CDPQ adds Asia infrastructure muscle with greenfield focus

Caisse de Depot et Placement du Quebec is building its infrastructure capabilities in the Asia-Pacific region by adding local investment talent, forging more strategic partnerships and leveraging the organization's global capabilities.

And the C$308.3 billion ($238 billion) Montreal-based institutional investor's latest infrastructure initiative in that region could accelerate a shift in focus from investments in operational brownfield infrastructure assets to greenfield projects with construction and patronage risks.

CDPQ manages the assets of Quebec's public provincial and municipal pension funds.

Cyril Cabanes, CDPQ's vice president, head of infrastructure investments, Asia-Pacific, said in a Sept. 14 interview that his team has grown significantly since he joined the organization in Singapore in early 2016, and will continue to grow along with CDPQ's portfolio of infrastructure investments in the region. He declined to provide specific numbers.

With CDPQ focused entirely on direct investments as opposed to investing through funds, identifying partners — either local partners for projects in one country, regional partners for projects in a variety of countries or global partners — is "the bedrock of what we do," Mr. Cabanes said.

It can take CDPQ's infrastructure team up to two years to forge a partnership that will last — hopefully — for 15, 20 or 25 years, he said.

CDPQ's most recent partnership, announced Sept. 13, is with Hong Kong-based CLP Holdings, one of the largest energy players in the Asia-Pacific region. Under the agreement, CDPQ took a 40% stake in CLP's energy platform in India, CLP India Pvt. Ltd., for roughly $370 million.

"We spent a lot of time with CLP," making sure the two sides shared a common vision about the business' growth prospects and a determination to deliver them, Mr. Cabanes said.

In what could become another key partnership, CDPQ teamed up recently with New Zealand Superannuation Fund, the NZ$38.9 billion ($25.5 billion) Auckland-based sovereign wealth fund, to put forward a proposal to the New Zealand government to build and operate a NZ$6 billion light-rail system for the city of Auckland.

That would be the second big greenfield project CDPQ has taken on, after garnering a 2016 mandate to design, build and operate a C$6.3 billion light-rail system — known as Reseau Express Metropolitain, or REM — for Montreal.

CDPQ will contribute C$2.95 billion, or just less than half of REM's total cost. In April, CDPQ announced construction of the project had begun, with the system slated to begin operation in summer 2021.

In an increasingly cutthroat investment market for government-owned roads, ports or airports coming to market, CDPQ's willingness to take on construction and traffic risks for major greenfield projects has stood out.

Some market veterans see increased risks from taking on such multibillion-dollar projects; others see potential benefits.

Increasingly fierce competition to invest in brownfield assets has left that segment of the investment universe "commoditized," with prospective returns falling significantly in recent years, said Isabelle Demir, head of real assets with Melbourne, Australia-based investment consulting firm Frontier Advisors Pty Ltd.

If sophisticated asset owners have the in-house expertise to take on more complicated projects, doing so can be a means of diversifying and improving returns for their beneficiaries, she said.

Mr. Cabanes called the structure of the "public-to-public" delivery model employed for the Montreal REM project "unique," with a lot of attractions for a government awarding projects of that nature vis-a-vis the typical public-private partnership model.

Among those attractions is transparency. For REM, "people knew what the cost of the project would be, what the fares would be before construction even started. That was locked in pretty early in the process," as was complete transparency on returns, Mr. Cabanes said.

The construction risk is borne by the contractors but — in a highly unusual move — CDPQ is bearing the risks related to the level of patronage, or usage. "We've taken all the patronage risk in this case" — after doing a tremendous amount of work on projections — "so our revenue model is entirely at risk," Mr. Cabanes said.

That, in turn, allows the government to deconsolidate the project from its balance sheet, he said.

For the REM deal, CDPQ worked with the government of Quebec, which identified projects it had hoped to pursue over the previous 20 years but never started.

"It's an off-market process, so the attraction … is that you have time to put forward your views, design a project, derisk it, structure it in a way that's going to work for all parties involved and then deliver it," Mr. Cabanes said. Returns are important, but "that certainty of process and that control over process is also very important to us," he said.

Some industry veterans expect to see more infrastructure partnerships between asset owners and governments in the future.

"We observe a growing trend globally of sovereign wealth funds and other large, sophisticated asset owners partnering with local governments to build necessary infrastructure," and help develop the economic ecosystems that surround such projects, said Rich Nuzum, New York-based president of consulting giant Mercer's wealth business.

"We believe in the investment thesis for this," said Mr. Nuzum, based on the "comparative advantage these asset owners have in terms of investment time horizon, ability to tolerate illiquidity and navigate complexity, and willingness or need to put large assets under management to work."

Mr. Cabanes said other governments in North America have shown a lot of interest in the REM experiment. There has been no shortage of states in the U.S. or provinces in Canada calling CDPQ, he said.

Mercer expects to see "a lot more of this going forward as the economic need for infrastructure development remains acute across developed, emerging and frontier markets," Mr. Nuzum said.

For local governments seeking to support economic development and deliver public goods, partnering with sophisticated asset owners can compare "favorably on balance to other sources of advice, assistance and financing that have historically played the major roles in this space," including investment banks and traditional general partner-managed investment vehicles, he said.

Frontier Advisors' Ms. Demir said the hurdle for asset owners looking to take on such projects — in terms of building experienced, in-house teams —will be high.

CDPQ, among the largest, most experienced infrastructure investors, is "only just starting to do this," and its REM experience — in terms of negotiating engineering, construction and procurement contracts and coordinating all aspects of that complicated project — should put the manager in good stead in the competitive process for the Auckland light-rail system, she said.

Andrew Knackstedt, an Auckland-based spokesman for the New Zealand Transportation Agency, in an email, said the project is in early stages and authorities are looking to report to the ministries of Finance and Transport on the proposals by the end of the year.

REM has given CDPQ a capability — having hired a "45-strong team just to do this project from end to end," including engineers and developers — that can be deployed for similar projects, Mr. Cabanes said. Greenfield projects currently account for a very small piece of CDPQ's C$16.2 billion in infrastructure investments, but that could grow "very substantially over time," he said.