Many are familiar with the Sea-to-Sky Highway connecting Metro Vancouver and the four-season playground of Whistler, BC. What few drivers of this rolling, 150-kilometre stretch of road realize is that it has been privately owned and maintained since it was upgraded in advance of the 2010 Olympics. In fact, it’s already changed hands twice in that time.
Though not tolled, the highway is the subject of a 25-year contract between the private owners and the Province of British Columbia, who operate it as if it were a toll road. The government pays the owners, Axium Infrastructure, a performance fee based on the level of traffic and (inversely) the length of disruptions due to mishaps like rockfall and washouts.
This is an example of a relatively new and growing asset class that you may consider including in your portfolio: Infrastructure.
When did private owners start investing in public infrastructure?
For most of human history, providing and financing public utilities like roads, water and ports was the responsibility of governments. As the needs for modern life have multiplied to include everything from airports to cellphone towers, governments have, over the past 30 or so years, turned to the private sector to take on the risk of building and operating these facilities.
The ability of governments to finance the projects they need upfront is getting more difficult,” notes Ben Jang, a Portfolio Manager with Nicola Wealth specializing in infrastructure investments. “Private operators have also proven themselves to be more efficient managers of these assets than governments themselves, improving the consistency of service while also keeping costs in check and generating a return for shareholders.
Why is public infrastructure attractive to investors?
Infrastructure investment has some attractive attributes for investors too. In a time when interest rates on fixed income have dwindled to almost nothing, it offers the prospect of steady yield, capital appreciation and protection against inflation. At the same time, its limited exposure to economic cycles—many assets have a virtual monopoly in their market—can help offset the volatility associated with public equities and further diversify your portfolio.
Major pension funds and multinational asset managers like Australia’s Macquarie Group and Canada’s Brookfield Asset Management were early movers in this space. For almost five years now, Nicola Wealth clients have had access to the asset class through the Nicola Infrastructure and Renewable Resources Limited Partnership.
The infrastructure component of the fund diversifies across regulated utilities, contracted infrastructure (with a private-sector counterparty such as a landlord) and usage-rated facilities (such as highways, hospitals or airports). Through our interest in Fiera EagleCrest, Nicola Wealth’s pool owns an indirect stake in Thames Water, which provides drinking water and wastewater treatment to over 14 million people in Greater London, England.
This investment opportunity in public infrastructure is only expected to grow with the urgent transition to more environmentally sustainable, climate-friendly infrastructure. Moreover, the developing world represents an untapped market ripe for growth with many public infrastructure needs. More and more, it’s an asset class that is growing, which you may look to have exposure to with your investments.
This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. This investment is generally intended for tax residents of Canada who are accredited investors. Some residency restrictions may apply. Please read the relevant documentation for additional details and important disclosure information, including terms of redemption and limited liquidity. All investments contain risk and may gain or lose value. Please speak to your Nicola Wealth advisor for advice based on your unique circumstances. Nicola Wealth is registered as a Portfolio Manager, Exempt Market Dealer and Investment Fund Manager with the required provincial securities commissions. An investment in Nicola Infrastructure and Renewable Resources Limited Partnership is an investment in alternative asset classes. Investments in alternative funds are highly illiquid and carry a related degree of risk of financial loss. Effective September 19, 2018, the fund adopted a new mandate and changed its name from the NWM Farmland Limited Partnership.