Canadian rules

Visitors to Canada Pension Plan Investment Board’s Toronto headquarters who fail to do their homework on the firm, and presume it to be a standard-issue public pension fund, will quickly be disabused of this notion by its head of private investments, Mark Wiseman.

“We’ve got 24 investment professionals just in infrastructure,” declares Wiseman, sitting with the head of that division, Graeme Bevans, in a well appointed, 26th floor conference room. All those people, he marvels, “and we’re still stretched”.

The very fact that Bevans is sitting beside him, adds Wiseman, is further evidence that CPP Investment Board has the heft of a pension with the structure and incentives of a private investment firm. After all, it’s not everyone who can convince a Melbourne-based head of infrastructure for a $16 billion asset manager to move to Toronto for a civil servant’s salary and a mandate to commit capital to other people’s funds.

What drew Bevans to CPP Investment Board in 2006 was, in fact, the opportunity to build what may become one of the largest portfolios of infrastructure assets in the world, and to do so with a team of seasoned professionals in three offices and with a fiduciary independence not commonly seen in pension investment.

Bevans, a mild-mannered but incisive Tasmanian, also saw in CPP Investment Board major advantages that many private equity-style groups do not have – an ultra long-term time horizon, not to mention a capital base of some C$109 billion ($88 billion; €65 billion).

Upon leading his first few infrastructure deals for the firm, Bevans was pleased to see that the market properly understood CPP’s approach to investing. “We were well received by the regulator,” Bevans says of the firm’s 2006 investment in the UK’s Anglian Water Group. “They could see that we had a very long-term commitment to the asset. That was perceived quite strongly. At first they didn’t know who we were. Over the nearly three years since then, our name has become better known.”

MAXIMISING RETURN

CPP Investment Board invests on behalf of the Canada Pension Plan, which is probably among the healthiest pension funds in the Western world at this point. The CPP plans on taking in more in contributions than it pays out in benefits until at least 2019. Until then it plans to grow its assets considerably, and this will hinge largely on the skills of Wiseman, Bevans and their colleagues. CP Investment Board president and chief executive David Denison oversees this team.

The outlook for CPP was not always so enviable. Founded in 1966 as a partnership between the federal government and nine provinces, by 1996 CPP was on a path to extinction, with C$17 billion in payouts each year supported by just C$11 billion in contributions. The Canadian government responded to this crisis by creating an investment organisation of a sophistication that has yet to be duplicated in most other countries where there are massive public pension liabilities (such as the US). The CPP Investment Board’s board of directors is comprised entirely of people with business and finance backgrounds; the firm operates at arm’s length from the governments it serves; and its investment staff members are paid competitively when compared to private financial services firms, albeit with a structure that rewards long-term performance.

Crucially, the pension is further shielded from political influence by having a mandate devoid of any requirement to support Canadian business. “We look at deals in Canada the same way we look at deals anywhere else in the world,” says Wiseman. “Our mandate at CPPIB is a very simple one: to manage the assets of the Canada Pension Plan so as to maximise return without undue risk of loss. So, while we are always keen to find high quality investments in our home market, we have no legislative bias to invest in Canada, or in North America for that matter.”

On the private equity side, also overseen by Wiseman, CPP Investment Board tends to invest directly in nearby deals (Canada, the US) but commit capital to third-party funds for areas outside of such geographic and at times sectoral proximity. Not so with infrastructure. While CPP Investment Board made a couple of infrastructure fund commitments leading up to Bevan’s hiring, the firm now intends to invest directly around the world in its preferred asset types.

“One of the things that we realised is that [infrastructure] is different than private equity, it’s different than real estate, and that we had to build a team to make those investments,” says Wiseman.

For CPPIB, investing through funds wouldn’t meet their “very, very long-dated liabilities”, says Wiseman, because private partnerships have limited lives, and GPs don’t get carried interest until they exit an asset. “We are happy to hold our infrastructure assets for decades. If we sell, we have the risk of finding another suitable place to re-invest our capital.”

