Alternatives-asset classes
Real estate and infrastructure are the most popular alternatives

Adjusting the mix

Nearly 80% of respondents that incorporate alternatives into their plans are looking to make increased allocations to one or more of their alternative investments in the near term—up from 72% last year.

Similar to last year, approximately 60% of pension plans that hold alternatives intend to increase their allocations to infrastructure in the near term and only a few are forecasting reduced demand. However, the demand for real estate is expected to decline year-over-year as relatively fewer plans augment their holdings (53% to 45%) and a higher proportion of respondents look to decrease their allocations to this asset class (0% to 7%).

On the other hand, demand appears to be strengthening for private equity and private debt as a higher proportion of respondents are planning increased allocations year-over-year (38% to 47% and 38% to 46%). Consistent with last year, a relatively small number of respondents plan to change their allocations to the less popular hedge funds and natural resources.

Change in alternative investment allocations

• 80%
  of respondents intend to increase at least one of their alternative investment allocations
• Real estate
  is experiencing lower demand*
• Private debt and private equity
  are experiencing higher demand*

Continuing the upward trend

Increased alternative investment allocations in the coming year are the continuation of a trend that has resulted in the more than tripling of Canadian defined benefit pension plan alternative allocations over the past 15 years from 12% in 2004 to 38% in 2019.⁴

Canadian Defined Benefit Pension Plans
Asset Mix⁴

Higher remote working = reduced office footprints

Real estate continues to be the most popular alternative investment but its popularity appears to be declining somewhat as fewer respondents are planning increased real estate allocations year-over-year and more are looking to reduce their exposure. This may be in anticipation of a potential reduction in office footprints and resultant lower demand for commercial real estate generated by the move to remote teams during COVID-19, a trend that could continue as firms and employees consider adopting more flexible approaches in the future.

The promise of an infrastructure boom

Respondents remain particularly upbeat on infrastructure as over 60% plan to increase their allocations to this asset class in the near term—the highest of any alternative class. This occurs at a time when governments throughout the world are promising an infrastructure boom as part of efforts to restart economies in the post-pandemic period by repairing aging assets in developed countries, providing electricity and clean water in the emerging world, and meeting demands for renewable energy and connectivity globally. The need is substantial and the G20’s Global Infrastructure Hub estimates that the world will require $82 trillion of infrastructure investment by 2040.¹

Meanwhile, CEO of the Canada Pension Plan Investment Board (CPPIB), the country’s largest pension manager, believes that “a wall of money” is headed towards real assets, including infrastructure, “because of structurally low interest rates.” The CEO recently urged governments to consider privatizing assets to help reduce record deficits that are expected as a fallout of the COVID-19 pandemic. He said CPPIB is in the market for infrastructure and real estate investments, despite the pandemic’s dampening effects on office space and commuter-driven infrastructure such as toll roads. “We still like real assets, we still like toll roads,” he said. “In fact, we’re very close on another toll road (investment).” CPPIB owns a stake in the Greater Toronto Area’s 407 commuter toll road.²

Also of note, the $330 billion Caisse de dépôt et placement du Québec (CDPQ) has reiterated the pension plan’s intention to double its infrastructure portfolio over the next five years to approximately $60 billion. The announcement came after CDPQ revealed a -1% return for its infrastructure portfolio in the first half of 2020, compared to a -11.7% return from real estate assets. According to the pension manager’s Head of Infrastructure: “We still have plenty of deals to do. It’s about finding long-term yield and value, and having a diversified portfolio. Diversifying the risk is as important as getting top dollars.” Among its infrastructure investments, CDPQ holds a 13% stake in London’s Heathrow Airport and has taken on Montreal’s Réseau Express Métropolitain, a $6.3 billion light rail Greenfield development.³

Private equity and private debt on the rise

A greater proportion of respondents are planning to augment their private equity investments in the coming year (38% to 47% year-over-year), continuing a 10-year trend of doubling allocations to this asset class in the search for higher returns (6% to 12% of assets).⁴ Potential benefits of private equity include the prospect of an “illiquidity premium” for not being in the public markets, while others suggest that stronger returns from private equity investments may be tied to complexity or higher governance costs rather than their illiquid nature.⁵

An increasing proportion of pensions are also accelerating their exposure to private debt (38% to 46% year-over-year), which is generally issued by closely-held companies and offers a premium over corporate bonds due to fewer disclosures and less liquidity. However, investors are reportedly facing a shrinking universe of higher-quality private debt investments to lift returns as the coronavirus pandemic has “crushed” many companies that issue such debt.⁶

Are you planning to include the following alternative investments in your plan’s portfolio during the next 12 months?

How do you expect to change your alternative investment allocations during the next 12 months?

• *Based on the proportion of respondents that expect to increase or decrease their alternative allocations year-over-year
• ¹The Economist, In the Works, January 2, 2021, USD in 2015 prices
• ²Financial Post, CPPIB Chief Sees “Wall of Money” Headed to Infrastructure Investments, December 15, 2020
• ³Infrastructure Investor, CDPQ Plans to Double Infra Portfolio, October 15, 2020
• ⁴Pension Investment Association of Canada, Asset Mix Report 2019 as reported at calendar year end, excluding cash and leverage
• ⁵Benefits Canada, Why are Institutional Investors Ramping up Allocations to Private Equity, December 20, 2019
• ⁶The Globe & Mail, Canadian Pension Funds, Insurers Seeking Private Debt, November 29, 2020