Hello, and welcome to the Download. I'm your host, Dave Richardson, and we have a special new guest with us today. It's important that we broaden out the topics that we cover and add new personalities, great people that we know and love working here at RBC Global Asset Management. We have Andrew Hay who, by the way, is here by popular demand. We had Mike Kitt on a couple of months ago, and after they listened to him— and no disrespect to Mike, he's a lovely guy—, but I started getting emails saying we should have Andrew Hay on because he's the head of global infrastructure. And infrastructure is really a cool thing to talk about on a podcast. So thanks for accepting the invitation and welcome to The Download.

Dave, it’s great to be here. Just past my two-year anniversary with RBC GAM, but I have to confess, this is the first time I've been described as a personality. So I'm looking forward to speaking with you this morning.

People can't see it because this is an audio podcast only, but it's too bad because they can't see you on video; you are clearly a spectacular personality. They're going to learn about that. Two years at RBC. Why don't you give us a quick rundown on your background and how you got into this and why you're interested in this particular area? How did you get here?

Yeah, I'm kind of a nerd at heart, and that's how I ended up here. I started my career in the 90s in computer science. What I loved about computer science was the problem solving, the algorithms, the efficiency of it. I went back to school for a master's degree in finance, and then out of that, landed in consulting because they wanted some computer nerd to migrate that technology into Excel. And very quickly that became modeling infrastructure businesses, infrastructure companies. And one of the things that I love about infrastructure is that you really have to understand how the business works in order to understand how it makes money and where the risks are. So I was in consulting for six years with KPMG. We had a world class office focused on infrastructure, based out of Toronto. I got to travel around the world, got to meet some people, got to break out of that computer science often insular mindset and into active listening, understanding the problems that clients were facing. And so that really grew into an appreciation for the asset class. And then in 2006, I moved over to CPP Investments. I had seen the rise of some of the Canadian pension plans getting into this direct infrastructure investing space— the OMERS, Teachers, some of the early movers. CPP was launching their program, and I was an early joiner and just excited to help build their program over the 14 years that I was there. And then that leads to RBC GAM and the approach that Michael Kitt had taken to bring that institutional quality investing of that pension plan model to our individual and institutional clients here at RBC.

That's what's so exciting about what you're doing with Michael and the team, giving the everyday investor the opportunity to get access to this space. And as we're going to dig into it, we're going to find out what it is and why it's so important and how it adds value as part of a portfolio. Because obviously, if OMERS and the Canadian pension plan are adding this asset class into their portfolio, there's got to be a value to it. So why don't we start with how we describe it. We say infrastructure. What do we mean by that as an asset class? Maybe put some color around what exactly it is you're looking at, how broad the space is and where you focus in terms of where you're investing in your portfolio?

Yeah, infrastructure, the definition gets changed over time. But the way I think about it is it's those components that contribute to your daily life or your society's daily life. And the classic definition, if we go back 30 years ago, we were thinking about two big sectors, transportation and utilities. In the transportation side, you'd be thinking about roads or toll roads— all of what I describe today will be under private ownership— but toll roads, airports, ports, rail companies. And on the utility side, you can think about it either in what they're carrying or what stage they are in. The logistics change in terms of what they're carrying. Things like electricity, power, whether it's heating fuels— in Toronto here, a lot of people use natural gas, but other heating fuels as well—, or water, for instance. So you had utilities definition by that; what are they carrying or by what stage in the value chain are they providing? The capability set, is it around the generation and creation of power or the transportation of power? Or is it around the retail interface to the customer, the end user? So those are the two classic definitions around transportation and utilities. Over time, as we thought about that same fundamental principle, something that supports daily life, and when it supports daily life, they often become natural monopolies, where it only makes sense to have one or two of them. We only have one airport in most cities. In Toronto, we have two. In London, in the UK, they have about five. But usually, you have these natural businesses where it makes sense to build up a large defensive capability set, where you're investing for the long term. You're investing a lot of money in capex, capital expenditure, and then you're realizing the benefits for decades to follow. So that's how we think about infrastructure. It's certainly grown over time with new definitions coming out. The pandemic has made us very aware that digital connectivity is now part of what we need on day-to-day life. So, we're really seeing new asset classes get introduced as well over time.

You talk about the pandemic and digital. Where else has that definition expanded? If you follow politics, infrastructure has become a big word around things that most people wouldn't necessarily think of as the building blocks of our day-to-day lives, as you described it. But it goes beyond that. What other areas now encompass infrastructure in general thought? And then is that legitimate? Is that the way you think about it? Has it expanded?

