'Alternatives are definitely the next avenue to retirement readiness,' says consultant at Normandin Beaudry
While Canada's pension funds continue their steady march into private markets, among the broad universe of alternative investments, one asset class is clearly pulling ahead: infrastructure.
According to several industry leaders, infrastructure seems to be attracting the most interest out of the alternatives space, particularly for its alignment with long-term liabilities and income generation needs.
Alexandre Bernard emphasized that while private equity often dominates the conversation around alternatives, his preference and where he sees more activity today is infrastructure, underscoring its role in providing tangible assets with reliable cash flows.
He also pointed to the ongoing energy transition as a major tailwind, noting, “there’s demand, there’s all the energy transition that’s going on... it’s not a small trend.”
“Infrastructure remains an important asset class that really brings diversification and lets investors own some real assets that have some cash flow,” added Bernard, head of the private equity research team at Normandin Beaudry.
Roderick Gomez, principal at Normandin Beaudry, agrees with Bernard, adding from the defined contribution (DC) perspective, infrastructure and real estate are the dominant alternative allocations, mainly because of structural limitations. He also sees infrastructure and real estate as essential tools for improving retirement outcomes in DC plans.
“On the DC side, alternatives are definitely the next avenue to retirement readiness,” he said.
While plan sponsors remain limited by what recordkeepers offer, Gomez emphasized that allocations to alternatives can be integrated in different ways, either as stand-alone options or embedded within target-date funds.
“We’ve seen that with some target-date funds where they do have an allocation to alternatives, largely infrastructure and real estate,” he explained. Despite the structural constraints, he views these assets as an increasingly valuable part of helping members build more resilient retirement portfolios.
As a result, allocations are largely driven by the availability of infrastructure and real estate options, particularly through private vehicles.
“We do prefer the private funds,” Gomez added, distinguishing them from publicly listed alternatives, which are less commonly used in DC plans.
Bernard emphasized that while many alternative assets offer diversification, infrastructure stands out due to its unique characteristics. He acknowledged that private equity has its merits but pointed out that it still carries equity-like risk and remains partially correlated with public markets.
Contrastingly, infrastructure investments are typically tied to long-term contracts and inflation-linked cash flows, which make them especially attractive for institutional investors, adding that infrastructure has shown resilience across economic cycles, supported by ongoing demand for investment.
“You have a long stream of cash flow because usually the contracts are like 15, 20 years and sometimes longer than that,” Bernard explained, adding that these assets also serve essential societal functions. “Over the last 15 years, even if some cycles were tougher than others, infrastructure remained quite stable,” he said.
While he acknowledged the sector may mature and behave more cyclically over time, for now, he sees it as a reliable diversifier alongside bonds and equities.
According to David Bardsley, head of KPMG Canada’s wealth and asset management advisory practice, infrastructure, along with private equity, real estate, and private credit, forms the backbone of the private market allocation. Yet, Bardsley acknowledged the complexity of investing in private markets, starting with the structural limits of the asset class.
“The irony of real estate and infrastructure is that there is finite real estate and infrastructure assets,” he said, underscoring the scarcity of opportunities compared with public markets.
Illiquidity, he noted, is both a challenge and a benefit as private assets “carry an illiquidity performance premium. Because they're illiquid, the returns are going to be slightly higher,” he explained.
Consequently, opacity in reporting and the slower pace of valuations, typically annual or bi-annual, mean investors often have less confidence in short-term numbers, even if long-term value creation has been proven over time.
Bernard drew a clear distinction between infrastructure and real estate, noting that while both asset classes tend to respond to interest rate movements, largely because they’re typically leveraged, real estate has been more vulnerable to recent social and economic shifts, pointing to the decline in demand for office space as remote work became normalized coming back from COVID.
He argued that infrastructure, by contrast, is more resilient in downturns, emphasizing that core infrastructure assets like energy, transport, and digital communication remain essential regardless of economic cycles.
Another factor, he noted, is maturity. Real estate is already well established in institutional portfolios, and many investors are now trimming exposure.
“Most of our clients start to have a bit more infrastructure than real estate in their allocation,” said Bernard, suggesting that infrastructure is becoming the preferred choice within private markets for generating long-term returns.
While he acknowledged the risks and illiquidity that come with these assets, Bernard noted that the trade-off can be worthwhile in a low-rate environment.
“It’s riskier for sure. It’s illiquid. So you have to balance those items,” he added.
Yet, Bardsley argued that Canadian pension funds have carved out a global edge in real estate investing by going beyond passive ownership, pointing to their active approach in managing and enhancing assets.
Instead of simply holding properties, he noted that Canadian funds focus on long-term value creation, whether by boosting tenancy, driving retail traffic, or collaborating with local governments to build supporting infrastructure like transit systems.
“This isn’t just deploying capital to buy a building and stepping away from it. It’s about the accretive portfolio value creation activity that the Canadian funds bring,” Bardsley explained.
While Bernard highlighted there’s a growing variety of infrastructure products on the market, like airports, toll roads and digital communication towers, his team suggests plan sponsors tackle a more diversified, global approach.
He added that some specialized funds, such as those focused on digital infrastructure tied to AI, can be useful for more targeted exposure if a client has the scale to handle multiple allocations.
Still, he cautions against committing to outdated infrastructure assets, particularly in traditional energy, highlighting the long-term risk of locking into 30-year contracts that may not age well.
While Bernard does see a growing role for private equity in portfolios, especially with strong momentum in the US, he cautioned that not all products are created equal. Fund-of-funds structures don’t always deliver meaningful value. He also stressed the importance of investor education around liquidity constraints.
“Clients need to be aware of their own structure and how much illiquid they become if they get into those new strategy or products,” he said.
