Since emerging as an asset class in the 2000s, the infrastructure market has been propelled by Canadian direct investors such as CDPQ, CPP Investments, Ontario Teachers’ Pension Plan, OMERS and PSP Investments, latterly joined by British Columbia Investment Management and the Alberta Investment Management Corporation. There was, though, a conspicuous absence of one member of Canada’s so-called Maple 8 pension fund group.
The now C$112.6 billion ($81.7 billion; €74.8 billion) Healthcare of Ontario Pension Plan remained out of the infrastructure fray until 2019, but has now amassed about C$7 billion of infrastructure assets to be the 46th largest investor in the asset class globally, according to our Global Investor 75 ranking released in June.
Steve Smith, who has been with HOOPP since 2010 and was appointed to lead the infrastructure build-out, does not regret staying on the sidelines.
“While many of our peer institutions were investing in infrastructure and developing their programmes, 15-20 years prior to when we got started, HOOPP was doing other things quite successfully,” Smith told Infrastructure Investor.
“We didn’t really miss out on the return opportunity that came with the declining interest rate environment that was associated with infrastructure investing. We just caught it in other ways, primarily on the fixed income side of what we did,” he added.
Smith also said that across its private markets teams, HOOPP generally has relatively smaller investment teams than its Canadian investment peers and would not have been able to build up teams as large as the other pension managers. It has, however, since hired from some of those other teams, bringing in former OMERS Infrastructure managing directors Paul Calder and Michael Holland as partner and managing director, respectively, and appointing Debra Granatstein as partner from the Canada Post Pension Plan.
Going direct
Yet, timing aside, HOOPP has not behaved like a typical nascent LP in the asset class. The infrastructure assets under management have been ramped up over the past five years extensively and predominantly through direct or co-investments, rather than GP fund commitments.
At the end of 2023, HOOPP Infrastructure had C$4.3 billion in direct or co-investments and C$1.4 billion in fund commitments, with the majority of those fund commitments coming during HOOPP’s first inception year. During 2024 to date, the fund’s infrastructure AUM has since risen to about C$7 billion, Smith said.
Its most recent direct investment came through a $650 million funding package provided to US-based solar and storage developer Pine Gate Renewables, made alongside Generate Capital and Australian investor HESTA, adding to the renewables investment made in 2020, when it supported KKR’s $1.4 billion investment in a 1.6GW portfolio of wind and solar assets in the US owned by NextEra Energy, the first from KKR’s Diversified Core Infrastructure Fund.
HOOPP was also among Canadian peers PSP Investments, AIMCo and Investment Management Corporation of Ontario supporting Brookfield Asset Management’s A$10.2 billion ($7.7 billion; €6.6 billion) take-private of Australian power grid operator AusNet, a deal also supported by Australia’s Sunsuper.
“We set out to execute with three pillars: one being the funds that we’ve invested in, the other being the co-investments and co-underwriting situations that we do in combination with those GP partners, and the third is direct investing and we have done a mix of those things,” Smith explained. “The mix of our portfolio is developing approximately as we expected it would develop.”
While the fund commitments have to date been a smaller portion of the programme, Smith said HOOPP has C$2 billion of unfunded commitments still to make to this area. HOOPP declined to name the funds it has committed to.
“We really view our relationships with those managers as an important source of origination of opportunities,” Smith said. “We are opening a London office and we’ll have a few people there shortly, but, as a small team, we can’t hope to effectively originate all on our own on a global basis across so many different sectors. So, we really leverage our GP relationships for that purpose and they leverage us as a reliable and responsive co-investor or co-underwriting partner as a form of de-risking of transactions for the funds that they manage. That has been differentiating for us as we’ve started our programme.”
Smith also said that HOOPP’s direct investments are designed to each serve different purposes, rather than fitting into a pre-determined view of a specific risk allocation. The direct investment portfolio also includes a Canadian highway, European and US digital infrastructure deals and a container terminal.
“We would view AusNet as a foundational portfolio component, an asset that it would not surprise me if HOOPP owns that investment 20 years from now and we have a number of other investments that are similar in nature to that,” he maintained. “Whereas some of the other investments that we’ve made [such as] Pine Gate, but also other investments that we’ve made, for example, we would expect to turn sooner and those investments also typically have a little bit of a higher return expectation attached to them.”
HOOPP’s infrastructure programme returned a net 8.1 percent last year, down from 9.4 percent in 2022 and 14 percent in 2021. That previous higher return was due to two investments “that performed very strongly right out of the gate”, according to Smith.
“Now, as the portfolio has grown, our denominator has gotten larger and less susceptible to being influenced by the performance of strong performance or weak performance of any single investment,” he explained. “The returns are blending down to be within the range that we expected when we launched our programme.”
‘We’re not done’
Amid the rapid growth, HOOPP sounded a note of caution on the asset class in its annual report released earlier this year. The pension fund noted the more gradual pace of growth in 2023, following interest rate hikes which “led to changing conditions for the infrastructure asset class”. As a result, HOOPP Infrastructure has been “highly selective” and will “take advantage of more favourable buyside conditions should they occur”.
“We’re not done,” Smith said defiantly, clarifying that infrastructure comprises about 6 percent of the allocation to date and the team can invest to up to 10 percent of the HOOPP portfolio until it has to request an increase from the board.
“We’re in a situation where we’ve built a reasonably sized portfolio already, there’s no pressure to invest and there’s no pressure to not invest, which is exactly the conditions that any investor would want to be dealing with internally and building out this kind of programme,” he reasoned. “I would say we’re at a stage where we’re maybe just past the middle of building the foundation of this portfolio.”
Still, if there’s been one surprise to Smith and HOOPP, it’s the growth of GP fund size since HOOPP came into the market in 2019, when, according to Infrastructure Investor data, fund size stood at an average of $1.1 billion. This grew to a high-water mark of $1.5 billion in 2022, although has reduced to $1.3 billion in H1 2024.
“When one reflects on the historical performance of the asset class and also reflects on the near zero rate environment that was existing for a few years following our creation of this programme, it’s logical that [fund size growth] would have occurred,” said Smith. “I certainly expected it, but it occurred on a scale that was unexpected. There’s a degree of adaptation within the industry that remains to occur.”
HOOPP, one imagines, will be waiting in the wings.