U.S. private-equity giant KKR sees opportunity in Canada’s infrastructure push

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Not long ago, investing in Canadian infrastructure might have looked like a steady but sleepy line of business for KKR & Co. Inc. KKR-N, the private-equity pioneer that is now one of the world’s largest asset managers.

But a worldwide rush to build new digital and energy infrastructure projects has changed that.

The growing thirst for capital to build cutting-edge data centres that train and run artificial-intelligence models, and to help transport energy in all its forms to new markets, is opening up a rich new set of potential deals for deep-pocketed investors such as KKR.

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As competition for investment dollars intensifies, Canada’s deep stores of energy resources, stable rule of law, proximity to the United States and access to Asian and European markets have caught KKR’s attention.

So has the country’s push to build major projects, led by the federal government in Ottawa – if the terms and the math add up.

“In the key sectors that are driving the biggest growth, be it energy, digital infrastructure, both Canada and the U.S. should play a really big role going forward,” Brandon Freiman, KKR’s head of North American Infrastructure, said in an interview.

“You have these two mega-themes that are probably the two biggest ones bearing down on the economy broadly, and they both squarely hit on infrastructure,” he added.

New York-based KKR manages US$723-billion of assets, and launched its first dedicated fund to buy infrastructure in 2011. It wasn’t the business that made headlines. “It often had this perception of being sort of stable and boring, and very different than private equity, which had all the growth,” Mr. Freiman said.

In the span of a decade, KKR’s infrastructure assets increased from about US$5-billion to US$90-billion, and the company built a track record of deals in Canada – especially in the energy sector.

In 2014, the first deal worth more than $1-billion that KKR did through its infrastructure strategy was with Calgary-based Veresen Inc., an energy infrastructure company that was later merged with Pembina Pipeline Corp. PPL-T KKR still owns 40 per cent of Pembina Gas Infrastructure, though media reports have said KKR is exploring selling it for as much as US$7-billion.

It is also a co-owner of the Coastal GasLink pipeline with Alberta Investment Management Corp. (AIMCo), and it bought a $1.2-billion stake last year in the Labrador Island Link, a 1,100-kilometre transmission line that carries renewable energy to Newfoundland and Nova Scotia.

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The current upheaval in global trade from tariffs and political tensions looms large, especially given Canada’s reliance on the U.S. economy. “You definitely can’t ignore it,” Mr. Freiman said.

But KKR is betting that infrastructure investment is becoming so essential that key projects won’t be knocked off course.

“If you look at things like data-centre demand, LNG demand, fibre needs, utility infrastructure, that growth will continue unabated whether the recent tariff action on Canada is rescinded or amplified,” he said. “None of that changes.”

KKR isn’t the only major investor showing heightened interest in Canadian projects and assets. Swedish fund EQT AB, which manages €267-billion ($432-billion), is eyeing an expanded presence in Canada after a November visit that included a meeting with Prime Minister Mark Carney. And Australian fund manager IFM Investors opened an office in Toronto last week, with plans to add to its $2.1-billion Canadian portfolio.

KKR doesn’t have an office or an investing team in Canada, but its senior ranks boast Canadians with deep business relationships, including chief financial officer Rob Lewin and Mr. Freiman. Both of them grew up in Montreal before they joined KKR early in their careers.

KKR built its might in private equity, and the company’s buyout arm still makes up 37 per cent of the company’s asset management business. But like many of the world’s largest investors, KKR has shifted its business over time toward managing assets that produce regular cash flows prized by shareholders.

That included building a large insurance business through its Global Atlantic Financial Group LLC subsidiary, with US$212-billion, which helps feed KKR’s growing credit business.

And KKR created a “strategic holdings” portfolio that now holds 17 investments that the company wants to own long term, beyond the typical life cycle of funds that sell assets after several years to return money to investors.

“We’re not trying to be Berkshire Hathaway,” Mr. Lewin said, referring to the buy-and-hold strategy made famous by legendary investor Warren Buffett. But the idea behind the strategic holdings strategy shares some of the same attributes: “Great businesses you want to own for a long time that can generate compounding free cash flow.”

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Now, as Canada tries to ramp up defence spending and push through a growing slate of infrastructure projects – in pipelines, liquefied natural gas (LNG), ports and mining ventures – KKR and other international investors could be key sources of financing.

“The same push that Canada’s experiencing is what much of Europe is experiencing as well. So, I think demand for capital dollars is going to be higher across both of those areas,” Mr. Lewin said. “By far and away the bigger opportunity for us is in infrastructure, but you are also likely to have meaningful defence spend, which requires scaled capital.”

KKR invests heavily in LNG in the U.S., and has it placed bets on Canada’s natural gas “value chain,” which includes gathering and processing facilities, pipelines, liquefaction sites and transportation. And Canada’s leaders are trying to shake a reputation for being slow to build LNG projects.

“Canada’s got the best resources, certainly just as good if not better geologically than the U.S. And then locationally, it’s better positioned to serve Asia than the U.S.,” Mr. Freiman said. “When you talk to LNG buyers in Asia or in Europe, which are the two biggest sources of demand, they want to be buying LNG from both countries. They want some diversity of supply.”

Canada also has available land close to reliable energy to take part in the data-centre boom fuelling rapid advances in AI, Mr. Freiman said.

The epicentre of the data-centre boom is in the U.S., especially for the megafacilities used to train new AI models built by tech giants such as OpenAI and Google. That arms race has raised questions about potential overinvestment, as companies and investors fear missing out.

But facilities that run those models and offer cloud computing services should provide an increasing opportunity for infrastructure investors in Canada, especially with the push to strengthen data sovereignty. And the overall demand for data-centre capacity has been steadily climbing.

“The level of demand is extraordinary,” Mr. Freiman said. “We get a lot of questions around, is it overhyped? But with the benefit of time, the demand trends are only going in one direction.”