Upon surveying the landscape for infrastructure funds, Wiseman’s group felt that in many cases the terms of the funds didn’t match the profile of the assets that CPPIB was focusing on. The Board’s approach to the asset class is markedly long term, low risk. “The type of infrastructure that we’re doing, which is that lower-risk, low-volatility, good old fashioned boring infrastructure, tends to have lower returns,” says Wiseman. In such a context, acquiring indirect exposure to such assets seemed like a longer – and more costly – road to the same place. “If you put those returns into a private equity model – i.e. two and twenty – by the time you’re finished paying the manager, you may as well invest in TBills,” comments Wiseman.

CPPIB isn’t opposed to two-and-twenty per se, but feels that the work GPs do on private equity deals is simply different than the work done on these kind of infrastructure deals. By way of example, he says: “If you buy Hertz, that thesis only works as a private equity investor if you can fundamentally change the nature of that business. That’s how you get paid. Generally speaking in infrastructure, we’re not changing the fundamental nature of the asset that we’re purchasing. If we’re going to buy a toll road, it was a toll road when it was built, it’s a toll road today, and it’s going to be a toll road 20 years from now.”

If that sounds a bit one-dimensional, Wiseman is also quick to note that his firm does look to improve the assets it owns through strong management and other resources being brought to bear on operations. With those 24 infrastructure investment professionals on the payroll, it’s fair to assume that CPPIB scrutinises assets closely post pre- and post-acquisition. And implicit in that is the do-it-ourselves attitude that others recognise as a CPPIB hallmark.

Finally, to invest in a fund would be “kind of giving up our scale advantage” says Wiseman, referring to the very large cheques CPP Investment Board can write for individual deals. Indeed, to date the firm has already deployed very sizeable chunks of its capital in infrastructure deals, and has attempted even larger transactions. The firm invested just under US$1 billion in the acquisition of Puget Energy and Puget Sound Energy, Washington State’s largest energy utility. Joining the US$7.4 billion deal, which closed in February, were four Macquarie entities, the British Columbia Investment Management Corporation and Alberta Investment Management.

CPP Investment Board also invested roughly US$1 billion in the Anglian Water deal, alongside Australia’s Colonial First State Global Asset Management, Industry Funds Management (Bevan’s former firm), and UK private equity house 3i Group. But US$1 billion is not an upper limit. Wiseman and Bevan say their firm recently offered to write a $3 billion cheque for an undisclosed bid that ultimately fell through.

Although it’s likely that CPPIB won’t be committing much capital to funds managed by any of the major infrastructure groups, it very well may invest alongside them in a syndicate, given its heft and regulator-pleasing long-term profile. It bid on the Pennsylvania Turnpike with Goldman Sachs and Ontario Teachers’ Pension Plan, for example. Bevan estimates that the firm has partnered with “quite a diversified pool” of more than 20 groups on bids. He also says CPPIB has a culture of partnership, generally preferring to work in consortia.

Notably CPP Investment Board does not have a demarcated allocation to infrastructure, nor to private equity or real estate, for that matter. Instead, Wiseman says his pension pursues a “total portfolio approach” whereby infrastructure assets are fitted into the balance sheet based on their unique characteristics, placing them along a continuum with pure debt at one extreme and pure equity at the other. Most infrastructure assets fit nicely somewhere in the middle, and right in line with CPP’s long-term risk-return goals.

Making sure that others – and vendors in particular – understand this investment approach and recognise the implications of having CPPIB as a partner or a counter party is clearly important. The team’s ambition is to have this combination of size, flexibility and network help ensure that CPPIB is put on the short list of institutions who are shown the relatively small number of large government divestiture deals done around the world each year.

EXISTING VS. GREENFIELD

Wiseman is a former lawyer who came to CPP Investment Board after a stint leading the private equity fund and co-investment programme at nearby Ontatio Teachers. He speaks with the precision of a lawyer, creating verbal bullet points in his answers and referring the questioner back to previous statements.

These are traits that serve well an institution with a carefully constructed investment policy. In the case of infrastructure, Wiseman claims that his firm has “one of the narrowest definitions of infrastructure” among investors. In a nutshell, he says, CPP wants to own assets that are monopolistic (and therefore often regulated), and it wants to own hard assets. So no lottery franchises, but plenty of toll roads and electrical transmission assets, for example.

