The right kind of boring

“I THINK WE have done just about enough investing in Chile, for now,” says Leo de Bever, chief executive officer of Alberta Investment Management Corporation (AIMCo).

De Bever, 63, is talking about his most recent coup – a deal which made AIMCo, a $70 billion Canadian pension fund manager based in Edmonton, the co-owner of SAESA Group. SAESA is a Santiago, Chile-based electricity distribution and transmission company responsible for delivering power to 16 percent of the Chilean population.

For AIMCo, the acquisition, from seller Morgan Stanley Infrastructure (MSI), marked its second investment in Chile. In December 2010 it acquired a 50 percent stake in toll road operator Autopista Central from Skanska, a construction and development company based in Sweden.

PLAIN-SPOKEN

An avid Warren Buffett adherent, de Bever is considered a consummate value investor. Yet de Bever is disarming and humble as well as, above all, cerebral. His slight Dutch accent lends itself to plain-spoken, unsentimental assessment.

De Bever was born in Zevenbergen, a small municipality far removed from Amsterdam, the bustling capital city. He earned a PhD from the University of Madison Wisconsin in 1975, going from there to the Bank of Canada, where he went on to become chief forecaster. His star rose during his next post, a decade-long stint as senior vice president with the Ontario Teachers’ Pension Plan (OTPP). There, he introduced infrastructure, as well as hedge fund and private equity investing, to the OTPP lexicon. For de Bever, traditional asset allocation had been ineffective, not to mention unreliable.

“Diversification was part of it,” de Bever explains regarding his decision to become a pioneering hedge fund adopter.

Before conventional asset management – i.e., mutual fund investing – began its gradual decline into the bastion of low, single-digit returns, de Bever had long sought a non-market correlated gambit. The alternative asset space, de Bever reasons, offered “a higher real return than index-linked fixed income”.

“The trade-off was more risk than fixed income, but less than equity,” de Bever adds.

A successful time at OTPP next led him to Australia, a pension fund Valhalla with its booming superannuation programme.

There he served as chief investment officer of Victorian Fund Management Corp, a Sydney-headquartered pension fund manager.

He remained with the organisation until April 2008, when AIMCo recruited the well travelled de Bever as chief executive officer.

His new job came with a harsh welcome: a month later, Lehman Brothers, the storied Wall Street financial services provider dating back to 1850, collapsed amid its exposure to sub-prime mortgages and reliance on cosmetic accounting. The death of Lehman would signal a chain reaction that gutted the global financial market and reduced Wall Street to a white-collar welfare state.

FLEXIBLE

A deft de Bever maneuvered AIMCo clear of potential catastrophe. AIMCo is a “Crown corporation,” or provincial government-owned business. With its excessive cash exposure and a political will that was flexible enough to let de Bever tinker with the investment mix, AIMCo sidestepped an equity market landmine. In 2010, AIMCo returned 12 percent while keeping its capital base intact. In the meantime, de Bever has become credited and much respected as an innovator in infrastructure investing. And while Alberta has long been considered a financial sector backwater compared with Canada as a whole, de Bever has done his best to cultivate local investment talent, increasing staff numbers from 130 to 270.

The deal for SAESA reunited de Bever with OTPP, the other 50 percent-owner.

According to Morgan Stanley, SAESA’s capital spending from 2007 to 2010 increased 14 percent annually. MSI purchased half of SAESA in 2008 for $870 million. According to Sadek Wahba, global head of MSI, the value of SAESA has risen in part because Chile has become an Organisation for Economic Co-operation and Development (OECD) member.

“We believe SAESA is well positioned for future growth and continued success,” Wahba told Infrastructure Investor.

For de Bever, SAESA is also attractive because of the market in which it is based.

“What I like about Chile, about its infrastructure – and this is important – is that sense of ‘You do your part, and we do our part,’” explains de Bever. “Their law is very clear.”

The political landscape in Chile, de Bever adds, is open-minded as far as privatisation is concerned, and therefore likely to attract even more capital.

SELECTIVE

Chile aside, de Bever is maintaining a “selective” approach when allocating capital in Europe, North America or emerging markets.

Interestingly, he is currently cool towards Brazil, an emerging market darling.

“Brazil is a great opportunity, or it should be a great opportunity,” he elaborates. “But it has become less investor friendly. That could pose a great deal of trouble.”

There are elements of geopolitical risk and socioeconomic risk associated with the country. “[The market in Brazil] is just not well-specified,” he says.

In a way, this makes Brazil a microcosm of global themes. The world’s global financial system is teeming with unprecedented risk, and an AIMCo investor talking shop with de Bever had better be prepared for a little gloom.

“In general?” ponders de Bever. “We are concerned with an uncertain global marketplace. The world, right now, is unstable”.

As a matter of fact that uncertain, unstable marketplace is the reason de Bever is a true believer in infrastructure investing – a “really boring” asset class.

“It is boring. Very boring,” de Bever insists. “You tell me, what is more boring than hanging a wire on a poll?”

FRUSTRATION

“Boring” is crucial to a prized aspect of de Bever’s investment theme: capital preservation. The bond market, an oft-cited backbone of a conservative asset mix, is passé as far as de Bever is concerned. His frustration with government paper in particular led him to explore infrastructure.

“A government bond is supposed to be risk free, and offer a dependable return,” de Bever says. “We no longer think of them as risk free, and we think the return is low”.

But to be a better investment than fixed income, a good infrastructure asset, like SAESA, has to be a “quasi monopoly” according to de Bever.

“Often, an infrastructure asset will provide a vital social service,” says de Bever. “Here, a government regulator will typically structure a contract around that asset to emphasise a need for the reliability and availability of the service, and a stable return higher than a bond because of operating risk, but modest compared to a stock”.

Right now AIMCo, de Bever says, is bullish on electricity – as evidenced by the SAESA deal. Transmission as a whole has “little complexity” in an operating sense – a de Bever litmus test in researching a good infrastructure asset.

“Make sure the tower can hold up the wire and make sure the electron can flow smoothly from generator to customer,” he says. “A power plant would fall in a similar category”.

AIMCo has developed a strong focus on energy-related investments such as pipeline firm Kinder Morgan, power producer First Wind and, outside of North America, Spain-based oil storage company CLH.

The flipside to energy: “The same type of asset can become risky depending on a different contract. A transmission system or power plant can be ‘merchant,’ meaning it will only get paid for energy generated and transported, which can increase risk”.

SILVER LINING

De Bever is less enthusiastic about transportation infrastructure. Here, despite his Autopista Central move, his logic that ‘boring is better’ is challenged. “A toll road is a bit less boring, because it has traffic risk that may be cyclically variable,” he explains.

The bigger macroeconomic picture is a bleak one, but there is a silver lining for infrastructure.

“The world is wobbly right now; our emphasis is on capital preservation,” says de Bever, “and infrastructure can do it well”