Hello and welcome to The Download. I'm your host, Dave Richardson. I'm in Montreal today, and I grew up here. One of the amazing things about Montreal, if you live here or you’ve spent any time here, they're always building. They're always working on something. Highways, electricity. We'll talk about internet in a couple of minutes. I think I drove by a project yesterday on the way from the airport that they were building when I was 10 years old living here. And they seem to have made about maybe a week of progress over 50 years. And so what we're getting to is we've got a very special guest today, which is our infrastructure guy, Andrew Hay. And Andrew, when it comes to infrastructure in around the city of Montreal and the roads across Quebec. This is not the people of Quebec, obviously. This is just the way things seem to run here. The infrastructure moves along very slowly. Although, the other thing is, I travel all across Canada and have been over the last two months, three months in particular, I’ve been pretty much everywhere. There are cranes, there's stuff going on everywhere like I've never seen before. So infrastructure is definitely on people's mind. But you find Quebec different in your experiences of working in your space?

David, it's great to have a chance to chat with you. I've been following your travels across Canada, and I don't know how the air carriers keep up with you. Do I find Quebec any different than other parts in Canada? I think what makes infrastructure a bit special in Canada is just that short construction window that you have. And so, they tend to cram a lot through the short summer. And a lot of what we look at, a lot of what the team looks at here, when we're looking at the RBC Global Infrastructure Fund, is we're looking at companies that are already built and generating cash flow so that we don't get pulled into that construction development delay pipeline. But certainly, in Toronto, much like in Montreal, whether it's traffic snarls because of Taylor Swift or Santa Claus parades or construction, it seems that there's always something going on in the streets of Canadian city in the summer or the fall.

I don't know if I've ever seen anything like it, and in all fairness, yes, the weather is a huge challenge here. And that is one of the things that makes a difference. But, Andrew, we've had you on a few times before. We probably don't have you on enough. So let's just start by saying that. And so, we always go back and do a little bit of a refresh. The idea of the space that you're working in, how you build a portfolio of different cash generating infrastructure, as you say, and why it is important. Why should investors think about infrastructure and the nature of these assets? Why is it important they have it in their portfolio?

So there's two reasons that we've really built what we've built. For the benefit of investors, number one, we want to be able to provide access to an asset class that has low correlation and therefore provides diversification. Two, the other things in their portfolio, they have stocks, they've got bonds. Where do they go from the diversification beyond that? Other alternative asset classes. What's special about infrastructure in particular is that a lot of the times, the listed companies, the public companies, need to throw yield all the time. Imagine the letter J. Sometimes it can prevent them from investing in something that would compress yield and distributions, even if there was something positive on the back end. Building a factory to make new widgets or something like that. And the private side of infrastructure allows investors to take a longer-term time horizon, longer-term view, look at the total return over time, and you can take in those companies that have a little bit of cash flow need for investment over the near term for a long-value creation in the medium term. So that's one of the reasons why infrastructure has been so compelling for the individual investors, and specifically the private infrastructure ownership model. It just helps bring that diversification and legitimate value because the ownership model as a private company can bring value over public companies in some circumstances.

And then one of the big parts about it here and why it's advantageous to work through a portfolio or through a professional investment manager is, me and a couple of my buddies can't get together and buy a 200-mile toll highway to generate income for ourselves. We just don't have enough cash to buy the entire highway. You might be able to buy an inch of it, and that's not going to get you anywhere. You need to be able to pool millions, hundreds of millions or even billions together to buy something that is significant, that's going to generate cash flow and over time, consistent cash flow that, again, as you say, is quite beneficiary to the people investing. So by pooling together with other groups. We have the concept of mutual funds. But this, I think, is an even harder space for an individual investor to get into than even buying 100 shares of a company, which you can do. You can't buy 100 feet of a highway.

