Mark Carney wants the world’s biggest funds to invest billions in Canada. Will they buy in?

Global investing heavyweights will descend on Toronto for the first Canada Investment Summit Monday. The big question is whether Ottawa has changed the investing climate enough for them to pull the trigger

Prime Minister Mark Carney aims to attract major investments to fund his nation-building agenda to strengthen Canada's economy and reduce dependence on the U.S. Photo by HYUNGCHEOL PARK/Postmedia

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A single line in Prime Minister Mark Carney’s first budget in November resonated with one of Australia’s largest infrastructure investors. It said the Canadian government was considering selling the country’s major airports, a signal IFM Investors Pty Ltd. took to mean the door was swinging open to billions of dollars of investible assets for major institutional investors.

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“The fact that Ottawa is looking seriously at how long-term capital can play a role in major infrastructure is a positive signal,” Gian-Carlo Peressutti, an executive director at IFM, said Thursday.

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Next week, the $287.3-billion global asset manager owned by Australia’s largest pension funds will lead that country’s delegation at the inaugural Canada Investment Summit following an invitation by Carney himself.

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Executives at the fund have said they are prepared to invest $10 billion in Canada over the next decade if conditions are right. And that goes well beyond airports.

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“The government is clearly focused on getting major projects built and removing some of the barriers that have held investment back, so the direction is encouraging,” Peressutti said.

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“The next test is turning that into a steady flow of projects that investors can actually put capital into.”

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People visit a duty-free store at the Toronto Pearson International Airport. The nation’s major airports could prove attractive assets for investors. Photo by Joe Raedle/Getty Images

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It’s a prospect that is drawing global investors from across Asia, Europe, the Middle East and the United States to the invitation-only summit in Toronto Monday. Among the 250 invited guests from more than 25 nations expected to attend are  BlackRock Inc. chairman Larry Fink, Barclays PLC chief executive C.S. Venkatakrishnan and senior managers of pension funds and sovereign wealth giants from Saudi Arabia’s Public Investment Fund (PIF) to Norway’s Norges Bank Investment Management.

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Carney’s goal is to attract major investments from the crowd to fund his nation-building agenda to strengthen Canada’s economy and reduce dependence on the U.S. But the big question hanging over the summit is whether the conditions for investing have changed enough in a country where major projects have often lagged and those that lack scale and do no sufficiently manage risk have at times scared private capital away.

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Global investors ‘underweight’

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Raman Aylur Subramanian, managing director and research lead at New York-based data analytics and index company MSCI, said there is a strong case for global investors to boost their investments in Canada, based solely on the size of Canada’s economy.

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A reallocation to align private assets alone with Canada’s share of GDP among developed nations would amount to US$200 billion in new investment, he said, citing research his firm published this month that showed global investors are “underweight” in Canada to the tune of half a trillion dollars overall.

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Subramanian also noted there is a growing recognition that global investors are heavily exposed to the United States across asset classes, with that exposure far outstripping the U.S. share of developed-country GDP. Uncertainty from the trade war has only deepened scrutiny of that imbalance.

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“We are not saying that you have to sell U.S., but this is a governance thing,” he said, adding that the mismatch in the U.S. is a frequent topic of conversation when he speaks to large global investors including sovereign wealth funds.

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“They’re asking this question, saying, ‘OK, if I have to diversify, what is the opportunity out there outside of the U.S.?’”

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With a whole world to choose from, Canada has to have the right combination of assets and investment conditions in place.

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A recent report by the CPP Investments Insights Institute, which polled 65 senior institutional investor professionals from 20 countries that manage about US$47 trillion in assets — about a third of global assets under management — found that Canada doesn’t yet have the formula to sway the largest among them.

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While Canada ranked highly for smaller-scale investments among institutions managing under US$50 billion and already familiar with the country, the research showed larger institutional investors managing US$200 billion to more than US$500 billion — including many U.S. asset managers — preferred Japan, where the selling points include a reputation for capital discipline, attractive valuations and diversification.

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Canada pensions step up

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“The world’s largest allocators are not asking where opportunities exist; they are asking where they can deploy tens of billions of dollars repeatedly and efficiently,” the CPP Investments report said.

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Even Canada’s pensions have often been reluctant to invest more here. They resisted efforts by former prime minister Justin Trudeau’s government to increase their holdings, citing a lack of investments with sufficient size and scale to satisfy their mandates of generating returns without undue risk. They also pushed back by suggesting they were already “overweight” in Canada, given its relative size in the global economy.

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But there are signs some are changing their tune.

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The Public Sector Pension Investment Board said this month that it expects to surpass $100 billion in Canadian investments over the next few years, targeting a 30 to 40 per cent increase from the $75 billion invested here at the end of March.

