Canadian public pension funds have been pioneers in the creation of infrastructure as an asset class. At least, that’s what Stephen Smith, managing partner of infrastructure at Healthcare of Ontario Pension Plan (HOOPP) thinks.

According to Inframation data, HOOPP is one of the top five largest pension funds in Canada, after surpassing CAD 100bn in assets under management (AUM).

The pension’s infrastructure investment strategy was launched in June 2019 and is now approaching CAD 2bn in infrastructure net asset value, through a mix of fund investments, co-investing and – like its larger Canadian compatriots – direct investments.

HOOPP has also completed four investments in individual companies, ranging from USD 200m to USD 450m. In December 2020, it invested in a USD 1.1bn NextEra Energy deal alongside KKR Diversified Core Infrastructure Fund, CAAT Pension Plan, and Varma Mutual Pension Insurance Company. In April 2020, it co-invested alongside North Haven Infrastructure Fund III into the USD 2.5bn acquisition of the Portuguese independent fiber network Fastfiber.

The other two deals, which have not been disclosed, are in the telecommunications sector in the US and in the transportation sector.

Smith, who became the first member of the infrastructure team after years of expanding HOOPP’s private equity portfolio, talks about the pension plan’s current infrastructure strategy and its next steps.

Why infrastructure?

With the size of our fund today, we can invest on a scale that's relevant to infrastructure investment opportunities.

There's an advantage to being able to invest on a larger scale: we've been able to make capital commitments to external managers that are very sizable.

[HOOPP has made three capital commitments totaling USD 1bn to: Morgan Stanley’s North Haven Infrastructure Fund III (USD 400m); Brookfield Infrastructure Fund IV; and Stonepeak Infrastructure Partners IV].

Committing that scale of capital to those three managers, we get their attention. We then demonstrate our interests and ability in co-investing and co underwriting on a larger scale than some other institutions would be able to due to capital constraints or differences in strategy and internal resources.

When the HOOPP fund was much smaller, I don’t think we would have been able to even think about executing in the way that we are now. It would have involved significantly more business engagements with external managers, much smaller co-investments and syndicated deals, which is all very different from how we're executing today.

Relative to some other Canadian pension plans, HOOPP is a late joiner, if you will. But relative to the overall development of the market globally, it's still very early days. To use a baseball analogy, I would say that this game is only in the second inning and it has a long way to run.

What’s your infrastructure strategy?

We're executing on a strategy of having a small number of GP relationships and having those GP relationships be very deep and active.

In particular, we're looking for co-underwriting opportunities. That would be a situation where the fund doesn't yet know that it has the deal in hand, but the GP knows that the size of the deal is much larger than the fund can handle on its own. We’re open to engaging with a GP in order to de-risk those situations and participate as an LP co-underwriter for a sizable chunk of capital.

We'll also look at normal co-investment situations, where the GP knows that they have the deal for the fund and they have a smaller piece that they need to place with their LPs.

We’re able to do both, and thanks to the size of our institution and the team that we've put together we're capable of doing that while being really responsive to GPs. It doesn't mean that we're saying ‘yes’ to everything. But we're saying ‘yes or no’ in a timely way so the GPs know what they're dealing with. From what we're experiencing with the relationships that we've established and the feedback we are receiving, it seems like we're in a differentiated position relative to some other institutions.

What are you looking for in the managers you select?

So far, the relationships that we've established have been with generalist managers with fairly extensive geographic reach, so that they cut across various sectors and geographies.

We've established three relationships: one with Morgan Stanley's North Haven fund, we are in the Brookfield fund and in the Stonepeak as well. And we believe that each one of those GPs participates in a different layer of the market in terms of deal size, so we think it's unlikely that we would ever end up in a situation where our capital is competing with itself for a particular opportunity. One of the things that we look for is to ensure as much as we can that we're not duplicating funding in a particular layer of the market.

The development of our funds program is going to be a work in progress for a while. In the future, we're open to the idea of participating in an evergreen fund. It could serve certain purposes within the execution of our strategy. We're also open to the idea of evolving from working only with generalist managers, to working with one or two sector specialist managers or a manager that has a very defined geographic focus. Today there are two sectors that are really benefiting from macro tailwinds: one is communications and data and the other is sectors that relate to the energy transition. The tailwinds for both seem to be only increasing.

What about direct investments?

One of the first investments we executed is the Next Era energy deal, led by KKR. We do not yet have a fund relationship with KKR, but we have a good relationship there and a long-standing dialogue.

They approached us at a time where they had not yet raised the fund that ultimately ended up investing in that Next Era transaction, and asked us if we'd be interested in looking at it with them. But make no mistake, they're clearly the lead. So it was a little bit of a hybrid between co-investing and co-underwriting. However, I would hesitate to call that direct, because that exit is ultimately going to be determined by KKR. In true direct investments, the decision to sell and governance and asset management responsibilities would rest entirely with HOOPP.

Today, we've completed four investments into individual companies. One is the renewables investment with NextEra being the builder and the operating partner, and then KKR and ourselves, and some other institutions. We've made two conventional co-investments in communications and data, one in the US and one in Europe. And then we recently completed a direct investment, which is really a club deal with, with a peer institution in the transportation sector.

Because so many infrastructure investments are very large or they relate to investments in companies that are very large and very valuable, it's important for us to find situations where we believe that we have aligned partners. It’s unlikely we would be in an investment entirely on our own. Many infrastructure situations involve multiple institutions and alignment with those partner institutions on the go-forward strategy for the company and for the investment is very important to us.

How strong are your geographic preferences?

We’re OECD-focused, but we do have a non-OECD amount that we are able to invest in emerging markets. Today, that amount is 1% of the total fund, so a little over a billion Canadian that we can look to invest in non-OECD jurisdictions.

One thing about infrastructure is that it's important to keep in mind is that in the developed world a lot of our infrastructure is old and in need of renewal. In the developing world, there's just a need for infrastructure - a lot of it is new build, but there is also some renewal need. So there's a bit more of a balance between the developed world’s and the developing world’s supply of infrastructure investing opportunities. And that contributes to why we think that there are significant opportunities to keep deploying capital in OECD countries, while also investing in non-OECD countries.

How will your portfolio look like in the long-term?

The long-term Vision for what our portfolio will look like is that less than a third - and in the very long-term probably less than 20% - of our portfolio will be net asset value held through funds.

About half of it should end up being direct investments that will be foundational and long-term holds. The remaining 30% should be co-underwriting and co-investments situations where the investments will cycle more frequently.

What is the future for HOOPP’s infrastructure allocation?

As we generate investment returns at HOOPP, that will continue to grow the fund. Over the long term, HOOPP should be on its way to CAD 200bn or more.

Over that same long term, the HOOPP infrastructure program should represent 10 % to 15% of the HOOPP total fund.

Today, 10 % to 15% would be roughly CAD 10bn - CAD 15bn, but over the long term that is going to grow because the HOOPP total fund will grow as well. So the long term future of the HOOPP infrastructure program is to have a net asset value well in excess of CAD 20bn.

[Editor's Note: The second paragraph has been amended to clarify that HOOPP is one of the top five largest pension funds in Canada.]

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Healthcare of Ontario Pension Plan (HOOPP) institutional

CANADA Public Pension Fund