The savvy foreigner usurping our super opportunity

This week brought news that Canada's $120 billion Ontario Teachers' Pension Plan intends to increase its presence in Australia, attracted by the prospect of state-owned assets, namely infrastructure, being privatised.

This is significant for two reasons: Firstly, Canadian pension plans carry a lot of clout – the OTPP is only the third largest in the country, behind the $170 billion Canada Pension Plan Investment Board and the $159 billion Caisse de depot, which manages public and private pensions in Quebec. All three dwarf any equivalent fund in Australia.

They brought the management of their funds in-house well before the global financial crisis and were largely insulated in Canada from the market crashes that decimated pension plans in the US and elsewhere. Now they are on the hunt for non-equity, long-term, safe investments, and Australian infrastructure is a primary target.

Secondly, the growing interest from Canadian pension plans in Australian infrastructure assets comes not only at a time when Australian governments are examining privatisation plans, but also when Australia's superannuation industry is being warned against over-investing in infrastructure for fear of hurting liquidity. Earlier this week, the Australian Prudential Regulations Authority warned super funds against over-investing in infrastructure on the basis that such investments are high-cost and not guaranteed to pan out.

Canadian pension funds have expressed no such caution. As of September 2012, the CPPIB held 34.4 per cent of its assets in foreign equities, 8.6 per cent in Canadian equities and 6.2 per cent in infrastructure. It and other major Canadian pensions are intent on reducing their exposure to equity and to shift those assets into infrastructure, much of it foreign. More than half of the OTPP's total investments are outside Canada.

The high Australian dollar is not a disincentive for Canadian investors in the way it can be for other foreign investors. The two countries' dollars are currently trading on par, which for a Canadian looking to invest in Australia is actually a more favourable exchange rate than in recent years.

Even so, if Canadian pension plans were looking for a bargain maybe they would be turning to countries with more favourable exchange rates than Australia offers. But they aren't. Instead, they want secure, long-term returns on stable investments. And in Australia's infrastructure assets they see a perfect match.

But why do Canadian pension plans see something in these infrastructure assets that Australian institutional investors seemingly don't?

For those Australian investors, the infrastructure assets remain a domestic investment serving cost-intensive industries (such as iron ore) to which they are already heavily exposed. In short, at first glance they offer little to an Australian institutional investor looking to diversify their portfolio.

Whereas for a Canadian investor, these assets offer exposure to a foreign market that has proven resilient amid global economic uncertainty in sectors (such as iron ore) that don't currently dominate the portfolios of Canadian pension plans. The pension plans themselves have cited Australia's openness to foreign direct investment, its well-established regulatory regime, open business environment and healthy economy as incentives for focusing on Australia.

Australia is hardly unknown territory for these pension plans. The OTPP bought a stake in Transurban, which it later sold, purchased stakes in European airports from Macquarie Airports and took a stake in the Sydney desalination plant. The desalination plant deal last year upped the OTPP's exposure in Australia to $1 billion.

Now, it has reportedly set its focus on two ports being offered at long-term leases by the NSW government, and set a minimum project target of $250 million on Australian investments. Reports suggest the Ontario fund hopes to team up with Westpac-owned Hastings Fund Management to bid for the Port of Botany and Port Kembla leases.

It may turn out that Canadian pension funds compete for the port investments, as the CPPIB is thought to be teaming up with Macquarie to bid for the ports. The CPPIB is equally familiar with Australia, having for instance invested $1 billion last year in the Barangaroo project on Sydney Harbour.

In October, the CPPIB invested $436 million for a 37 per cent stake in AMP Capital Retail Trust, which owns half of Sydney's Macquarie Centre and 80 per cent of Gold Coast's Pacific Fair Shopping Centre. The CPPIB also paid $1.1 billion for a near-majority stake in five Chilean toll roads, demonstrating a global interest in infrastructure.

"We believe that private equity assets can produce risk-weighted returns that will outperform public equities in the long run,” CPPIB's chief executive Mark Wiseman said earlier this month.

The strong interest from Canadian pension plans in Australian infrastructure offers an opportunity for Australia's revenue-hungry state governments.

But state infrastructure assets are only privatised once. Timing is everything. And this time around, when 'for sale' signs are hung on Australia's state-owned assets it may well be Canadian pension plans who are first to sign on the dotted line.