PSP Investments cites geographic appeal, transportation needs and long-term demographic growth
One of Canada’s largest pension investors has joined Canada Pension Plan Investment Board (CPPIB) and Spanish construction firm Ferrovial in ownership of Ontario’s 407 Express Toll Route (407 ETR).
The Public Sector Pension Investment Board (PSP Investments) has acquired a 7.51 per cent stake in the 407 ETR for a cost of $2.39 billion. Michael Rosenfeld, managing director of infrastructure investments at PSP Investments says that it represents his fund’s “largest infrastructure commitment in Canada to date.”
Rosenfeld outlined why his firm has made this investment, which would roughly value the whole 407 ETR at just under $41 billion. He cited the highway’s position in the Greater Toronto Area, arguably Canada’s most important economic and demographic driver. He said that the 407 ETR suited PSP’s preference for stable long-duration investments. The 407 is subject to a 99-year lease with the province of Ontario agreed to in 1999.
“There [are] less than a handful of toll roads in the world that have that makeup,” noted Rosenfeld.
Incidentally, the timing of PSP’s move could carry political implications, particularly for Ontario Premier Doug Ford’s possible ambition to buy back Highway 407. In recent months, the provincial government has floated the idea of reacquiring control over the highway to ease traffic congestion on the 401, along with building an underground tunnel.
So, could PSP’s stake be subject to political risk?
Rosenfeld acknowledged the discourse, he cited a framework of “responsible stewardship and ownership” from the other shareholders as a reassurance.
“We're entirely open minded to the perspective that different solutions need to and could be proposed to address them and the 407 is a very important part of that overall mix,” said Rosenfeld. “It's what we've seen historically through our due diligence. We fully take that into account as we think about how we can contribute to help improve those transportation needs.”
Just as he sees the political risks as minimal, Rosenfeld argues that the demographic promises are extremely attractive. Referring to the GTA’s population growth as a “unique and tremendous factor” he argues that the demand for the 407 will only continue to grow.
“With the need for transportation in the future and the growth of housing and urban development, these are all really interesting factors that come into play in other toll roads, to be clear, but in our assessment, they’re much more prevalent here,” he explained.
Rosenfeld highlighted the opportunity to deploy multi-billion dollar checks in a toll road investment as “highly unique,” adding that institutional investors don’t typically see opportunities of highway 407’s nature and size very often in Canada, or even globally.
Beyond its geographic appeal, the 407 ties into PSP’s broader infrastructure strategy, as Rosenfeld was quick to highlight the firm’s extensive history with toll road investments.
With the GTA’s continued population growth and economic expansion, PSP is certain that traffic volumes will support steady revenue. For institutional investors, infrastructure assets like the 407 are diversifiers that are hard to find elsewhere, Rosenfeld emphasized.
“You’re getting long-term cash flows, and to some degree, visibility over those long-term cash flows,” said Rosenfeld.
While he doesn’t expect astronomical growth, Rosenfeld asserted the GTA offers a thriving and stable economy and that includes the 407 being “a mature and steadily growing investment.”
At the same time as PSP announced their acquisition, CPP Investments and Ferrovial who concurrently entered into agreements to acquire an aggregate 6.76 per cent stake in the 407 ETR from Quebec-based engineering services and nuclear company AtkinsRéalis, formerly SNC-Lavalin Group.
Once the deal has been completed, “ownership control of 407 ETR is expected to be attributed as follows: Ferrovial at 48.29 per cent, CPP Investments and other institutional investors at 44.20 per cent, and PSP Investments at 7.51 per cent,” said PSP in a press release. “AtkinsRéalis will cease to be a shareholder.”
