisations. By contrast Australian pension funds have been eager to invest in privatised assets.
And Canadian defined benefit (DB) funds were often underfunded, while Australian defined contribution (DC) superannuation funds were fast-growing.
Inderst said infrastructure could work in both a DB and DC environment. "The Canadian model has some large investors investing directly. The Australian DC pension system is dealing with different issues of liquidity and members switching funds."
"In Australia," he added, "they are more likely to create their own funds, owned by pension funds or use other funds working on an open ended basis which are cheaper than the closed end private equity funds popular in the US and Europe."
He said the important message was that there was more than one way to invest in infrastructure. "It depends what risks pension funds can take - whether they are interested in the very conservative side of infrastructure or can afford to be more adventurous and take some greenfield risk.
"It also depends how mature the pension scheme is, and how strong the sponsor," he added.
The report also warned that perceived supply side constraints and inflows of new capital to the asset class could lead to "an unhealthy overvaluation of assets".
IPE and Stirling Capital Partners are co-hosting a conference, Infrastructure for Pension Funds and other Capital Owners, to take place on 2 October in London. For more information please visit www.ipe.com/infrastructure.
