Small funds driving private infrastructure investing in Canada

Canada's small infrastructure funds are happily snapping up the scraps left by the market's biggest players.

Northleaf Capital Partners last week closed the second fund in its $2.5 billion program targeting long-term projects like health care, renewable energy and transportation in developed countries around the world. The Canadian-based fund targets equity investments of $150 million to $200 million with a return in the 10% range on a project.

Northleaf's projects are dwarfed by those of some of the bigger players. Canada Pension Plan Investment Board targets infrastructure investments of C$500 million to C$2 billion with its C$22 billion of infrastructure assets under management, according to board financial statements. And Brookfield Infrastructure Partners LP raised $14 billion last year in what was at the time the largest private infrastructure fund ever raised in the industry.

“Where we see a real opportunity is to continue to play in a very attractive part of the market that's below the radar screen of where the biggest players operate,” Stuart Waugh, Northleaf's managing partner, said by phone from Toronto.

Private investment in infrastructure has risen globally as governments look for additional funding to close their funding gaps. The infrastructure deficit in the U.S. is pegged at $3.6 trillion; in Canada it's C$200 billion ($153 billion), and in Europe €1 trillion ($1.1 trillion), according to a Brookfield Infrastructure Partners report. Last year, Canada announced plans to create an infrastructure bank with a C$35 billion government investment to raise at least C$140 billion in private capital.

The bigger funds are largely looking to invest outside Canada, where they can get more size for their investment and take an equity stake in a project as opposed to providing debt financing, which is the preferred Canadian approach for private infrastructure investment, according to Paul Smetanin, president of the Canadian Centre for Economic Analysis.

“The big players that we have in Canada are going to chase rates of return and it's questionable whether the government is going to put enough rate of return on the table for them to want to invest,” he said. Brookfield Infrastructure Partners, for instance, reports compounded annual returns of 15% since 2008.

Smetanin said the Highway 407 ETR toll project is the only Canadian example of a large-scale private equity infrastructure project. Total public infrastructure investment in Canada over the last two decades has averaged around 3.1% of gross domestic product, Smetanin said, while a Cancea analysis recommends closer to 5%.

That leaves funds like Fiera Infrastructure Inc., which has C$500 million in invested and committed capital for infrastructure, to scoop up smaller projects that need financing. An example is its recently announced 50% stake in an Ontario wind power facility, which has a 20-year contract to provide electricity in the province.

Alina Osorio, Fiera Infrastructure's president, sees a healthy pipeline of projects longer than 20 years with an investment in the C$75 million-to-C$125 million range that her firm targets in developed countries.

“We have an ambition to grow our portfolio to C$1.5 billion to C$2 billion in the next three years,” she said in an interview at Bloomberg's Toronto office.

There have been 81 projects worth around C$43 billion in Canada from 2011 to 2016, according to data compiled by PPP Canada, a government agency that provides expertise on public-private partnerships.

Northleaf, with $9 billion across private equity, private credit and infrastructure investments, is looking at regulated energy assets in northern Europe and a transportation asset in the U.S. as possible next investments in the second infrastructure fund, which it aims to deploy in five years, Mr. Waugh said. Its focus is on assets with a long-term life in developed countries.

“The overarching theme of the next 20 years is going to be, even within the developed economies, the need to reinvest in replenishing the current inventory of public projects,” Mr. Waugh said, including transportation, hospitals, schools, and airports. “We're going to see an increased demand for private capital to go in and fund those projects.”