Show Transcript
Many investors are looking to infrastructure projects such as utilities, transportation and energy assets to help diversify and enhance returns, Greg Bonnell speaks with Colin Lynch, Managing Director and Head of Alternative Investments at TD Asset Management about investing in infrastructure, real estate and private debt.
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[AUDIO LOGO]
Well, beyond the world of stocks and bonds, there's an asset class known as alternatives. That can include everything from investing in infrastructure to mortgages and private debt. Joining us now to discuss the potential opportunities in this space is Colin Lynch, managing director and head of alternative investments at TD Asset Management. Colin, welcome back to the program.
Well, thank you, Greg. Thank you for having me here.
You've been on the show many times. I think that's the first time I've used your new title. So obviously, you have a new mandate to discuss with us that includes these alternatives. Tell me about it.
Yeah, well, it's an exciting new mandate. And I'm very excited to lead a broad team to invest in these different asset classes. And as you mentioned, they could go beyond real estate. And we do have Canadian real estate and international real estate.
But we also have commercial mortgages. We have private debt, which provides debt to-- whether it's private companies, also participates in real estate lending, infrastructure debt as well. And we also have global infrastructure. And that's a fascinating asset class, which includes everything from renewable energy, through to transportation, to things like social infrastructure as well.
And so when you look and step back from that, these asset classes, beyond being ones that aren't publicly traded, are really ones that fit into some of the core themes that our society, worldwide, is embracing today-- for instance, energy transition being one; two, housing shortage being another; three, the availability of capital being limited more from the government sector and needing to rely on other participants beyond the government to help create society-sustaining solutions.
And so the alternative space is an incredible space because not only are you able to help provide some of these solutions for all of society, but investors increasingly realize that the alternative space plays a very interesting role, a diversification role, an attractive, return-generating role for a portfolio.
Let's talk about some of those potential opportunities, start breaking down the silos. You mentioned infrastructure. This is interesting because we know, particularly in North America, we have aging infrastructure. There are goals we want to meet in terms of climate and governments that are strapped for cash. So let's start talking about the opportunity there.
Yeah, absolutely. It's a very significant opportunity. Let's start with energy transition. We certainly have many forms of energy and traditional energy. But we also have-- I was going to say newer forms. And actually, if you think about it, they're not actually really that new.
The sun's been around for a while. We're just trying to figure out how to harness its power.
Precisely. And that we're now doing at scale. And so infrastructure investors have been able to participate in some of the financial returns associated with participating at scale in a couple different ways-- number one, brownfield, i.e. existing assets that are generating power, but two, greenfield, the development of new assets. And some of those returns on the greenfield side tend to be quite attractive. And so solar is just one element of the renewable energy equation. That includes wind farms as well. That includes biofuels.
And then, there's also the capture and the storage of that energy. So think battery packs. And investors in this space have the opportunity to help governments, for instance, when they have issues, around the sustainability of their power grids. For instance, if there is a significant weather event that we saw in Western Canada earlier this year, some of those battery banks are able to provide power to those grids in their times of need.
And then, beyond energy, there's transportation. So think ports and think facilities at airports. Think highways. There's also the facilities that you frequent when you're travel-- where you're driving along those highways, the service plazas. All of that is-- and more-- part of infrastructure.
And those are-- call it-- the basic needs elements associated with living our day to day lives. But without those basic needs satisfied, we really can't live much of our day to day lives. And so really, infrastructure represents the ability to invest in providing high quality, whether it's power, whether it's transportation, whether it's social infrastructure, to help provide the basic needs of our day to day lives.
Now the average person can understand infrastructure because it is a part of their daily lives. Talk to us about private debt, the space there, and the opportunities, maybe a little bit about what we're talking about here.
Yeah, so we know about the fixed income market, for instance, which is providing debt to companies. And that debt is publicly traded. Similarly, private companies, companies that aren't privately traded, also need debt. And so the private debt market provides debt to some of those companies.
Now, there might be small business owners, for instance, that don't have publicly traded companies. They might own their small business. And they go out, and they get debt from different providers. Broadly put, that's part of the private debt universe. But where we invest is typically a bit broader in terms of companies that are operating at some significant scale, that might be doing nine figures of revenues or 10 figures of revenues. And we have the opportunity to provide debt to those companies.
But it goes beyond those private debt companies. So if we go back to infrastructure, on the equity side-- so you have investors that are investing in, for instance, renewable energy. Some of those investors use debt as well. So instead of putting all the cash down, they might seek to use some debt. And that helps them amplify their cash. I.e., instead of investing in one portfolio of projects here, they might be able to invest in three or four. And that allows them to achieve diversification and higher returns.
But from a debt side, that allows a different investor to participate in some of that renewable energy without having some of the higher risk that's associated with the equity side while achieving greater diversification as well. And so there's multiple ways to get exposure to some of those big themes. You can get exposure through direct ownership through the equity side-- i.e. infrastructure-- or you can get exposure on the debt side, perhaps a little bit lower in the risk spectrum, perhaps a little lower in return. But that might work for different type of investors as well, according to what they are looking to accomplish.
