TDAM Talks Podcast: A Public Chat on Private Markets

INGRID: Increasingly investors today are able to access asset classes that once were only available to large institutional funds, such as pension funds and corporate accounts. Joining me today on TDAM talks is Colin Lynch, head of alternative assets here at TD Asset Management. My name is Ingrid Macintosh. Hello, Colin!

COLIN: Hi, Ingrid!

COLIN: Thanks for having me here.

INGRID: I want to dig a little bit into when we say alternative investments, people often think risky things like crypto or hedge funds. That's not what we're talking about today, right?

COLIN: Absolutely.

INGRID: So as head of alternatives, maybe give us a sense of what it is that we're talking about at TD Asset Management in this category.

COLIN: Yeah, great question. Really. Alternative investments are, in TDAM world, non publicly traded investments. And so these are things that we live in, we inhabit in our daily lives like buildings, offices and shopping malls and warehouses and apartment buildings. But there are also things like ports where we receive goods from around the world through or airports or facilities on airports or whether it is service plazas that we frequent on our long car trips.

COLIN: Those also are included in alternative investments in the area called infrastructure. It's the funding, however, for many other things. So whether it's for some of those real estate things that I described and we have an area called commercial mortgages that provides debt to some of those real estate entities. But we also have another group called Private Debt, which provides financing to a host of different areas, whether it's, on the real estate side in terms of land loans.

COLIN: And it's a bit technical, but, you know, it's one type of lending in the real estate world all the way through to utilities and power to ports, to infrastructure, types of assets. Those assets have both equity and debt components. And so we have a group that also provides financing to those investments as well.

INGRID: Okay. So let's break this down a little bit. Traditionally, public market investments, we think of stocks and bonds. I'm super simplifying it, but I think what you've described is here is four key categories. You talking about private debt, We're talking about real estate, we're talking about infrastructure and we're talking about mortgages. Yes. Well, let's let's start breaking it down a little bit and go deeper on each of them.

INGRID: Speakers Choice. What do you want to take first?

COLIN: Well, why don't we start with real estate? And so real estate's a fascinating place, all for actually quite fascinating. But really, it's where we live, work and play at the end of the day. And so where we live, our apartments, where we work, our offices, some of us work in retail settings as well, and also some of us work in warehouses.

COLIN: And then where we play in leisure facilities such as hotels, but also in retail format such as enclosed shopping centers, but also walking down the street. And it's the shopping center or it's a store that's on what we call a high street, a main street.

INGRID: That's where we talk about real estate. I know that, you know, from an institutional perspective, pension funds like these types of assets because they have a long term cash flow associated with them. I think we've been talking about real estate in more recent times. You know, there's been a lot of noise around it. What is it, the death of the office, What's happening to retail, real estate?

INGRID: What was is retail dead? Maybe talk a little bit about how we approach real estate, because I think our listeners would really benefit from understanding maybe it's not all doom and gloom and this really is a long term patient play.

COLIN: Yeah, it really is. And foundationally real estate as an investment asset class has been a long and around for as long as civilization has been effectively. And so we....

INGRID: Had investments in caves and.

COLIN: Almost.

INGRID: Almost almost we've been at it almost.

COLIN: But not nearly necessarily that long. But it is really interesting when you step back and just look at humanity. Ultimately, we inhabit physical spaces. And and so what's been interesting is over the length of time in which people have been investing in real estate, we have invested from an institutional perspective in more and more of these types of physical spaces.

COLIN: So if you go back 50, 60 years, it was all about office and all about shopping centers. And then about 20 years ago in Canada, it became all about residential. And we were one of the first really to step in and to invest in a meaningful way in the residential space. And when I say residential, I mean apartment buildings.

COLIN: And so this is really the spaces where we inhabit and and we have the opportunity as a result to invest in those spaces and to create great experiences for individuals that live, work and play in those spaces.

INGRID: When we talk about how we invest, whether it's in fixed income or equity at TD Asset Management, an underpinning to everything we do is this concept of quality. Yes, and that really plays itself out as well in real estate, just like equity markets. Not all stocks are created equal, not all properties are created equal. Can you talk about quality in the real estate space and the types of things we look for?

INGRID: What might differentiate our approach?