No, you're absolutely right. I think the largest Canadian pension plans who moved into this direct private infrastructure space over two decades ago, that's my pedigree coming from CPP investments. Darren Picket, you may have met Darren from our team. He's from Ontario Teacher's pension plan. Being able to deploy 500 million at a time, 2 billion dollars at a time in those investments gives you access to things that you wouldn't otherwise. That's one of the reasons they were early movers. It certainly suited their programs very well. It was an efficient way to deploy capital. What I love about our program is it lands into the RBC GAM capability set, where we've got this wonderful distribution model to allow us to aggregate, so that, Dave, you and your friends can put in a small amount of money, but it gets aggregated across thousands of people. Then we're able to write those $100 million, $200 million equity tickets in those large infrastructure company. This is exactly why our model is well suited to the strategy.

I think people look at the CPP or the Teacher’s pension, and for those who are in those programs, they’re just fantastic programs in terms of the way they're managed, the way they've evolved over time. But people look, particularly Teachers’ pension, and just say, wow, well, they own that shopping mall over there, and they own that building over there. Why can't I get a piece of that? And what you're able to do here now is you're able to accomplish the same thing. You've got a large group of investors who are contributing into a particular fund. That cash that's accumulated gives you the ability then to go out and make that type of investment, which is, again, what I think a lot of people say, well, wow, I would love to be a part of that because I can see the value in owning something like that, that over time is going to consistently generate return for me, particularly, again, in terms of yield.

I agree with you, Dave. There's also another analogy that might be helpful to some investors as they're thinking about what they want to build. They want to build long-term wealth, for instance. That long-term investing horizon, if you look at some of the pension plans, they have well-understood liability profiles into the future. They're looking at investments that will have some sort of inflation matching to it or an inflation escalated revenue in that. That's where some of the real assets can come into play, in a real estate or infrastructure. I think as individual investors are also thinking about that long-term value creation and inflation against protection, this is another reason why some investors are moving to these asset classes.

Yeah. Again, the inflation protection, if I think of maybe the classic case, we've talked about this on previous podcast. And by the way, go back and listen to Andrew's previous appearance. We go a little bit more into detail than we're going to go today on the asset class itself, the different parts of it and even deeper on the rationale. We wanted to do a quick refresh today to start. But you can go back and listen to the previous versions. By the way, when you do that, please subscribe, leave a five-star review. Andrew, I have to say that. That's my infrastructure build from the marketing folks. They want me to talk about that. I'm embarrassed to do it, but I'll play my role as your beloved host. But the classic that I think about is the 407, which is a highway, a toll highway that runs across Toronto. Really, it's a bypass highway that's actually being swallowed up by the city as Toronto continues to grow by leaps and bounds. But it's a toll highway. We built the highway and then end up selling it out to companies and ultimately into funds and pensions that actually get the revenue. I think about the price of the toll on that that continues to go higher. And again, that's an example of your inflation protection, that the price that people are paying, which is the revenue generation and cash flow that comes out of the project, that price goes up as overall prices go up and income levels go up. So again, that's something that you want to have a piece of in your portfolio.

Yeah, the inflation protection is a big piece of that. Also, the customer service mentality that can come from private ownership, it's really understanding what it is that your customers want. Because a lot of the time, you have infrastructure traditionally provided by governments, and perhaps the interface with the customer isn't as finely tuned. And so with the 407 ETR, for instance, they set toll rates at a rate that provides a good driving experience for the customers. If toll rates are too low, you have too many cars on the road that becomes congested again. So it's a very careful feedback loop of testing the market, testing the customers, and making sure you've served them appropriately. And the customer service levels, and the responses of that particular company are just incredible. When you think about the service providers that you have in your life, whether it's your water, heat, gas, electricity, etc., it's just amazing. They have to deal with such volumes of customers. And I think that the 407 ETR does an exceptional job with all their customer interactions. So I think that's a wonderful example, Dave, of one of the kinds of companies that you'd look for that actually does very well in private hand because they can bring that customer mindset and focus.

I actually just had a fantastic experience working with the 407, as you mentioned that, and I'll be driving across the 407 as I head home from Montreal tomorrow. But let's talk about maybe an area that people don't think about as much as being infrastructure — although in our day-to-day world, we touch it almost every minute of every day — and that's digital infrastructure. So where do you draw the lines around what is digital infrastructure? Can you give me some examples of what it is? And then why is this such an exciting area for you in the space that you operate?