The firm currently favours transactions in developed countries, as well as the acquisition of assets that have already been built. With a nod back to his earlier point contrasting CPPIB’s definition of infrastructure witha wider, more private equity-shaped one Wiseman says: “We’re not in the business of taking on construction risk.” He adds however, that some of the infrastructure companies in which his firm has invested are expanding through greenfield projects. “They themselves are experts at this, so we do get greenfield through them,” he says.

Although CPP Investment Board has an investment in Transelec, a Chilean electrical transmission company, it has mostly avoided emerging markets to date. This is in part because many of the infrastructure deals in the developing world are development deals. Bevans doesn’t rule out eventually investing in emerging markets, but he says the risks of development must be offset by the opportunity for extra upside. “If you look at the opportunity to develop an airport, it has the ability to expand and grow with the GDP,” Bevans says. “Investing in an airport in India or China can be very attractive. But investing in a power plant, does not inherently see your investment grow with the general economy. You’re going to get whatever return you get per gigawatt hour you produce. There’s not leverage on the local GDP growth. As we shift and move into [emerging] markets, we’ll be more likely to be focused on assets that have GDP correlation.”

‘FOGGY’ OPPORTUNITY

If Graeme Bevans is deeply moved by President Obama’s stated ambitions to spur economic recovery by extensive investment in US infrastructure, he doesn’t show it. Asked whether the current economic environment will yield opportunities for CPP, Bevans answers: “It depends how bad things get.”

Bevans points to the history of the two dominant infrastructure markets, the UK and Australia, and explains how they got to these positions: “When those countries were in severe economic hardship, and states were faced with significant liabilities and deteriorating ratings, they actually used the privatisation of assets as a means to recapitalise the state. I think until the [US] public sees that is effectively their best alternative, I’m not sure that you’re going to see a huge amount of activity on the privatisation front.”

In addition, any serious wave of privatisations in the US will not come until a better regulatory framework is created and proponents of PPPs begin “marketing to consumers and voters as to what’s happening and how they’re going to be protected”.

In Europe, Bevans sees more immediate signs of deal flow. “The economic situation [there] is probably not dissimilar ” from the US, he says. “The UK is already effectively privatised, [and] the opportunity set will predominantly be the resale of overleveraged assets. On the Continent, you have the EU competition commissioners seeking disaggregation of major utilities, and that will flow through to distribution networks [like] power transmission and gas transmission. So there’s a lot of opportunity in those markets to participate in that process. But the timing is not clear.”

Wiseman agrees that opportunities tend to come from change and distress, but that at present one can’t pinpoint exactly how these will be manifest. “Layered on top is a very challenging debt capital market,” he says. “Quite frankly, a lot of infrastructure investments that were made in the last decade are not going to work out well due to overleverage or poorly conceived capital structures. So whilst it’s fair to say there’s going to be opportunity, it’s still fairly foggy as to how that opportunity is going to arrive.”

As the fog clears however, CPP Investment Board and its dedicated infrastructure team will be waiting, well-capitalised and confident as to what will make them spring into action. Expect to see them competing for those assets somewhere near you soon.

THE CVS

Mark Wiseman, Senior Vice President, Private Investments

Wiseman is responsible for leading private equity and infrastructure investments in the CPP portfolio. Prior to joining the CPP Investment Board in June 2005, he led th private equity fund and co-investment programme at the Ontario Teachers’ Pension Plan. He was also vice-president at the private equity firm Harrowston Inc. and spent several years as a corporate lawyer with Sullivan & Cromwell practicing in New York and Paris. Wiseman holds his MBA and law degrees from the University of Toronto and was a Fulbright Scholar at Yale University where he earned his master’s degree in law.

Graeme Bevans, Vice President and Head of Infrastructure

Bevans is responsible for leading the development of the infrastructure portfolio in the Private Investments department. Prior to joining CPP Investment Board, he was most recently the head of infrastructure at Industry Funds Management (IFM), an investment funds management company, and Executive Director at Copernican Securities, both located in Melbourne, Australia.

IN THE CPP INVESTMENT BOARD PORTFOLIO:

Puget Holdings

Washington state’s largest energy utility

AWG

The owner of the UK’s Anglian Water Services, a regulated water and sewage business

Télédiffusion de France

European telecommications tower company

Transelec

Chilean electrical transmission company

Wales & the West Gas Distribution Network

UK gas distribution business