COLIN: Absolutely. And I'm going to tie that back to your earlier question around a bit of the noise in the market, because every 5 to 10 years you have a leader in the real estate world, and we've gone through, let's be clear, a very big transformation in our world in the last five years. But you go back five years ago and retail centers were going to be dead.

COLIN: And I don't even mean the pandemic. I mean, these headlines were around pre-pandemic. Then we had the pandemic where most people said, my goodness, like we're done with shopping centers. Well, if you go to a shopping center in Canada or in.

INGRID: That's not the case...

COLIN: True. Exactly. They're full and they're not anecdotally full. They're full from the perspective of ... foot traffic's up relative to 2019 and spend is up relative to 2019. So every sector has its moment in the sun effectively. The key for us is diversification. And getting diversification right means orienting to each sector where there is quality. All right. So in the office space, tons of commentary about the future of Office.

COLIN: Well, what happens in every period of economic dislocation and this is one we just had the idiosyncratic event called COVID. But this is, to be clear, a period of economic dislocation. What happens there is a flight to quality. And so if you think about it from a tenant perspective, if you were renting in what we call Class B or Class C, call it lower quality space, older vintage building, it's not as nice and pretty inside and you have the opportunity to go to a newer building that is nice, fresh and new, and it's really closely located to a subway station or a major train station.

INGRID: It's quality, especially if I'm going to have a hybrid model, I might need less space. I can afford to get to the better space, hence the quality bias playing out in real estate.

COLIN: Exactly. And so this is happening, whether it's GFC, whether it was the early nineties, every period there is a flight to quality where there's economic distress. So therefore we invest in quality across each major property type because in these periods where there's ups and downs, we outperform on the up and we don't experience as much down.

INGRID: Let's move it to talk about infrastructure, because I think this one's a little bit more esoteric to most people. What do we mean by infrastructure? Where we railways, ports? Give us some great examples.

COLIN: Yeah, it is the area of the world that powers our daily lives and I literally mean power because it's especially in our age where we are looking at accomplishing net zero objectives and moving towards environmental sustainability, infrastructure is one of the ways to invest in helping to accomplish that, whether it's renewable energy with solar or wind or biofuels, whether it's energy capture and storage, it's an incredibly exciting way not just to invest, but to help the world move towards its net zero objectives.

COLIN: But it's not just that I talked about warehouses worth of goods before they hit the warehouses, hit airports, they hit port facilities. And so it's a mechanism by which we were able to supply.

INGRID: ... the supply chain as well.

COLIN: Precisely.

INGRID: How?

COLIN: We buy.

INGRID: Things to acquire things, too.

COLIN: Exactly. So, you know, and there's many other areas, you know, whether it's social infrastructure, whether it is whether it's facilities by which you get your on the rent goods, etc.. It's a you mentioned a very idiosyncratic, very diverse world within infrastructure. Absolutely. But the key is a lot of this was provided by governments and we're in the time where governments have effectively run out of money to sole source supply a lot of these elements of our basic lives.

COLIN: So governments have increasingly, over decades now look to the private sector to help provide some of these elements, these basic elements of our daily lives.

INGRID: So in infrastructure, funds are a way that we fund that growth in our economies. Third, let's go to private debt. And I think when when investors think about debt, they think of investment grade and high yield in the public markets. Now we're sort of turning the dimension around and going to the private side, but still in the investment grade category.

INGRID: So maybe talk a little bit about that and the types of things we'd be investing in.

COLIN: Yeah, absolutely. And I think that's really important because as well, there is a lot of dialogue around private debt. We are focused on the investment grade, private debt space in both Canada, the US, but abroad as well and in Europe and and further afield. And it is providing. So let's start with infrastructure, whether it is to ports, facilities or rail, it is providing the debt to these entities that are powering daily needs in life from an energy production and distribution perspective.

COLIN: Same thing. W hen you when you look at whether it's power transmission lines, whether it's storage, energy capture and storage facilities, you have equity investors and element of this is publicly traded. But a significant element of this is privately held. And whether it's by major pension plans, other institutional investors around the world and they use debt to accomplish their objectives, whether it's to enable them to invest more in the facilities, whether it's to enable them to make further investments, diversify their portfolio, etcetera, etcetera.