Let me take it in two directions. One is the introduction to the public sector element that you ask about, Dave, and then the other will be around risk profile. On the government interface, the traditional providers of infrastructures for the communities were the government. And what we're seeing now more than ever is government balance sheets being stretched because of a lot of support that they put into the communities, around pandemic support or other kinds of support, during the challenging period of time that we've had. I saw a study recently that talked about the need for private capital coming into infrastructure, that had previously been built by governments, being a substantially larger number than it has been in the past. One of the studies called for energy transition, the need for private capital there being eight times in the future what it has been in the past. That was a Boston Consulting Group study. But fundamentally, where the definition gets a little bit muddy is where the governments start talking about social infrastructure. And I think the governments should be investing in healthcare. We have an educated population. This is sort of their policy, not my area of expertise, but those kinds of things generally don't relate to a private sector ownership model. So the interface is a little bit tricky to navigate. But where we see it happening in Canada with public/private partnerships is when the government comes to the private sector owner and say, build us something. We want you to build us a hospital, but once you've built it, we'll really take it over. We'll continue to hire the doctors, the nurses, and so on, but maybe you'll be responsible for the snow removal in the parking lot. So by bringing the private sector in, in a way that allows them to optimize and reduce the overall cost, maybe by spending a little bit more upfront for a good design, but then lower maintenance over time, so bringing the private sector in for a 30-year ownership model, but the government still delivers the social aspects of what's so important to our community. That's one place where the definition is interesting to watch. And the other place is around the risk spectrum. I'll do this one fairly quickly, but if you take those classic definitions that we've talked about, toll roads, for instance, everyone can envision what a toll road is. It's either carrying commuters to work, or it's carrying trucks past a big bypass for highly urbanized areas— think about the US interstate. But then as you think about other ways to explore that risk curve, you can think about parking. Is parking higher risk than toll roads? Is it street parking or is it parking where you own the land? And if you own the land, maybe you can do something neat in the future, like add electric vehicle EV charging stations, and you can build on it. So the definitions tend to get stretched by risk profile, too, where sometimes you don't have that really highly defensive moat and protecting you from competition or having limited competition, but sometimes you do still have that competition. And one of the questions that I got recently was around airports, and what about the person who has a jet refueling business who refuels the airplanes? Well, that's still driven by GDP, by travel, but it's definitely a different risk profile than the airport itself.

If we go back to the initial example you used of the snow removal at the hospital. It's going to snow in Canada every year, so there's going to be income that's going to be regularly generated by that company removing the snow. They have that contract; they've got the exclusive or a long-term deal. So you can plan to see that income come in for the investor who invests in that company, and that's really what creates opportunities in this space. Very simple. Or I think one of the big examples here in the Toronto area that I always hear my friends and relatives complain about. The 407, which is a big bypass highway. If you know Toronto well, there's the main highways that go through the heart of the city, which are the Gardiner Expressway and the 401. But as the city's grown, you now needed a different bypass road. It was built. It's a toll road. And the government basically offloaded the highway to, I believe, a Spanish company— but you're probably more up to date on that. And basically, they generate the income off the tolls. I hear relatives go, well, that's awful. How could we have given that up? But what you're saying is the average investor now has an opportunity to invest in something like that and get the benefit of the income that's being generated off of that infrastructure. I'm in a very narrow space, I know, Andrew, but is that a simple way of thinking about where there's some opportunities?

Absolutely spot on. Let me describe two things that I build on. First of all, your definition of long term; stable, predictable cash flows often linked to inflation— that's your snow removal example or a toll road example. And when you have that stable, predictable cash flow, you can look at some elements of infrastructure as being very fixed-income like, very bond like, very defensive. And that's a nice way to think about adding that component to an investor's portfolio. In the toll road example that you used in the 407 example, there was some wonderful ingenuity that came about on account of private ownership where they had some innovative ways of getting better snowmelt with the use of a salt mixed with water to create a slurry. It was better for the environment, because there was less salt. Less cost because there was less salt. And there was a better experience for drivers, too. So, bringing in some of that private sector ingenuity into those parts of daily life are one of the real wins to an infrastructure business.

Like you say, for a lot of investors— and particularly if I think of who's listening to this podcast or the people that are working with a financial planner or financial advisor—, one of the big challenges they have is a little less challenging than it was a year and a half ago as interest rates have risen, but is finding those sources of stable income. And with that inflation protection— and this is a space that's particularly interesting, which again is why the public pensions and private pensions have looked into this space—, it just seems like, as you've mentioned, this area is just exploding. There's a lot of focus on it, coming out of the pandemic. And just in general, I'm driving down the road, I see a bridge that looks like it's got some cracks in it or a pothole I run through, that infrastructure is on people's minds. What do you see as the future for infrastructure? I would take it that you're pretty optimistic about the direction that this is going?