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PSP CEO Deb Orida, whose organization is co-hosting the summit alongside the government and the Canada Pension Plan Investment Board, said the decision was based on “a new investing regime” that includes increasing global uncertainty and tensions with the United States. Another feature, she said, is the efforts Canada is making to find ways to accommodate pension mandates and aligning investments to them.

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“What we’re seeing is more opportunities to put capital to work around some of our areas of strength…. We’re seeing increasing opportunities to invest in infrastructure in Canada,” she said.

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On Friday, the Ontario Teachers’ Pension Plan Board followed suit, saying it plans to “further its exposure to attractive opportunities in Canada through investing an additional $10 billion by the end of 2027 in public and private Canadian investments that meet its return objectives.”

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The Ontario Municipal Employees Retirement System (OMERS) has also pledged to expand investments in Canada, targeting at least $10 billion over the next five years, including a $1 billion purchase of Canadian equities in the first half of this year and announced in August.

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“While we continue to maintain a geographically diversified portfolio to meet our long-term pension obligations, the current environment in Canada has considerable potential and we look forward to exploring those opportunities that align with our strategy,” Blake Hutcheson, chief executive of OMERS, said in August.

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The Carney government has been listening, too, particularly amid the trade war with the United States. Ottawa has pledged to invest government funds to “catalyze” $1 trillion in total investments over the next five years.

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To that end, a major projects office was created to fast-track nation-building projects that will boost Canada’s economy and reduce reliance on the U.S. More than 25 energy, mining, transportation and infrastructure projects are in the works representing more than $192 billion in investment.

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Prime Minister Mark Carney announces in August $10 billion in federal financing to develop the Gull Island hydroelectric project and expand Churchill Falls, flanked by Newfoundland and Labrador Premier Tony Wakeham and Quebec Premier Christine Fréchette. Photo by Keith Gosse/The Telegram

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The government also announced plans to launch the Canada Strong Fund, billed as a sovereign wealth fund that would be funded in part through “asset recycling” popularized in Australia, turning government assets over to private fund managers in return for proceeds that would fund more priority projects.

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At the summit, the Canadian government plans to set the table with a prospectus or “dealbook” showcasing potential blockbuster investments.

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Orida said there is some overlap between the dealbook and multi-billion-dollar gas, critical minerals and port developments being fast-tracked through the Major Projects Office. Summit organizers also created a portal so the attendees can arrange one-on-one meetings to privately discuss confidential mandates, whether that’s with bankers, companies, government officials or investors.

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“Newer opportunities are coming up in within Canada like data centres and infrastructure from a pipeline or privatization of airports,” said Subramanian, whose research is distributed to institutional investors and governments around the world including Canada’s. “That’s what will be interesting for international investors.”

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Aeronautics and defence is another area Canada has identified for an investment push that may be appealing to outside capital allocators.

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Beyond the assets, Canada’s global reputation for predictable rules, stability, and a strong regulatory framework has been identified as a selling point.

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“There’s never been a better time to have a reputation of being boring,” said Andrea Johnson, a partner and national leader of the corporate group at Dentons LLP.  “This is the message: we’re a safe harbour in a period of global instability.”

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To turn this into invested dollars will require improving conditions for capital to be deployed, according to several recent reports from banks and consultants leading up to the summit, including the CPP Investments research.

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“Successful markets do not simply attract capital,” the CPP Investments report said.

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“They design projects, institutions and commercial frameworks that allow capital to deploy.”

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What’s holding Canada back?

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One hurdle to the investment summit’s lofty ambitions could be the lack of a completed major project to point to for proof of concept.

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In early July, the Financial Times reported that Canada’s Major Projects Office had told an official United Arab Emirates delegation that it had no projects ready to receive tens of billions of dollars the UAE had committed.

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The gap was summed up in a report on Canada’s foreign investment prospects produced this month by Royal Bank of Canada and McKinsey & Co.

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“Execution, not diagnosis, is what is holding Canada back,” the report said, noting that greater returns, speed, certainty and market access are all necessary to increase Canada’s share of foreign direct investment.

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“Investors do not reposition capital on commitments but proof of change, and Canada needs visible wins it can point to.”

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The type of institutional investors coming to the summit tend to look well beyond a country’s share of global GDP in determining where to invest. They base investment decisions on the unique attributes and risks of each country and size up assets, projects and platforms against their “hurdle rate” — an internal rate of return measure that justifies making the investment while meeting the fund’s obligations to unit holders or beneficiaries.

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Sometimes there has to be something beyond the asset and nation, if all else is equal.

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“If I am a global allocator, I probably will look at both Canada and Australia together for critical minerals (because) Australia has them as well, so when the projects come off the ground, both will be competing for the same capital,” Subramanian said. “You have to identify … what does Canada bring uniquely on a risk-adjusted basis compared to what the other country’s going to offer?”

