Exploring the Canadian alternatives market

Alternatives continue to see rising demand from institutional investors in the Canadian marketplace. Tim Rourke, vice president of pensions and asset owners at CIBC Mellon, discusses how the country is well placed to meet it

Canada is known for its prudential regulatory environment, robust and mature financial markets, a stable political environment, and the collaborative leadership of large plans, which are among the world’s most successful and sophisticated. Canada is home to a number of leading alternative managers and investors, who are increasingly turning to alternatives, such as real estate, private equity, and infrastructure, as a means to improve performance and diversify their portfolios.

Many institutional investors invested in alternatives contend with the need to preserve capital and generate returns amid times of sustained historically low interest rates and continued market volatility, and these factors drive plan sponsors’ further expansion across the full spectrum of alternative asset classes.

Canada’s largest plans are global leaders in alternative investments, building capabilities in-house and deploying their capital to realise stable, long-term investment opportunities. There are ongoing movements into real estate, infrastructure, private debt and other classes that require a new set of reporting and oversight capabilities.

The BNY Mellon Canadian Master Trust Universe, a BNY Mellon Global Risk Solutions fund-level tracking service, is one such source of peer comparisons of performance by plan type and size. It comprises 90 Canadian corporate, public and university pension plans, with a market value of more than CAD 234.1 billion (USD 187.3 billion) and an average plan size of CAD2.6 billion (USD 2 billion). The detailed sub-asset class information helps in identifying macro allocation trends.

According to BNY Mellon Global Risk Solutions, for the one-year time period ending 30 June 2017, the median return for real estate in the BNY Mellon Asset Allocation Canadian Trust Universe was 8.1 percent. In terms of allocations, as of 30 June 2017 the asset-weighted asset allocation was 3.6 percent for hedge funds, 7 percent for real estate, 4.3 percent for other real assets, and 1.9 percent for private equity. For plans above CAD 1 billion (USD 800 million), BNY Mellon Global Risk Solutions reports infrastructure has seen an increase to 3.9 percent in June 2017 from 3.1 percent that time last year, and over the same time period for plans of that size, real estate increased to 7.2 percent from 6.2 percent, according to the BNY Mellon Asset Allocation Canadian Trust Universes.

BNY Mellon’s whitepaper, Split Decisions: Institutional Investment in Alternative Assets, which was conducted in collaboration with the research service FT Remark, suggested that further growth in alternative allocations will be supported by the continued development of new products in the alternatives space. Accordingly, fund managers are catering for increasing amounts of capital that is intended toward alternative assets. This report notes that alternatives are now part of the mainstream set of investment options for institutional investors—it is no longer the small niche that it once was.

As a result of ongoing movements into real estate, infrastructure, private debt and other asset classes, investors are seeking a new set of reporting and oversight capabilities. There is a lot of expertise in the Canadian alternative investment market, and opportunities will continue to be brought forward, but it’s important to have the necessary experience to navigate, monitor and oversee opportunities within your risk appetite. Accordingly, data and the ability for providers to give owners and managers access to the information they need is gaining strategic importance in Canada.

Using data analytics, either with current in-house infrastructure programmes or an outsourced solution, can drive operational efficiencies, support governance and effective evidence-based decision making, and increase automation. According to the global report, Preqin Investor Outlook: Alternative Assets H1 2017, there is strong institutional investor appetite for real and alternative assets, and there is a focus from institutional investors on fund managers providing transparency and detailed performance data.

From a global perspective, Preqin’s Investor Outlook reported that the proportion of institutional investors allocating to the real estate asset class is the majority of respondents at 61 percent, followed by private equity at 57 percent and then hedge funds at 51 percent.

Preqin confirmed that institutional investors continue to see strong returns from their real estate portfolios, and remain committed to this asset class with a 93 percent majority of investors polled stating that real estate met or exceeded their expectations last year. Smaller pension plans are showing increased interest in alternative investments, looking to realise returns experienced by the larger Canadian plans. Therefore, it is expected investors will continue to look to real estate as a key allocation of their portfolio for diversification and stable returns.

The ability of an investor to allocate capital through separate accounts and co-investments can be closely linked to its size, with larger institutions having more resources and experience. In the Bain & Company report, Global Private Equity Report 2017, it is suggested that many of the larger deals that closed last year consisted of co-investments by big pension funds in Canada. The report noted that sponsorship and solo direct investing requires heft and the ability of investors to support their own programmes.

In its report, Bain & Company cited the Canada Pension Plan Investment Board (CPPIB) as an example of the trajectory of influential investors. According to the report, CPPIB started its direct investing programme in the mid-2000s, and by 2016, it transitioned to more direct investments, ramping up its direct private equity programme to a net asset value of CAD 16.6 billion (USD 13.2 billion). An outcome of the trend for negotiating co-investment rights, as noted in BNY Mellon’s Split Decisions whitepaper, is that it can assist in lowering overall fee levels for investors.

There is a positive outlook that drivers such as greater investor demand for yield will likely continue to propel the Canadian institutional alternatives market forward. For investment servicing providers such as CIBC Mellon, the move by investors to alternative investments such as real estate creates new opportunities for securities processors and safe keepers to move to being data managers, and provide client service and innovative solutions to support alternative investment vehicles across a range of fund types and future data needs.
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