The quest for the Holy Grail

We’ve all been there, have we not? Sat in a dentist’s chair regretting that this particular dentist is of the chatty variety. With your jaws clamped open, all you can do is offer up the occasional grunt or gurgle in response to questions about current affairs or holiday plans. Mark Weisdorf, managing director and chief executive of JPMorgan Asset Management’s Infrastructure Investments Group, recalls his mother’s wish that he become a dentist (or doctor). It’s perhaps as well that he didn’t. Possessing an affable and welcoming disposition, Weisdorf is also, by his own admission, fond of talking.

Several hours after first arriving at his office on New York’s Park Avenue, I feel intellectually stimulated by Weisdorf’s observation of the infrastructure asset class as the “Holy Grail” for institutional investors – while anxiously aware, as I check my watch, that my working day has shrunk somewhat. The conversation was both fascinating and long running.  

Having posed for pictures patiently (and also good naturedly given that a couple of his office colleagues showed up to spectate), Weisdorf takes a seat in his office. He proceeds to explain how he came to be here, surrounded by Manhattan’s iconic skyscrapers, rather than in a surgery fixing teeth. Having studied science at the University of Toronto, he trained as a chartered accountant at Touche Ross, where he went on secondment to the Ontario Securities Commission, the Canadian equivalent to the US SEC. “That was very interesting,” he reflects. “It got me interested in investors.”

After this, he spent no less than 17 years in investment banking, first at Merrill Lynch Canada, followed by a decade at Wood Gundy (later CIBC) and then a spell as head of investment banking at HSBC Securities (Canada). “I was always interested in the buy and sell side of investments,” he reflects. In March 2000, he made a momentous decision to join the buy side as vice president of private market investments at the Canada Pension Plan Investment Board (CPPIB), the investment arm of the Canada Pension Plan, a retirement fund for Canadian employees.   

Weisdorf takes up the story: “I was employee number seven or eight and, at that time, it had about $7 billion in assets under management (AUM). Now it has over $150 billion in AUM and around 700 employees. So I was very much involved at the beginning.”

Building from scratch

Weisdorf was handed what he describes as a “blank sheet of paper” with which to write CPPIB’s investment strategy across private markets. This is significant, since it transpires that building things up from scratch is a major source of motivation for Weisdorf. He says he relishes the “intellectual challenge”. Repeatedly, he has taken on the task of developing something new or fledgling.

At HSBC Securities (Canada), this involved adding investment banking and advisory services to an institutional sales and trading boutique that hadn’t made a profit in five years (in the following three years, revenues rose from $25 million to $125 million). After his four years at CPPIB, he would go on to launch his own consultancy business, advising institutional investors about investing in private markets (“I helped Macquarie to educate investors on the risk and return characteristics of infrastructure and how it might fit into their portfolios”).  And eventually along came “the opportunity to establish a new investment strategy inside JPMorgan Asset Management with over $1 trillion of client capital but with zero exposure to infrastructure”.

But back to CPPIB, where diversification was the priority. “Private equity was where the Board allocated all its risk capital when I joined whereas, because infrastructure and real estate are based on real returns – returns with a low correlation to equities and fixed income – they offered the prospect of diversification and inflation protection. So I developed three areas [private equity, real estate and infrastructure], wrote policies and procedures, built a team and put $7 billion to work in three years.”

Weisdorf reels off statistics like these as if reading from a shopping list, but building a team at the same time as investing more than $2 billion a year from a standing start is surely notable by anyone’s estimation. Arguably the most significant part of the above quote, however, is Weisdorf’s reference to the low correlation real assets has to equities and fixed income. He is a passionate advocate of infrastructure as an asset class, and what drives that passion is his belief that infrastructure represents the “Holy Grail” for institutional investors.

Big as real estate

“My biases and beliefs include that real return assets – led by infrastructure – play an important role in diversification, risk reduction, high risk-adjusted returns and long-term asset liability matching. It’s the Holy Grail for institutional investors. Institutions thought they only had equities and fixed income for low correlation of returns to each other. Now they are beginning to appreciate they have infrastructure as well, and that means infrastructure should become a very large part of institutional portfolios.”

How large? Weisdorf believes that, ultimately, there is no reason why infrastructure should not be as significant a part of institutional portfolios as real estate. He is well aware that a number of big Canadian pensions and Australian superannuation funds already give more or less equal billing to real estate and infrastructure, having been committing significant capital commitments to infrastructure since the mid-90s.

