Some of the most crucial needs in burgeoning emerging markets are building or upgrading infrastructure projects — highways, railway tracks, airports, rail stations, power stations, among others. As a result, Canadian pension funds have made significant investments in emerging markets infratructure in recent years.
The demand is vast: A 2020 report from consulting firm McKinsey & Co. found developing countries "will need to invest more than $2 trillion a year in infrastructure just to keep pace with projected GDP growth over the next 15 years.”
In November 2022, the World Bank found India will need to invest $840 billion over the next 15 years in urban infrastructure if it is to effectively meet the needs of its fast-growing urban population. The Islamabad-based Institute of Policy Studies research organization warned that Pakistan is currently facing a staggering $124 billion infrastructure investment deficit over the next two decades.
“Emerging market infrastructure investments represent an opportunity to own exposure to the rapid expansion of emerging economies,” said Taylor Krystkowiak, vice president and investment strategist at Themes ETFs, issuer of the Themes U.S. Infrastructure ETF. Themes ETFs and its sister company Leverage Shares have a collective AUM of $952.8 million, a spokesperson said.
A May 2024 report from Dutch asset manager Robeco, "Emerging Markets’ Second Growth Wave Is Straight Ahead," noted that emerging markets are “expected to offer richer investment opportunities than developed peers over the next decade, driven by technological innovation, continued urbanization and shifting geopolitical and global trade dynamics.”
Robeco had $211 billion in assets under management as of June 30.
British Columbia Investment Management
British Columbia Investment Management Corp., Victoria, has extensive stakes in various emerging markets infrastructure entities.
The emerging markets, said a BCI spokesperson, “continue to be an important part of our infrastructure and renewable resources portfolio. We see opportunities driven by economic and demographic trends, particularly in Asia and EMEA (Europe, the Middle East and Africa), across a range of themes such as digital infrastructure, renewable energy and transportation.”
BCI’s infrastructure and renewable resources program is a diversified portfolio of C$28.1 billion ($20.8 billion) of tangible real assets as of March 31. About 25% of this program is currently invested in the emerging markets. BCI made its first direct investment in 2006, the spokesperson noted. BCI had a total of C$250.4 billion in assets under management as of March 31, 2024.
“Our global program invests primarily in core infrastructure assets that operate in stable regulatory environments and renewable resources assets that are critical to meeting the demands of a growing global population,” said the BCI spokesperson. “We target privately held assets with high barriers to entry, potential for strong cash flows, and favorable risk-return characteristics.”
Typically they anticipate a holding period of more than 20 years, the spokesperson noted.
“We also invest in publicly listed infrastructure and private infrastructure debt to complement our current holdings,” the spokesperson added.
Across emerging markets, BCI targets relatively large companies with high quality management teams. “We are growing our team to support investment strategies in Asia, notably India and Southeast Asia, as well as EMEA,” the spokesperson said. “From digital infrastructure to the energy transition, we are pursuing a range of themes that benefit from the unique characteristics and tailwinds of emerging markets such as rapid growth, increasing urbanization, high productivity, an expanding middle class, and increasing participation in global supply chains.”
BCI’s London office and a local presence in India “bring us closer to these markets, enhancing our ability to source new opportunities, manage our portfolio, and build relationships with partners, advisers and management teams,” the spokesperson said. For example, BCI is among the investors in the Indian operations of American Tower Corp., the U.S-based real estate investment trust and owner of wireless and broadcast communications infrastructure around the world.
“India is growing faster than many emerging markets and has surpassed China for the world’s largest population, also overtaking the U.K. as the fifth-largest economy by GDP globally,” the BCI spokesperson said. “We believe India’s economic and demographic trends will continue to drive demand for foundational infrastructure and logistics, presenting attractive prospects for investors.”
BCI has made “sizable investments” in India, the spokesperson noted, and the pension fund continues to see opportunities in the region.
“We are interested in the country’s deep track record and see opportunities in digital infrastructure, renewable energy and road transportation,” the spokesperson added. “BCI has two investment professionals based in Mumbai to support deal flow and to manage our investments.”
BCI’s other investments in India include Summit Digitel, one of India's largest mobile tower installation companies and a provider of telecom and wireless communications; Cube Highways, an infrastructure investment trust; and Data Infrastructure Trust, Summit Digitel’s holding company. “With the acquisition, DIT is positioned to become the largest tower portfolio in India and the largest platform of telecom towers globally, excluding China,” the spokesperson said.
BCI also holds investments across Latin America focused on electric transmission, power generation, timberlands, agriculture and road infrastructure.
In 2006, BCI made its first direct investment outside of North America and Europe through Transelec, a power transmission company in Chile. In 2016, BCI made its first stand-alone renewable energy investment in Isagen SA, a hydroelectricity platform in Colombia. In 2017, the pension fund manager made its first investment in Uruguay through LUMIN, a timberlands and forest products company. And in 2021, BCI, alongside some partners, acquired assets to form Vista Hermosa Inversiones Forestales, a company focused on sustainable management of timberland assets in Chile.
Krystkowiak of Themes ETFs said that among emerging market economies, India and Southeast Asia have the greatest potential for both economic expansion and improvements in infrastructure to support future growth. “Expanding electrical grids throughout the region are expected to drive significant demand for copper and other industrial materials,” he said.
Canada Pension Plan
The Canada Pension Plan Investment Board, Toronto, has also invested in various infrastructure-related entities in the emerging markets.
As of March 31, in India, CPP owned APL Apollo Tubes, a maker of structural steel tubes, which are widely used in infrastructure projects; Indus Towers, which provides infrastructure services to mobile network operators; NHPC Ltd., a hydroelectric power generator; and Powergrid Infrastructure Investment Trust, which owns, constructs, operates, maintains and invests in power projects.
In Mexico, CPP owns Grupo Aeroportuario del Pacífico and Grupo Aeroportuario del Sureste, both airport operators. “As an active, global infrastructure investor, we currently hold 29 investments, including toll roads, ports, utilities and digital assets across 13 countries in both developed and emerging markets,” CPP stated in its 2024 annual report.
As of March 31, infrastructure accounted for 8% of the pension fund’s C$646.8 billion in assets. Infrastructure investments, CPP stated in the report, delivered a net return of 2.6% in fiscal 2024. “The portfolio experienced mixed results, with gains driven by toll road investments, partly offset by lower performance in select logistics and utilities investments.” (The total fund returned a net 8% in that fiscal year.) For the five-year period, the infrastructure portion returned an annualized net return of 5% (versus an annualized 7.7% for the total fund)
CPP declined to comment on its emerging markets infrastructure investments.
Challenges
But there are challenges in investing in emerging markets infrastructure assets.
“Considerations around regulatory and political stability, currency volatility, approval timelines, and contractual certainties can be barriers for infrastructure investors in many emerging markets,” the BCI spokesperson said. “We are seeing progress on more investment-friendly policy frameworks in certain regions as the regulatory regimes evolve and mature. We are also seeing engagement in constructive discussions to address gaps in attracting capital for infrastructure development.”
The BCI pension fund takes a “pragmatic approach” to investing in emerging markets, spending “considerable time assessing the local investment landscape and building relationships with local partners to deepen our knowledge of the region and understand potential risks.” As a long-term investor, it can take many years of due diligence before BCI directly invests in a new market, the spokesperson added.
“We continue to closely monitor the macroeconomic and political landscapes across emerging markets as part of our ongoing asset management efforts,” the BCI spokesperson noted. “As active investors, spending time on the ground is at the forefront of our approach. Our investment teams travel regularly to emerging markets to meet with and engage our partners and portfolio companies.”