And so the private debt is interesting because it can play in multiple different places, whether it's the real estate side, the infrastructure side, whether it's to private equity companies providing debt to those companies or privately held companies, and therefore able to build a pretty diversified portfolio of exposures, and therefore limit the risk side, while looking for opportunities to amplify return on the debt side as well.
Another interesting space. And you mentioned real estate in there. That is how the audience knows you before your mandate expanded. Let's talk about mortgage investing. What's going on here?
Yeah, mortgage investing has really experienced quite the renaissance. And "renaissance" may not be the precisely accurate term because it's been a space that has grown materially, commercial mortgages. And commercial mortgages funds in Canada, in particular, have grown dramatically over the last decade, but in particular, over the last five years. Why is that?
Well, number one, the yields have been quite incredible. And part of that's been brought to you by the higher interest rate environment. Part of that's also because we have a lot of developments in this country. So whether it's building new rental housing, or whether it's building new condominiums, the developers tend to use mortgage financing. Some of that is really variable-rate, limited-term financing. That attracts a higher level of yield associated to that. I.e., the interest rate tends to be higher because it tends to track variable rates.
And so mortgage funds in general have benefited from some of that higher-rate environment. And that's been very attractive in terms of presentation of income and income yield for investors. You know, as that space has evolved, that hasn't meant that the mortgage funds have not participated in other spaces, such as providing mortgages for retail centers.
And when we say retail, of course, there's many types of retail. There's not just the shopping centers, the enclosed shopping centers, but there's also essential retail, like the grocery stores, the pharmacies, et cetera. Mortgage funds participate in providing loans to some of those centers as well. And then you have industrial, the warehouses. And we have seen the growth of e-commerce and the significant acceleration of that space over the last four to five years.
Well, mortgage funds have also participated in lending to some of the developers, some of those new warehouses, in addition to providing what we call term financing, which can be more on the fixed rate side, to some of the stabilized, income-producing warehouse properties. And then, of course, the office space, which not a lot of mortgage lenders are stepping into that space these days. But historically, mortgage lenders have participated in that space as well.
When you step back from all of that, the default rates in Canada have been pretty contained. The yields have been pretty high. And now, mortgage funds are generally looking to really capture, and crystallize, and lock in some of that high-income yields that have been brought to you by the variable rates, because the Bank of Canada has been increasing interest rates.
But as we sort of plateau in terms of where the rates are, the opportunity now presents itself to lock in some of those-- some of those higher rates. Because in three, to four, or five years, if rates are lower, that will look quite attractive if you've locked in pretty higher-- pretty high rates from a historical point of view. [AUDIO LOGO]
[MUSIC PLAYING]
Well, beyond the world of stocks and bonds, there's an asset class known as alternatives. That can include everything from investing in infrastructure to mortgages and private debt. Joining us now to discuss the potential opportunities in this space is Colin Lynch, managing director and head of alternative investments at TD Asset Management. Colin, welcome back to the program.
Well, thank you, Greg. Thank you for having me here.
You've been on the show many times. I think that's the first time I've used your new title. So obviously, you have a new mandate to discuss with us that includes these alternatives. Tell me about it.
Yeah, well, it's an exciting new mandate. And I'm very excited to lead a broad team to invest in these different asset classes. And as you mentioned, they could go beyond real estate. And we do have Canadian real estate and international real estate.
But we also have commercial mortgages. We have private debt, which provides debt to-- whether it's private companies, also participates in real estate lending, infrastructure debt as well. And we also have global infrastructure. And that's a fascinating asset class, which includes everything from renewable energy, through to transportation, to things like social infrastructure as well.
And so when you look and step back from that, these asset classes, beyond being ones that aren't publicly traded, are really ones that fit into some of the core themes that our society, worldwide, is embracing today-- for instance, energy transition being one; two, housing shortage being another; three, the availability of capital being limited more from the government sector and needing to rely on other participants beyond the government to help create society-sustaining solutions.
And so the alternative space is an incredible space because not only are you able to help provide some of these solutions for all of society, but investors increasingly realize that the alternative space plays a very interesting role, a diversification role, an attractive, return-generating role for a portfolio.
Let's talk about some of those potential opportunities, start breaking down the silos. You mentioned infrastructure. This is interesting because we know, particularly in North America, we have aging infrastructure. There are goals we want to meet in terms of climate and governments that are strapped for cash. So let's start talking about the opportunity there.
Yeah, absolutely. It's a very significant opportunity. Let's start with energy transition. We certainly have many forms of energy and traditional energy. But we also have-- I was going to say newer forms. And actually, if you think about it, they're not actually really that new.
The sun's been around for a while. We're just trying to figure out how to harness its power.
Precisely. And that we're now doing at scale. And so infrastructure investors have been able to participate in some of the financial returns associated with participating at scale in a couple different ways-- number one, brownfield, i.e. existing assets that are generating power, but two, greenfield, the development of new assets. And some of those returns on the greenfield side tend to be quite attractive. And so solar is just one element of the renewable energy equation. That includes wind farms as well. That includes biofuels.