COLIN: And so debt is a quite powerful tool for those investors to help them as well.

INGRID: So what leads an insurer to go into the private debt market if their investment grade is that size? And I think more importantly, what benefit does an investor get from being in private versus public debt? So much more yield.

COLIN: Absolutely. There's an element to size. There's an element of confidentiality of information and competitive information. There's an element of speed and certainty of execution as well. And if you're running a business and you're looking for growth, that speed, certainty of execution with an entity that you trust and know well helps because candidly, it's one less thing to worry about when you are actually trying to, for instance, build out a large platform.

COLIN: We in the private side are able to create accretive returns for our investors because we are able to find those situations where borrowers will like to interact with a small number of potential investors, where they have that certainty and that reliability and those investors are potentially with them as they progress on their journey and do more and more things.

COLIN: And so they're willing to pay a bit more to provide them with that certainty and that ease of execution.

INGRID: Which is why it's been such a positive asset class for pension funds, because they are long term investors and now similarly individual investors through the funds that we manage, have access the same kind of return profile, longer duration, higher yield without probably a little bit less liquidity, but thinking about it the right way.

COLIN: Yeah, absolutely. And I'd even go further than that and think about it from a sense of democratization. Yeah, right. These and not just in private debt, but broadly in alternatives are spaces that traditionally have not been available to individual investors. And now we are able to provide that opportunity to investors and a wider pool of investors to not just participate in accretive returns, but to actually participate in solution making for society in our world.

COLIN: And so that's really exciting.

INGRID: Do good, feel good. Before we leave sort of the broader asset classes talked a bit on the mortgages piece because I know that's the fourth pillar that that we discussed.

COLIN: Yes. And it has been tremendous in terms of the ability to participate in the creation of accretive yield opportunities for investors, not just for the reasons that I mentioned from a private debt perspective, but what the mortgage fund has been able to do is participate, for instance, in a lot of multi-unit residential construction loans to multi-unit residential owners.

COLIN: And that part of the world has been very creative. If you think about rates and where they have gone and variable rates, a lot of that development financing is variable rate. And so the mortgage fund, because it has the ability again to provide certainty and speed of execution, borrowers like that and so are therefore willing to pay a bit of a premium to attract that that speed and certainty and reliability and effectively, you know, the mortgage fund has a very good sense, an idea of who their borrowers are.

COLIN: And for a borrower, as you go through and if you've ever gone through the process to get a mortgage on your home, you know that there's a process and use of diligence and etc..

INGRID: When you're doing it at scale.

COLIN: If you're doing it at scale and you're looking to move very quickly, it's really important to have somebody providing you with your financing that can also move with you.

INGRID: So we've talked about real estate, we've talked about infrastructure, private debt and the mortgage fund. I want to go a little bit deeper now. You know, yes, the asset classes themselves are a benefit to the individual investor when accessed because of the higher yield, the lower liquidity, etc.. How do you know what's a good deal? Like, what do you look for?

COLIN: Yeah, that is a really it's a really good question.

INGRID: In two hours or less.

COLIN: A part of it...So let's, let's, let's use an example. So in our in August we made the decision and we closed in October at the acquisition of a portfolio of 30 residential buildings in Finland and since that time, by virtue of where we have seen valuations, that was a very good deal. So what went into that? Part of it was understood adding the residential space globally.

COLIN: In many places in the world you have more people moving to cities. Unfortunately, it leads to divorce rates high. You have smaller family units and then you have migration patterns around the world. So you understand all that?

INGRID: The demographic lens?

COLIN: Yeah, exactly. Then you got the economy right. And what's driving that economy nationally within regions city submarket. Right. And that drives a bit of demand i.e. if the economy's doing well and there's multiple drivers of growth, therefore job creation happens, more people then move to that area, they need places to live. So all of that economic points also need to understand.

INGRID: Are these are rental buildings or.

COLIN: Exactly right.

INGRID: So instead of a condominium where people are buying the units and you have to get them funded, a purpose built residential rental building are the types of ... are a type of investment. We'd make in the real estate portfolio.

COLIN: That's right. And the vast majority of the investments in in the residential space that we make. Why? Because they produce income. Exactly. For all types of investors. We're really focused on the growth of their income, the protection of their income stream over time. And so residential is a really good way to generate income and to grow income. Why?