He believes that in the US and Europe, where infrastructure allocations are typically much smaller, the gap with real estate might be closed in between 10 and 15 years “given the compelling risk and return characteristics of infrastructure for institutional investors, the search by institutional investors for alternative investments that meet their risk-adjusted return requirements, and the tremendous need for private sector capital”.

Weisdorf volunteers several recent examples that give him cause to believe that the US institutional investor base is being won over by infrastructure: the decision of the $238 billion California Public Employees Retirement System to raise its target infrastructure allocation from 1.5 percent to 2 percent in November last year; the announcement by the $40 billion Alaska Permanent Fund Corp in May this year that it would aim to invest $400 million in infrastructure in fiscal year 2012; and the appointment of consultant Caledon Capital Management by the $8.5 billion New Mexico Retirement Board in August to help it pursue infrastructure investments that are “more sophisticated than just buying funds”.

False start

Weisdorf believes that these commitments indicate the asset class has overcome investor concerns based around certain misplaced expectations. “There was a false start [for the asset class] in that a number of investors including GPs didn’t realise that transport was more economically sensitive than regulated utilities. They either didn’t realise it, weren’t sufficiently disciplined, or they might have been misled. And the problem was compounded by the application of too much leverage.”

Weisdorf says his team “couldn’t make sense of prices [for transport assets] pre-09”. After being outbid for Chicago’s Midway Airport in September 2008, the team acquired its first transport assets in the first quarter of 2009 [North Queensland Airports]. This was, of course, sound judgement – it transpired that many transport assets deteriorated in line with the overall economy. “It was an area where the industry stumbled,” says Weisdorf. “It caused a pause and a reflection on the risk/return characteristics of infrastructure.”

But while some investors got their fingers burnt, Weisdorf insists that “those who understood infrastructure’s characteristics came through the crisis well. Overall, it did better than any other asset class apart from fixed income. Not only that, but it performed even better on a risk-adjusted basis, i.e., with less volatility. It was what we expected, and it means that if you have a diversified infrastructure portfolio, you can achieve high risk-adjusted returns.”

He also points out that those who kept their infrastructure exposure low may feel they made the right decision based on the ‘mispricing blip’, while being happy to consider opening their wallets today. “Investors who didn’t commit much may be glad that they missed that cycle but will invest now. They dodged the bullets and now they have good visibility.”

Equally, even those who did suffer may take a benign view. “Many of those who experienced volatility are large and sophisticated organisations and they will have learnt from it. There are few who say they’re not interested [in the asset class] any more. It was unfortunate that infrastructure was gaining acceptance before the worst crisis in 60 years. You might have come to the wrong conclusion, but the vast majority have a good understanding – and we would rather have knowledgeable investors.”                

Courting process

But while many LP groups are only now beginning to have their heads turned by infrastructure, Weisdorf was a full-blown convert long before JPMorgan came calling on him six years ago. The meeting of the man and the banking behemoth came about following a presentation Weisdorf delivered at a real assets seminar.

“A few months later I got a call from Joe Azelby, global head of real assets, who was global head of real estate at the time. He said that [JPMorgan] clients wanted an investment strategy with attributes similar to real estate – a similar risk/return profile. There was a lot of institutional interest in real estate and not enough sensible investment opportunity. There was a courting process that lasted nine months and then I decided to wind down the consultancy [and join JPMorgan].”

So what was the attraction of JPMorgan for Weisdorf? One aspect of this has already been mentioned, and was an obvious lure. Here was a massive, global organisation with extremely deep pockets – but without an infrastructure strategy. But there was more to it than that. Weisdorf also saw an alignment with what he believed was the right strategic approach to core infrastructure investment – namely, an embrace of open-ended funds.

“One of the big reasons I came here was that this platform had only open-ended perpetual real estate funds at the time. So I thought ‘that’s interesting’. Other firms were considering offering investing infrastructure through closed-end funds, while this platform had investors committing to real estate for 40 years through open-ended funds, and that made sense to me. It meant that clients could make the decision about changing their allocation, not us. It’s always puzzled me why you would sell assets if they match your liabilities. How do you find a different investment that serves you better? I didn’t feel that a 10-year closed-end fund made sense for core, strategic assets.”

Weisdorf is quick to stress that he is not opposed to closed-end funds per se. In Asia, in recognition of a different risk/return profile, JPMorgan offers an opportunistic, capital gains-driven strategy through closed-end funds. He also points out that the firm offers tailored accounts for large clients and might consider something like an opportunistic, greenfield strategy in the US or Europe at some point. The bottom line: “It’s all about what clients want.”