That's a fantastic question and something that we spend a lot of time looking at and thinking about. When we define infrastructures, we're looking at companies that are usually providing an essential product or service to a large number of customers. And because they're providing an essential product or service to a large number of customers, that creates a stability to it. I say «boring», but maybe you want to use «stable and predictable» cash flows. You know it's going to be around for a period of time. And so that can include things like your toll roads, your airports, your ports, things that support trade in the economy. It can include things like electricity utilities, or water utilities. Those are the natural points of life. So what we've really seen is that the digital connectivity is something that we need as much as the other utilities. Some people think about the internet as a fourth utility. Is a digital investment in infrastructure or is it higher risk private equity? The question comes down to that stable and predictable cash flow. Is it boring? Is it an essential service or not? Actually, the way that we define the infrastructure that we invest in, we've got this really nice 18-sectors, three-by-six grid, of what we would consider a market sector that we'd want to be in. In the digital space, we've got three definitions. You’ve got wireless communication towers. I think in Montreal, you're connected by cell phone to your Rogers, Bell and Telus network. The tower company, the tower aspect of that is absolutely core infrastructure. Nothing's changed. It just needs to put up power. It needs to put up fiber internet connectivity. Then the technology on the tower. It’s not owned by the tower company, in many cases, it's owned by some other company, that'll change over time. You go from 3G to 4G to 5G, etc. You think about that wireless communication tower stack, part of it is infrastructure, and part of it will cycle over time. I'll maybe come back to this, but actually the foundation or the first digital infrastructure company that our fund invested in is a wireless towers company. It operates in the UK. And the UK is different from Canada in that you've got that separation between the carriers, the cell phone companies, and the infrastructure provider. So that's one of the reasons why that was a good choice for us. But the other two sectors that we think about when we talk about digital infrastructure are data centers — which are, of course, undertaking a massive boom because of the need to train generative AI — and fiber, whether fiber is business to business or fiber to the home business to consumer. So those are the three definitions. Within those definitions, in every single case, we ask ourselves, is this boring? Is it stable? Is it predictable? Is it infrastructure? That's a lens through which we look at digital infrastructure.

Wow. You've now given me a framework for why my wife says I'm boring. I think I fit all of those categories. I’m very stable, predictable, and I generate decent cash flow. So I had a job most of my life. Including my lawn mowing business, actually. I was doing some great infrastructure work here in Montreal myself. At 10 years old, I started mowing lawns and investing. So, Andrew, is this the area, again, particularly when we talk about data centers, out of all of the infrastructure space, do you think this is going to provide a particularly large opportunity to grow and find opportunities?

There's been an awful lot of money invested in data centers, and we're seeing a ton of deal flow. We haven't made any investments yet. When we look at the risk-return profile of some of the companies that we have seen and have access to, it hasn't lined up yet with where we wanted to deploy money. There's obviously an incredible theme around data centers, whether that's computational power or storage. Those are the two main uses of data centers. That's certainly true. But whether you're an infrastructure or real estate company that is building a building and connecting the fiber and the power, or whether you're the users of that building — which is quite often what they call the hyperscaler companies like Meta, Amazon, Google, Microsoft — there are different ways to participate in that theme of generative AI. Actually, one of the things that we're looking at quite closely is the play on generative AI data center where you're the owner of the building. But does it have a certain cash flow risk? Going back to your example of you being boring, steady and predictable, I don't know if your wife was supporting you through your university years, but there was a period of time when you were in growth mode before you became the pinnacle of success that you are today. When you look at some of these data centers, some of them are still in a growth mode, and you're really dependent on that cash flow generative capability set 5-10 years from now. Then that makes you think, what are your customers doing 5-10 years from now? A lot of your customers are actually working in competition with you because they're building their own data centers. It's been a phenomenal investment environment for the last five years. There's a ton of money going into it. A lot of people have made a lot of money. We're seeing the deal flow. At this particular point in time, we haven't prioritized the data center yet, but it's still something we're going to look at. We still love the generative AI theme, and we just have to think, are there other dimensions that we can use to get to the theme? For example, data centers need power. Could you buy a wind firm next to a data center that provides power? So we're thinking about all that stuff, Dave, in that context of always being steady and predictable, boring, serving an essential need, product or service for a large number of people.

