The Covid-19 pandemic has raised the effective risk characteristics of previously stable assets such as property and infrastructure, and is leading the Canada Pension Plan Investment Board (CPPIB) to reassess the risks involved in real asset investment, according to Suyi Kim, Asia head for the fund.
Investment in airports and mid-stream oil and gas facilities has already come under scrutiny by asset owners as the global pandemic impacts demand for travel and energy, but other infrastructure assets are also feeling the strain. Global toll road collections fell by up to 85% in the early stages of the pandemic, according to S&P Ratings.
This unprecedented volatility is also being seen in other asset classes that the pension fund had previously regarded as stable, according to Kim, who was speaking on a panel at the Milken Institute Asia summit on December 10.
“One of the lessons we've learned during the pandemic is that private real estate as well as infrastructure assets have more equity like risks than we thought before," she added. "For example, rental income for many real estate investments got frozen, because of rent holidays, and toll fee collections being suspended, or slowed down.
"So, going forward, we may focus more on the business model risks in these real assets, which were previously thought of as just delivering very stable cash flow with a high component of fixed income characteristics,” said Kim.
According to CPPIB’s latest financial results, the fund has some C$95 billion ($74.7 billon) of real assets spread across four sectors, from its C$456.7 billion in total assets. Alain Carrier, CPPIB’s head of international, said such investments had become a “challenge” for investors.
Speaking at the Greenwich Economic Forum last month, Carrier said the combination of lower returns and increased regulatory uncertainty for its real asset portfolio meant the CPPIB was taking a more cautious approach to making additional infrastructure investments as it seeks to ensure they can meet its investment hurdle rate.
“When I joined CPP Investments [another name for CPPIB] 12 years ago, it was possible to buy a UK utility with an expected yield of 12% but recently this has fallen to the 6% or 7% level, even though you actually are facing some regulatory uncertainty,” he said. “So real assets have become incredibly challenging from a cost of capital standpoint because our mandate as it relates to ensuring the long-term sustainability of the CPP is to earn a 4% real return on the assets we manage. That’s closer to 6% in relative terms.”
“You could say that some real assets today are not delivering the type of actual returns that are required, and while they are still an anchor to our portfolio, we're going to be very cautious in the near term in terms of what type of assets we invest in.”
AGAINST THE TIDE
CPPIB’s more cautious view on infrastructure goes largely against the tide. Asset owners are generally increasing their interest in the asset class, with Ontario Municipal Employees’ Retirement System looking to double its Asian infrastructure exposure by 2025, and the Ontario Teachers' Pension Plan having recently opened a Singapore office to house its newly appointed regional head of infrastructure.
Concerns about the impact on Covid-19 were not limited to real assets at the Milken summit. Singaporean sovereign wealth fund GIC’s group chief investment officer, Jeffrey Jaensubhakij talked about the potential negative impact of government support schemes to keep unviable – or zombie companies – trading.
Initiatives like the UK’s job support scheme, which pay a large share of worker’s salaries while they don’t work, meant otherwise unviable companies are continuing to trade, he said. As a result, Jaensubhakij argued that sectors, or indeed entire economies, may avoid taking necessary restructuring actions to deal with the impact of the pandemic.
“This concern around zombie companies, and whether all this liquidity support allows firms to not adjust in the way that they need to for the future, is a live one,” he said. “And it extends even to the whole economies; certain types of jobs are being supported today because of government schemes but they will have to transition eventually and re-skill their workforce for the jobs that are going to be created for the future types of industries.”
Jaensubhakij said he believed that such existing government support could delay that much-needed long-term transition, stymieing the flow of capital and investment to more promising companies and sectors.