Independent v sponsored

Still on the theme of investor preferences, there has been a buzz recently around the launch of independent funds such as the spinout of Stonepeak Infrastructure Partners from Blackstone Group and the apparent success of a number of these independent outfits on the fundraising trail. Does being the infrastructure arm of an investment bank position Weisdorf’s team on the wrong end of the trend?  

“There is a debate around independent versus sponsored and what’s better,” he acknowledges. “In my view, it’s horses for courses. There is not one right answer. Independent funds do meet some peoples’ needs. But where you have monopoly assets that you own for the long term, you need a platform that provides continuity and added value over the long term. This means that the assets will be well managed into the future even if the senior members of the investment team leave. That’s a big issue for long-term-hold, essential, low-risk assets. You know you can trust a firm with a long history of meeting fiduciary obligations and a culture of building teams (see also boxed item, ‘It’s a cultural thing’).” 

One thing’s for sure, JPMorgan now needs a large team to manage its infrastructure operation. From the zero allocation that Weisdorf inherited, JPMorgan Asset Management now manages more than $4.5 billion in client commitments to infrastructure. The organisation has invested in assets exceeding $8 billion in total enterprise value.   

Weisdorf is passionate about the subject of infrastructure, and his accomplishments have given him plenty to talk about. He therefore has no regrets about his chosen career and never really had any intention of finding his vocation within a dental surgery. He does, however, confess to a “slight regret” at missing out on a career in architecture because of its “interesting blend of art and science”. He doesn’t mind too much though, as he finds the same combination present in infrastructure investment.     

‘It’s a cultural thing’
Weisdorf stresses the importance of developing the right culture. Here, he highlights some of the central figures in JPMorgan’s infrastructure operation

Mark Weisdorf explains the ingredients needed for a successful team. “You need a mix of talent – for example experience with regulated utilities, transport, acquisitions, asset management, research, financing, engineering etc,” says Weisdorf. But, beyond having useful skills, the most important thing is commitment to the cause. “You have to fit in and embrace the culture,” he says.

Among the “critical hires” identified by Weisdorf are Jason Zibarras and Surinder Toor. Zibarras, previously at banking group ING for 15 years, joined in London four years ago. “He was brought in to establish and build a London-based team and to acquire assets outside North America,” says Weisdorf. Zibarras has since led three water and electricity deals in the UK, airports deals in Australia and a ports deal in Spain.

Surinder Toor was hired three years ago as a senior asset manager, also in London, having previously been finance director at Scotia Gas Networks, the UK gas distribution company. As Scotia has Canadian pension investors, Weisdorf says Toor understands the demands of the Canadian institutional investor base.

Toor was named head of asset management a year ago, while Zibarras was handed the chief investment officer brief. “So Jason is now responsible for all aspects of the investment process and Surinder for asset management.”

As chief executive, Weisdorf retains responsibility for portfolio management and investment strategy – “overseeing what goes in and what comes out” – as well as being a member of the investment committee for the Asian strategy and considering other investment strategies.

Other key team members identified by Weisdorf include Andy Walters, whose three-year stint followed 15 years at Citi, and Dan Schuller, a civil engineering veteran.

Take-off in Queensland
Weisdorf talks through a deal that he feels encapsulates JPMorgan’s approach to infrastructure

“I think the best example of our approach is our investment in North Queensland Airports (NQA) – a 99-year concession to operate the Cairns and Mackay airports in Queensland, Australia.

We acquired the airports shortly after the onset of the global financial crisis, in January 2009, during a short-term trough in airline travel. However, given Cairns’ proximity to the Great Barrier Reef (Australia’s number one tourism destination), Mackay Airport’s proximity to the Bowen (mining) Basin, and both airports’ proximity to the higher growth economies of Asia, we were of the view that NQA would generate long-term passenger growth rates in excess of those of the average growth rates in the OECD.

In the three years since we’ve owned the asset, we have completed a major renovation and expansion of Cairns’ domestic terminal, increased passenger revenue through new airline tariff agreements, renovated portions of the Mackay terminal and Cairns international terminal, increased non-aeronautical revenue, increased passenger traffic, and completed a major debt refinancing.

The results have been material increases in passenger growth, revenue and EBITDA; and confirmation of our investment theses with respect to the superior long-term trend for passenger growth at Cairns and Mackay, plus opportunities to de-risk the business and materially enhance the value of the assets.”