We had Marcello on who is responsible for technology investments, and we talked earlier in the year, and I still come back to this because I very rarely get shocked when I get an answer from you and all my colleagues who are professional investors. There's not much that surprises me. But I asked him what the next big wave was around technology, and he said nuclear power. Again, you're making that connection between the massive amounts of power. Nuclear, wind, alternative sources of energy, that's a big part of that infrastructure base as well?

Well, it is. And I think that if you look through the underlying, one of the things that people often don't appreciate is that carbon emissions from electricity generation in North America, in the United States, have actually decreased over the last 20 years. Why has it decreased? There are some energy efficiency plays, but generally the population has gone up, so you'd expect a level of increase. But in the move from coal to natural gas, which burns cleaner and cheaper, there’s actually been a reduction of emissions. That's a nice example of how the natural evolution of technology, when underpinned by an economic value, also has this really nice, call it social or long-term value, because there's going to be a long-term value impact as well if you don't have a healthy environment. And certainly, people report on that now. So is the next evolution going to be back to nuclear, which had a bit of a hiatus? We see small modular reactors, SMRs. We’ve been invited to participate in opportunities to fund SMRs, MMRs. And again, we haven't participated in those yet. But is that the technology that comes about in the next wave, both because it is safe and economical? And or because it doesn't rely on a foreign power for your fuel source. Certainly, when Russia invaded Ukraine, the Russian gas price spiked, and there was a lot of stress in the UK and Western Europe. Is nuclear the next wave? I think that would have been an interesting conversation that you had with other members of your team.

The way you would build a highway 50 years ago is very different from the way you build a highway today, getting back to just your core bricks and mortar. Nuclear today is very different from nuclear 50 years ago. You might think of Three Mile Island or more recently, but still way back in time, Chernobyl, those things. It's a different beast than it used to be.

Well, we hope that the technology, which means both safety and performance and efficiencies and cost, you hope that the evolution of technology applies across, whether it's nuclear, the next generation of wind and solar, next generation of combined cycle gas, whatever it is. We want to invest to make sure that things are getting better for the future, and you're respecting the technology. That actually might be a nice way to link this a little bit, Dave, to the digitization of existing assets, too, which is related to digital infrastructure, but maybe a small nuance to it. Let's take smart meters, for instance. At home, 20 years ago, you probably had someone who came and read your gas or electricity meter once a month, once a quarter. It's quite expensive to have someone coming out to your house. Then they moved to measuring every three months or six months, and they take a guess in between. Maybe they used big data, the early-stage generative AI to estimate your use in between time. But one of the ways that we see digital coming into conventional traditional infrastructure is around things like smart meters, where the meter reports back to the utility through a wireless network. Or you see other aspects of digital and electricity coming together. You're not just buying a parking lot, an infrastructure parking lot, but you're also providing EV charging, or you're providing other ways of layering on the next generation of consumer need into what has been traditionally an established infrastructure play. I'm pretty excited to see that come out as well.

Yeah. I think I'm really making a connection, too. I think all Canadians are concerned about climate change and the environment and doing things better than we have in the past in terms of emissions and pollution. I was in Victoria, on Vancouver Island, which might be the epicenter of those concerns. And if there's a place that I travel to that would be next in line or right there with it in terms of the concerns around the environment, it would be the Quebec marketplace in and around Montreal. You see a lot of concerns. You certainly see more Teslas here or electric vehicles than you do in Toronto, which you might not necessarily expect, but that is the case. And you see little differences as you travel around. But the idea that I can invest in a way that is helping evolve and improve outcomes around the electric grid, the way we derive energy, the way we take energy and build the infrastructure around the distribution. It makes it an interesting play, if I've got a concern around the environment, this sounds like a way that I can invest and aggregate assets together to help move forward in that area.