COLIN: Because your vacancy rates tend to be very low.

INGRID: So it's interesting because when you say to somebody today, would you invest in real estate, they would say, no, it's really toppy, it's this, it's that. But you're actually it's an inverse thesis here, which is actually the the the counter to lack of affordability is the growth in this part of the sector globally.

COLIN: So that's right. And so we need a place to live like in the simplest terms, we all need a place to live and so that's why the residential space, the multi-tenant residential space, i.e. the apartment space, tends to be quite a lot less volatile than other sectors. But just closing up that Finland example, we also understand who's there, who are the market participants?

COLIN: What are they doing? Where is the new construction, what's rental rates looking like? And if we're partnering with anybody who's somebody on the ground managing it, doing the leasing, signing the lease and negotiating, advertising, all of that is part of the due diligence.

INGRID: Yeah. And how important is our brand in terms of allowing you to access these types of deals? I think, you know, I didn't mention it at the outset, but our alternatives business at TD Asset Management is just under $40 billion. I think our listeners would be surprised to hear that. But is that part of how we get access?

INGRID: Yes. What makes what makes an investor almost a privileged investor to even get access to these higher returns?

COLIN: Yeah, it's a fantastic point because we go around the world, around the country, and we are, you know, looking for new opportunities and it really matters ... a few things. One, the size and scale, and part of that is within it, within alternatives, nearly $40 billion TD Asset Management, over $400 billion TD wealth, 1.1 trillion. The bank group nearly 2 trillion.

COLIN: All of those numbers actually matter to folks around the world, and it says that you are a solid stable at scale and you're able to implement with certainty because all all of those pieces of that equation really matter. In addition, this is not our first rodeo. Yeah, we've been doing this for 35 years and counting. And that also matters to because we've seen cycles, we've lived cycles and that experience working all around the world with many folks in many jurisdictions providing it's other individuals that we are looking to work with, with comfort.

INGRID: That we partner with ...

COLIN: Exactly. And so they are more inclined to work with us than with other people because of those factors.

INGRID: Let's talk let's sort of move the conversation similarly to infrastructure. And again, you know, I I'm putting my hand up now. I would love to go and do site inspections with you and some of the places where some of the most fascinating places that you're finding good value now in the infrastructure space.

COLIN: Yeah. Well, speaking of site visits, well, we acquired three ports in Italy recently, so I don't.

INGRID: Think I got invited for that site visit.

COLIN: We'll have to work on that. Absolutely. If you want. If we want to see some very historic cities in the process. Absolutely. But those ports are really interesting because it's a couple of things. One, more than 2 million trailer equivalent units pass through those ports per year in just the three ports that we acquired across our platform. It's over 20 million across the US and the European ports.

COLIN: And so that's one exciting thing. Just focusing on the ports in Italy, we bought into a platform to scale and so the exciting point is, yes, those are three major ports in Italy, but we have the opportunity to grow further into other European countries and to build a position in places like Germany and Austria and participate in that supply chain through multiple countries.

COLIN: And so for me, it's not just the ports. And yes, in a place like Venice, that's fantastic. But it's also the opportunity to grow throughout that supply chain and to build something of scale, either 20 million, what we call to use the trailer equivalent units. But it's not even just there. You know, if I think about silicon ramps, the first investment a decade ago, right, renewable energy, solar farms, and we call it greenfield and infrastructure, where you're building...

INGRID: No pun intended.

COLIN: Well, but we we've built significant scale such that across our renewable energy program, it's over 3500 megawatts. What does that mean? That means enough power to power 1 million homes per year.

INGRID: Amazing.

COLIN: So it is a significant scale of renewable energy and you come back to the point where the point is around. Yes, fantastic accretive returns that make sense in investors portfolio. And you have the ability to deliver and help deliver on what we need to accomplish from the world from a climate perspective.

INGRID: So really alternatives are not this risky out there asset class. It's getting access at scale in a collaborative way to pools of assets that are generating higher returns, longer duration and more stable returns. And now finding ways to bring them to the individual investor where they were once only available to institutions in the landscape that we're in right now, we're sort of at hopefully a peak in interest rates.

