Can investing in infrastructure serve as a safe haven in times of economic uncertainty?
Nick Jansa, Executive Managing Director for Europe, the Middle East and Africa (EMEA), discusses the role infrastructure can play to help deliver steady returns in a portfolio
With higher interest rates and inflation, increasing competition for deals and geopolitical complexities, the investing climate has changed in recent years. As a result, long-term investors are taking active measures to mitigate risk, diversify portfolios and help generate stable returns.
"As a long-term investor, we try to think about how we can prepare and be resilient around potential market shocks while trying to construct the most resilient portfolio," says Nick Jansa, Executive Managing Director for EMEA, Ontario Teachers'. "This includes investing in different asset classes and different geographies to generate the strongest returns."
One asset class that is often considered a safe haven for investors is global infrastructure. “Fundamentally, infrastructure is meant to be lower risk, with a return that reflects that — it's an important part of our portfolio that helps us pay pensions which are inflation linked," Jansa told the audience of a global infrastructure panel during the recent Financial Times' Due Diligence Live event in London.
Below, read more of Jansa's highlights from the panel, including why Ontario Teachers' increased its allocation in infrastructure several years ago, the role it plays in different market dynamics and how it is helping drive the energy transition.
Ontario Teachers' is a large investor in many different asset classes. What does infrastructure bring to the table?
Nick Jansa: Infrastructure is a long-tenured asset class for us. As a pension plan, we have to ensure our investments make a steady enough return to cover our outflows and long-term liabilities. A key part of that is about reducing funding volatility, making sure we have a funding surplus and ensuring we keep up with inflation. This means creating a portfolio that generates a certain level of return without taking on too much risk. Infrastructure plays an important role here because it can help to generate stable returns, which are often inflation linked, and at times generate cash returns.
In which market environments does infrastructure tend to outperform?
NJ: Infrastructure tends to outperform in more challenging market environments, but it still provides a very important stable return in what you might call the recovery or stronger years. We started to increase our allocation to infrastructure about four or five years ago. We were one of the earliest pension plan investors to build a direct infrastructure strategy around 25 years ago, but we wanted to build greater stability in our portfolios and to account for inflation, which we believed was going to go up. We're now at a point where we are comfortable with our exposure and have a broad, diverse and global portfolio, with majority or co-control stakes in a range of assets.
How do transaction volumes in the infrastructure sector compare with other asset classes such as private equity?
NJ: Transaction volumes are down across all asset classes, but people are less worried about infrastructure because there isn't the need or desire to churn the assets in quite the same way. Investors tend to hold infrastructure for longer, so there is less pressure to return capital to the LPs (Limited Partners). Overall, there are probably more long-term investors in the infrastructure market. This creates a different type of environment and it means you can have a slower year. Infrastructure transactions are also much larger, so while the volumes look very high, there are actually a smaller number of transactions taking place than within other asset classes.
Private capital has a pretty important role to play in the energy transition. How do you see infrastructure playing into that?
NJ: In many ways, some of the largest infrastructure investments need to happen to enable the energy transition. In the UK, for example, we're investing in electricity transmission lines just to be able to get renewable power from the North Sea to England, Wales and Scotland. Otherwise, you can build as many offshore wind turbines as you want, but it doesn't make any difference unless you can deliver power to the end consumer. As direct investors, we have an important role to play in helping invest behind this. The transition to net zero creates new investment opportunities but also changes the risk dynamic, so investors and their portfolio companies need to work together to find solutions that contribute to a low-carbon future at the same time as delivering stable, long-term returns. Governments who provide policy certainty, stability and investment in skills and planning, stand to benefit most from long term direct institutional investment.