We want to be very thoughtful and responsible in our investing logic. We want to look at something that creates economic value for our investors. This is a fund for investors to make money. A responsible investing mindset is a good way to mitigate risks and enhance the way that you think about the risks embedded in the company that you're making. There are also some impact funds that you could look at, charitable ways to contribute towards improving the economy as well. That's not what we're focused on, but that responsible lens is a really nice one. The way that we think about this is, when we're looking at a long-term investment, we want to make sure that it washes its face. It does well on underlying economic value of the service that you're providing. Then if there happens to be a social layer government's subsidy or something like that, that's an upside. When we underwrite in that way, it's always to our advantage. Whereas if you assume that government's subsidy will always be there, and then there's a change in government, then you're disappointed and your investment is not doing as well. I like your point about the forward thinking. I think infrastructure, when done well, can be an intergenerational gift. It can be something that improves the future, whether it's climate, environment, or efficiencies. One of the best ways for governments to improve the GDP is to invest in things like, do my citizens have broadband Internet? That has a wonderful economic enhancement, but it also helps to break apart the digital divide of the haves and the have nots. So these things, as long as they are economically viable on their own, it's something that we would look to for our fund. And if there's a social benefit above and beyond that, that's really nice. But we don't want to have to rely on those in our investment.

Yeah, well, I just get the idea of this. You're thinking about something that is going to be stable over an extended period of time. So I have to look out and think about where things are going to be 20, 30, 40, 50 years from now. And I'm valuing this asset today. But if it's not going to evolve, if there's no potential for it to continue to evolve over those 50 years, there's more risk there, so I've got to evaluate that. And it may be ultimately unattractive short term and not something I really want to go into. You've got to have that mind. It's almost self-fulfilling in a way. As you say, you're not specifically looking for it because you're evaluating things from an investment perspective. But in doing that, the nature of the area that you're working in, you get that side benefit sometimes, and that's just an added benefit of the investment overall.

The team has wonderful debates when we're thinking about the investment thesis under which we would apply a certain investment. What do we love about these businesses? If you think about the way a new technology gets adopted over time — over time, there’s more and more penetration; ultimately, 100% of the population is using a new TV or phone or whatever — the adoption over time is not a linear line. It actually follows an S-curve. So very slow with the new technology and then very rapid adoption that appears out. We want to buy the boring stuff. We want to buy the steady, predictable, established technologies that 90% of the population are already using. But we also want to have a little bit of that mindset, looking at the emerging technologies that could possibly displace the established technologies in the longer term. It's a really fascinating way to invest. The team has these wonderful dynamic conversations that are predicated on both sides of that evolutionary model, and I just love it. It's something that I've loved doing for more than two decades.

Yeah, and again, the diversification of it. You're going to have a portfolio. You're going to have some exciting stuff, but it’s really nice to have some of that boring stuff, as you say. I imagine coming back to the analogy before, it's why my wife keeps me around after all these years. She's got her exciting professional tennis career and all the interesting things she does. And then there's me. Always there.

You are always there. And then, as a responsible owner of the digital infrastructure or the infrastructure that exists there, Dave, are there ways you focus on the customer to enhance the value that she's getting from you? I'm wondering whether you're making her dinner when you get home tomorrow from your road trip or whether there's something you're picking up at the airport on your way home for her. I'm thinking about that value.

I do all the cooking. This is probably not that interesting for the people listening. But we actually have almost reversed the traditional roles in so many ways. Because we do what we're both good at. And she's better at some things that you'd think I should be able to do, but I can't. She's amazing. I love my wife. What else am I going to say? But I am boring and I'm glad she does keep me around.

One of the things that I really appreciate about travel is the opportunity to try some new food. That often leads to a new recipe that I'll bring home as well. I'd love to hear your top recipe sometime.

I'm heading out to have steam hot dogs right now for lunch in Montreal. That's what I do here. Here's one you'll like: you put honey on your onion rings. You got to give that a try.

I’m writing that down.

All right, Andrew. Always amazing to catch up with you. We got to get you on more often. Always an interesting conversation. Thanks again for popping in here today and really incredible stuff. So thanks, Andrew.

Thanks for making time on the road, Dave. I always love your questions and insights. Thank you so much.