INGRID: You know, there's all sorts of noise in the cycle. Is this period good or bad, neutral, or does it not matter when we talk about alternatives? When I was talking about what's the macro view, What's the landscape look like for X over the next 6, 12, 18 months? Yeah. Given these are longer term investments, do we think about it differently when we ask you the question about market environment?

COLIN: Good question. I think that those factors do matter.

INGRID: Yeah.

COLIN: But not as much as the longer term factors. So when we're talking about real estate, some of the longer term factors are immigration, family patterns, migration to major cities. ET cetera. Those matter far more than whether interest rates are 2% or 5%.

INGRID: Right.

COLIN: In the infrastructure.

INGRID: That's just pricing.

COLIN: That's pricing. Right. But at the end of the day, if you have demand for space, then that demand will outweigh some of the shorter term implications of pricing. Now, pricing does matter, meaning if you you know, plenty of individuals bought, let's say, offices in Hong Kong at what we call a 2% cap rate. What does that mean? That means if you took the income and you divided it by value, i.e. the purchase price, your income was 1/50 of your purchase price.

COLIN: That's effectively what that means. And so, yes, that's that's if interest rates then went from 2% to 5%, you know, the bar for performance goes way up, right? So we have an obligation in the alternatives world to ensure that we are investing at the right price. So that's critically important. And it drives how much shorter term to medium term performance.

COLIN: But if we acquired a great price and foundationally, there's no demand for the space, i.e. a Class C office building that's very far from any transit, yeah, then we might have thought we acquired is a great price. It turns out that wasn't a great value. Precisely.

INGRID: Low price, zero value.

COLIN: Exactly.

INGRID: What it when we think about individual investors and the conversation around asset class, people think about should I be in, should I be out? That's not how we think about alternatives, right? Do think about them as that sort of longer term ingredient in a portfolio? Yeah.

COLIN: So it's you know, think about when you buy your house or a house, if you're investing in a house and when you buy your house, you have many different things transaction costs, broker costs, tax costs, etc.. And so, yes, you can buy a house and sell it next year and buy another one and sell it the year after.

COLIN: But I would submit that probably that's not going to be the way you're going to create long term value for yourself. Similarly, in the alternatives world, really hard to buy a port and then look to sell it next year, partially because there are costs of acquiring, but partially also because these are generational assets. And so one, it creates big flag if you're going in and try to sell because the next person you're trying to buy from is going to ask, Hey, are you going to try to sell this the year following?

COLIN: But also because these are generational assets, you never want to be in a position where you're forced to sell.

INGRID: Right.

COLIN: And there might not be somebody on the other end to buy, not because the asset doesn't have value, but not everybody has $300 billion in their pocket to outlay.

INGRID: Exactly.

COLIN:

So you do always want to take the perspective in the alternative space of long term value creation. And then because of that, you always want to get those long term fundamentals correct.

INGRID: So what would you say is a sort of a last thought for our investors? How do you see the future of alternative investing? And I think I know where you're going to go a little bit on this one, because I think, you know, the traditional world of stocks and bonds like that is just so efficient. Now, what is the world of alternative investing?

INGRID: Are we just at the beginning of it or.

COLIN: Yes, in short. And it's it's interesting because the items within alternative investments were not at the beginning of they we've been living them in our daily lives. What we are at the beginning of is investors participating.

INGRID: That mainstreaming of.

COLIN: It. Exactly. And so we were at the in baseball terms I apologize the early innings, call it the first or second inning of the provision of the ability for individual investors to access the space. And to me, that's extremely exciting because institutional investors, major super funds, have had that ability to amplify their returns by participating in this space.

COLIN: And now we have the ability to provide individual investors with that same opportunity to amplify their returns. So I really do think it's it's another step in the democratization of investing. And to me, that's exciting.

INGRID: But not everybody can get in the door, right? And this is where experience time in the game relationships. Yes. Set us apart.

COLIN: Absolutely.

INGRID: It's a great note to end. Thank you, Colin.

.

COLIN: Thanks for having me.

INGRID: And to our listeners, thank you for joining us today. You can find more of our podcasts on Spotify, Apple, Google and Amazon and also on our website, www. TD Asset Management . com. Thanks and have a great day.