Well, I think that there's two ways I'd approach this. One is more and more what we're leaning into is being able to enable to allow individual investors to get access to this asset class so they're a provider of capital into the solution set. The solution set meaning matching up the source of capital from investors to the need of capital, like the crumbling infrastructure in your example. And when we think about matching those things up, I would say that there's probably three things that are really interesting to the investor who's now looking at this for the first time. And the first thing that they see is that there is access to a large investable opportunity set that's been hard to access in the past. I remember that concept of access has been something that you spoke with Michael Kitt about as well. That really holds true, as it relates to infrastructure and as it relates to the large investable opportunity set, that we definitely see the need for investment in infrastructure, in developed markets as well as emerging markets. But even developed markets need to refresh what's already there and to build new. In the United States, for instance, they need to refresh the electrical grid, but they also need to build new capacity to support renewable power generation that's coming online. You put those two things together and what does this mean? Well, the investment in the US energy grid needs to double from what it has been. And this is just a story that we're seeing around the world. The second thing I'd say is that we're seeing investors appreciate the alignment of time horizon. Infrastructure is a long-term investment. It fits into that piece of your portfolio where you're willing to park money for ten years or whatever the number will be, the same way that an investment in your home might be seen. And it's really important to think about that alignment. There are transaction costs to get in and out, so if you have college tuition coming due next week, you don't want to park your money in a long-term illiquid private markets fund. That just doesn't make sense. But if you've got a piece of your portfolio, that's a great spot for it. And the Canadian pension plans, what they've moved to— and this is an averaging, if you look at the largest eight to ten of them—, you see about a 10% exposure to that kind of private illiquid infrastructure asset class. That's where they've moved. Of course, they've added maybe another 10%— I'm using round numbers here— in real estate, 10% in private equity and so on. So they have a very large illiquid private markets element at the end of the day. But the important part is that alignment of interest on the need of capital and the source of capital. And when you have misalignment, you have frictions, you have costs, you have things that can drag down returns. And there's this nice little study that was done by an organization called Focus and Capital on the Long Term, FCLTglobal.org. They pulled the CFOs of listed companies and asked: would you undertake an NPV positive— a present value positive, a value accretive business—, would you invest in this new factory that was going to make widgets if it was NPV positive? So you'd sell a lot of widgets in the long term, but there was short term impact to your earnings per share, to your yield. And the majority of CFOs said, no, we can't do that because our stock trades on yield. And so the second real important thing that we're seeing is the investors are responding positively to that message of «I get it». I get this point about alignment on investment time horizon, and yes, I do want a small piece of my portfolio in that. And then the third thing, and you mentioned it off the top, is that diversification benefit. When it's structured in this way, where it's private, it's long term, and you have active management as an owner, you have the ability to move levers to adjust for the new economic realities of the business that you own. Then you create a diversification element to your portfolio that allows you to either reduce the volatility of your return without changing your expected return, so you reduce the risk. Or you can increase the return without changing the volatility. And the mathematicians will talk about the low correlation coefficient that this asset class has relative to fixed income or equities. That's really how we're seeing it fit together.

Yeah. And then what is fantastic about what you're doing, going back to Michael's comment about bringing this to the average investor, is you're not talking about expenditures of a couple hundred bucks here. You're building an airport; you're talking several billion. You're improving the electrical grid; you're talking trillions of dollars. It's not like I can just fish into my portfolio, even if it’s significant, and go and buy an airport or in Michael's example, go buy a commercial tower. But what you can do is you can pool that money together with a firm, with an expertise, and as we pool that together, then we start to get to some significant amounts of money that we can then deploy and create that opportunity for diversification using infrastructure. It's a proven concept because you've got these massive pension plans that have used this so effectively, and we can almost piggyback onto the concept or even find more innovative ways of doing it because it's a private sector coming to the table and involved in investing in this sector. I know I'm asking dumb questions here, so you're being very patient. My positioning may be off, but that's really what we've got here. You've just opened the door to this and then you've highlighted the diversification benefit.

Well, I love it. I don't think these are dumb questions, Dave. I think these are great questions. We've opened the door and it is that pooling concept. And that's part of what I think really plays to the strength of our platform. And we're trying to lean into. These concepts that we're talking about, you need a strategy to execute against them. We've talked about the «what», but we have to talk about the «how». How are you doing it? I think of all the elements that you mentioned for me in my first two years here. The first year was, why do we want to do this and then how do we do this? How do we do this in a way that has integrity to what we're best at and the things that our clients want. And if we're not the best provider of that, then we shouldn't do it. So that «what» and that «how» are a really important way to think through designing these kinds of access points when we're making these solutions available.

Well Andrew, that's a great introduction to the space. Very important highlights. We always want to highlight here for investors when we bring on a new topic or a new guest. We're really trying to highlight that importance of diversification and thinking of different ways you can diversify your portfolio. Whether you're doing it yourself by adding individual pieces, managing it on your own, or as many people do, they might give the money to an investment manager to build that entire portfolio. And you want to make sure that whoever you're giving that money to, to manage that overall portfolio, is getting access to these various areas where you can more broadly diversify your portfolio. And again, either give yourself a boost in returns or at the very least manage the volatility in that portfolio, reduce the risk while you're generating the return you need to reach your financial goals. So it was a really important area to highlight and I'd love to get you back again if you're up to it and maybe we can dig deeper into some very specific examples of things that you've done or things that you think are going to be opportunities in the future in this space.

I'd love to come back. Dave, it's great to talk to you. It's great to listen to you and many of the other guests that you've highlighted over the last couple of years that I've been listening to. So thank you for the opportunity and the excellent questions.

Oh geez, this was great, Andrew, real pleasure talking to you, and we'll see you soon.

Thanks Dave.