And then, there's also the capture and the storage of that energy. So think battery packs. And investors in this space have the opportunity to help governments, for instance, when they have issues, around the sustainability of their power grids. For instance, if there is a significant weather event that we saw in Western Canada earlier this year, some of those battery banks are able to provide power to those grids in their times of need.
And then, beyond energy, there's transportation. So think ports and think facilities at airports. Think highways. There's also the facilities that you frequent when you're travel-- where you're driving along those highways, the service plazas. All of that is-- and more-- part of infrastructure.
And those are-- call it-- the basic needs elements associated with living our day to day lives. But without those basic needs satisfied, we really can't live much of our day to day lives. And so really, infrastructure represents the ability to invest in providing high quality, whether it's power, whether it's transportation, whether it's social infrastructure, to help provide the basic needs of our day to day lives.
Now the average person can understand infrastructure because it is a part of their daily lives. Talk to us about private debt, the space there, and the opportunities, maybe a little bit about what we're talking about here.
Yeah, so we know about the fixed income market, for instance, which is providing debt to companies. And that debt is publicly traded. Similarly, private companies, companies that aren't privately traded, also need debt. And so the private debt market provides debt to some of those companies.
Now, there might be small business owners, for instance, that don't have publicly traded companies. They might own their small business. And they go out, and they get debt from different providers. Broadly put, that's part of the private debt universe. But where we invest is typically a bit broader in terms of companies that are operating at some significant scale, that might be doing nine figures of revenues or 10 figures of revenues. And we have the opportunity to provide debt to those companies.
But it goes beyond those private debt companies. So if we go back to infrastructure, on the equity side-- so you have investors that are investing in, for instance, renewable energy. Some of those investors use debt as well. So instead of putting all the cash down, they might seek to use some debt. And that helps them amplify their cash. I.e., instead of investing in one portfolio of projects here, they might be able to invest in three or four. And that allows them to achieve diversification and higher returns.
But from a debt side, that allows a different investor to participate in some of that renewable energy without having some of the higher risk that's associated with the equity side while achieving greater diversification as well. And so there's multiple ways to get exposure to some of those big themes. You can get exposure through direct ownership through the equity side-- i.e. infrastructure-- or you can get exposure on the debt side, perhaps a little bit lower in the risk spectrum, perhaps a little lower in return. But that might work for different type of investors as well, according to what they are looking to accomplish.
And so the private debt is interesting because it can play in multiple different places, whether it's the real estate side, the infrastructure side, whether it's to private equity companies providing debt to those companies or privately held companies, and therefore able to build a pretty diversified portfolio of exposures, and therefore limit the risk side, while looking for opportunities to amplify return on the debt side as well.
Another interesting space. And you mentioned real estate in there. That is how the audience knows you before your mandate expanded. Let's talk about mortgage investing. What's going on here?
Yeah, mortgage investing has really experienced quite the renaissance. And "renaissance" may not be the precisely accurate term because it's been a space that has grown materially, commercial mortgages. And commercial mortgages funds in Canada, in particular, have grown dramatically over the last decade, but in particular, over the last five years. Why is that?
Well, number one, the yields have been quite incredible. And part of that's been brought to you by the higher interest rate environment. Part of that's also because we have a lot of developments in this country. So whether it's building new rental housing, or whether it's building new condominiums, the developers tend to use mortgage financing. Some of that is really variable-rate, limited-term financing. That attracts a higher level of yield associated to that. I.e., the interest rate tends to be higher because it tends to track variable rates.
And so mortgage funds in general have benefited from some of that higher-rate environment. And that's been very attractive in terms of presentation of income and income yield for investors. You know, as that space has evolved, that hasn't meant that the mortgage funds have not participated in other spaces, such as providing mortgages for retail centers.
And when we say retail, of course, there's many types of retail. There's not just the shopping centers, the enclosed shopping centers, but there's also essential retail, like the grocery stores, the pharmacies, et cetera. Mortgage funds participate in providing loans to some of those centers as well. And then you have industrial, the warehouses. And we have seen the growth of e-commerce and the significant acceleration of that space over the last four to five years.
Well, mortgage funds have also participated in lending to some of the developers, some of those new warehouses, in addition to providing what we call term financing, which can be more on the fixed rate side, to some of the stabilized, income-producing warehouse properties. And then, of course, the office space, which not a lot of mortgage lenders are stepping into that space these days. But historically, mortgage lenders have participated in that space as well.
When you step back from all of that, the default rates in Canada have been pretty contained. The yields have been pretty high. And now, mortgage funds are generally looking to really capture, and crystallize, and lock in some of that high-income yields that have been brought to you by the variable rates, because the Bank of Canada has been increasing interest rates.
But as we sort of plateau in terms of where the rates are, the opportunity now presents itself to lock in some of those-- some of those higher rates. Because in three, to four, or five years, if rates are lower, that will look quite attractive if you've locked in pretty higher-- pretty high rates from a historical point of view. [AUDIO LOGO]
[MUSIC PLAYING]