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Skin in the game

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There are signs Canada is working to tip the scales in its favour, including through the new sovereign $25-billion Canada Strong sovereign wealth fund announced by the Carney government in April. Pitched, in part, as a means to “recycle” government-owned assets and free up capital to invest in priority nation-building infrastructure projects, an important yet often overlooked element is the pitch for institutional investors to jump in alongside the federal government on projects, Subramanian said, adding that this offers the kind of risk reduction sought out by global investors.

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“(With the) Canada Strong Fund, the government is also trying to utilize (itself) as a co-investment partner … so there is a guarantee,” he said. “If I’m a global investor, I’m saying, ‘Hey, the Canadian government is not just attracting capital, but they’re also putting the skin in the game.’ That way, it’s much more reliable compared to any other country where they’re just attracting the capital.”

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There have also been numerous discussions behind the scenes about how to get pension funds bound by their fiduciary duties to contributors and beneficiaries in alignment.

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Sebastien Betermier, executive director of the International Centre for Pension Management, said ICPM laid out a framework for such discussions to help match investor needs with targeted policy and create windows for investment.

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He said the framework has been embraced by governments in the United Kingdom and some within Canada. It is his understanding that the Ontario government has discussed the ICPM investibility parameters with large Ontario-based pensions funds and it’s possible global investors coming to the summit will be armed with the roadmap.

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“What Canada faces with the domestic investment pressures is very common in other countries too,” Betermier said, adding that he would not be surprised to see consortiums of foreign and domestic players form to make investments after the summit.

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Infrastructure and heavily regulated sectors face political risk over the longer term, which is often higher for foreign owners, one of the reasons Canadian funds have joined with local partners when they invest overseas, he said.

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“I suspect that many of the foreign investors, if they come into Canada, will look to have one of the Canadian peers next to them because it will reduce some of that government risk down the road,” said Betermier, who is also a finance professor at McGill University. “If the deal is well structured, the partnership works (and) I don’t see why that would be an issue for some of the large Canadian peers, given that they already partner with some of these funds abroad.”

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Another blueprint of sorts was prepared ahead of the summit by the CPP Investments Insights Institute, which laid out investment criteria that worked for both Canadian pensions and foreign governments in four successful public-private ventures outside Canada.

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The projects ranged from a large nuclear development in the United Kingdom to a wind generation and transmission platform in the United States and a highway infrastructure project in India. Among the selling points included customers already under contract, the ability for patient capital to build investment platforms rather than one-off investments, and investors matched to the project stage best suited to them.

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Other successful projects benefitted from early co-design between government and institutional investors, a visible pipeline of future acquisitions, and regulated revenue during construction. The research also cited Australia’s asset recycling program, which worked because operating assets with established cash flow were sold to institutional investors and governments “recycled” the value into projects that were not yet ready for private ownership.

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Some of these steps that help priority investments fit within a pension mandate are being undertaken by the Canadian government on a small scale, said PSP’s Orida, pointing to the offtake agreement in the Canada Growth Fund’s $25-million investment in Rio Tinto’s Scandium-oxide production facility in Quebec last year, which will see the government of Canada purchase a committed volume of scandium.

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“Scandium is a critical mineral that you need for defence-grade aluminum as well as fuel cells, and that plant is the sole source of scandium in North America and one of the few in the OECD,” she said, adding that the government commitment provides price stability that will make financing expansion of the plant more attractive to large institutional investors.

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If the money that flows from the investment summit tracks input global institutional investors gave the CPP researchers, one of the most likely outcomes of the summit is more investment from smaller funds that have already purchased assets here and are likely to expand on those investments.

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There is also keen interest in attracting more private equity and venture financing, with the Canadian Venture Capital and Private Equity Association mounting a Toronto conference just ahead of Carney’s summit.

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“We have some very excellent fund managers in Canada that would be receptive to more global pension fund interest, who can then deploy capital into projects that are less suitable for direct pension fund investment,” said Johnson, the lawyer at Dentons. “This is part of why the CVCA event (as an) adjunct to the the Canada Investment Summit makes so much sense.”

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Isabelle Hudon, CEO of the Business Development Bank of Canada (BDC), said this month’s investment summit could become an annual event, and pointed to Choose France, now heading into its 10th year, as a possible model.

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In June, at the conclusion of the latest gathering of top companies and investors there, France’s president Emmanuel Macron said foreign companies had agreed to €93 billion in total investments, much of it going towards AI and data projects. Rare earths investments were also on the table in France and the deal tally covered 71 projects with expected job creation exceeding 15,000.

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“I can tell you that I’ve seen this in France, and it can be quite powerful,” said Hudon, who is also Canada’s lead negotiator in establishing the Defence, Security and Resilience Bank, a multilateral financial institution backed by public and private capital.

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The success of Canada’s first summit will be judged by what follows, even more than what happens in the room, said Orida.

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“The real measure of success will be the investments that come in the weeks and months afterwards.”

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