GPs: Direct investors are coming for your money too

Large direct investors like OTPP are looking to leverage their expertise to partner with more passive providers of capital, opening up yet another competitive front.

We don’t want to oversell our matchmaking talents here at Infrastructure Investor, but it does seem somewhat serendipitous that, roughly one year after Ed Krapels, founder and chief executive of Anbaric, challenged investors in our pages to bypass funds altogether and go direct through platform companies, Anbaric ends up selling a 40 percent stake to one of the asset class’s premier direct investors: the Ontario Teachers’ Pension Plan.

For the record, we have no idea if Andrew Claerhout, OTPP’s head of infrastructure and natural resources and this month’s keynote interviewee, picked up the phone to Krapels after he read his piece – penned in response to an editorial Infrastructure Investor had written on CalPERS’ decision to pursue infrastructure via separate accounts. What we do know is that we are not surprised to see the two have joined forces, considering how much their thinking aligns.

In his piece, Krapels offered investors a vision of greenfield-oriented platforms generating proprietary dealflow and superior returns in a space dominated by the trading of, in his view, overpriced brownfield assets. Claerhout, in this month’s interview, explained that OTPP prefers to back management teams to help it pursue its greenfield strategy. The upside is access to proprietary deaflow and the added returns that come from greenfield investing.

But there’s another piece to that puzzle: knowledge transfer. OTPP wants to learn from the teams it partners with, so that in five to 10 years’ time, it is well-positioned to take on even more risk. That should worry GPs. And not just because that accumulation of knowledge makes the already slim chance of them getting money from OTPP even slimmer; it should worry them because the likes of OTPP plan to use that experience to entice more passive providers of capital.

“One of the things we are looking at doing is increasingly partnering with capital providers that don’t have the expertise to invest and manage infrastructure, but would look to us for that,” Claerhout explained. But he went further: “I think there are many benefits to partnering with Teachers’ as opposed to short-term capital, especially if the institution is similar. We don’t only manage assets, we also manage liabilities, so if we think about the type of assets that we buy into in infrastructure, they need to have very specific characteristics.”

Sounds tempting, especially coming from a nearly 50-strong infrastructure team with a solid track record. According to the pension’s 2016 annual results, published earlier this year, its C$18 billion infrastructure portfolio’s four-year net return stood at 12.1 percent. Sure, the likes of Global Infrastructure Partners or EQT Infrastructure might beat that return hands down – the €1.2 billion EQT Infrastructure I fund, closed in late 2008, is generating a 26 percent gross return, according to market sources – but they are best-in-class performers that carry a corresponding price.

Claerhout, by the way, was not intimating that OTPP is ready to manage third-party money, rather that it’s looking for partners to reduce portfolio concentrations. But what’s particularly interesting about his thinking is the way it highlights where large direct investors are going. Not just competitors in the deal space – or a closed door for fundraising GPs – direct investors are increasingly well-placed to divert money away from managers, even when they don’t position themselves, like OMERS’ Borealis, as direct competitors on the money-management front.

That’s not to say this diversion poses an existential threat. You need only look at the $15.8 billion raised for GIP III to see that the best managers are not exactly struggling to raise money these days. But that doesn’t overshadow the fact that direct investors are assembling increasingly larger teams, amassing more knowledge and, crucially, thinking of directing that expertise externally. Assuming they perform well, they could turn into even more formidable competitors.

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