“We’ve kind of flown below the radar and haven’t been splashed across the front pages of trade magazines and newspapers, but we’ve been very busy,” Gavin Ingram says as we meet for the first time at OPTrust’s headquarters in downtown Toronto.
Ingram, who just last year was promoted to co-head of the pension fund’s Private Markets Group (PMG) and was appointed global head of its infrastructure portfolio, is the ideal person to talk about the steady and solid growth the programme has experienced since its inception in 2006.
OPTrust had begun to set the foundations for its private markets platform – which comprises private equity and infrastructure – before Ingram joined the organisation as portfolio manager.
“There were only a couple of people as part of the group when I came through the door. We’ve grown progressively and we’re now 20 investment professionals. We’ve gone from just a Toronto office to offices in London and Sydney, acquiring a global footprint,” Ingram says in a light Australian accent that has not abandoned him in the 13 years he has spent in Canada, working for Macquarie Group as vice president, before moving to OPTrust.
The pension fund reached its target allocation of 15 percent for the asset class in mid-2014. Today, the infrastructure portfolio accounts for around 12 percent of OPTrust’s total assets under management with 14 investments valued at C$2 billion (€1.4 billion; $1.5 billion). It is diverse both in terms of geography and sub-sectors, Ingram says.
But perhaps even more important than the portfolio’s diversity is its performance, generating a net return of 48 percent for fiscal year 2014.
“A lot of it is Porterbrook,” Ingram acknowledges, referring to the UK rolling stock company in which OPTrust invested in January 2009 alongside a number of partners including iCon Infrastructure and Antin Infrastructure Partners. A consortium comprising Allianz Capital Partners, Canada’s Alberta Investment Management Corporation (AIMCo), Hastings Funds Management and EDF Invest of France, acquired Porterbrook for an undisclosed sum last October.
“We were a material part of that but our exact stake was not disclosed,” Ingram says.
While exiting Porterbrook favourably impacted 2014 results, it shouldn’t give the impression that OPTrust’s infrastructure programme is “a flash in the pan”. According to the pension fund’s 2014 annual report, OPTrust’s infrastructure portfolio has delivered an average annual net return of 18.9 percent compared with 6.8 percent for the portfolio benchmark.
What’s more, Porterbrook is just one of several large-scale, high-profile assets OPTrust has invested in. Some may find this surprising given that, with C$17.5 billion under management, OPTrust is smaller than some of its Canadian peers – but it only proves that size is not all that matters.
THE RIGHT PARTNER
“We’re not the biggest fish in the pond. We can’t use our cheque book to throw our weight around,” Ingram remarks. Instead, his team focuses on finding the right partner.
“Everything we do, we do with partners,” he says. “We’re not looking to take 100 percent [of an asset], so leveraging our partners, looking to create infrastructure transactions that are win-win for everyone, and creating a differentiated angle,” is what OPTrust does. This strategy has served the infrastructure programme well.
One example is Globalvia, a transport concessions company originally founded in 2007 as a 50/50 joint venture between Spanish developer Fomento de Construcciones y Contratas (FCC) and Spanish lender Bankia.
In 2011, the two shareholders sought to raise capital to further grow the company. Globalvia formed a subsidiary, Globalvia Inversiones, to which it transferred 18 road and rail concessions in Spain, Portugal, Ireland, Chile, Mexico and Costa Rica. By contributing a total of €750 million OPTrust, Dutch pension PGGM and the UK’s Universities Superannuation Scheme (USS) now hold bonds that can be converted into Globalvia shares.
In July, FCC and Bankia announced the sale of the company to Khazanah Nasional Berhad, the investment holding arm of the Malaysian government, which has agreed to pay up to €420 million. OPTrust, PGGM and USS remain investors in the company.
“We’re not the biggest guy – our programme doesn’t lend itself to that – but we find our way into a lot of these transactions,” Ingram explains, referring to Globalvia, while at the same time offering another example to further illustrate his point – InfraREIT.
In 2010, OPTrust partnered with US energy company Hunt Power, Japanese trading house Marubeni, and US insurers John Hancock and TIAA-CREF to create the Electric Infrastructure Alliance of America (EIAA) and the Gas Infrastructure Alliance of America (GIAA), which had a combined $2.1 billion of capital available to invest in the development and acquisition of electricity and gas transmission and distribution assets in the US. Both were set up as real estate investment trusts (REITs).
Last January, the company’s owners successfully floated InfraREIT on the New York Stock Exchange, offering 20 million shares of its common stock at $23 per share.
Clearly, when it comes to infrastructure, OPTrust prefers to work with the right partners – but would it consider investing through funds?
“We do invest in funds but it’s very selective and it’s very much for strategic reasons,” Ingram explains. “Our fund partners have been very good to us over the years and we value those relationships. Those relationships have generated some investment opportunities but also strategic benefits, not only in terms of GP relationships but also some of the LP relationships we fostered that go on to other investment opportunities,” he adds, declining to disclose the specific GPs with whom OPTrust has partnered to date.
But there are also other types of investments OPTrust has made that may show up as funds but which are actually more like platforms. “It’s like we’ve set up our own fund and we own part of the GP [general partner],” Ingram says.
Firelight Infrastructure Partners is one such example. A C$200 million fund, OPTrust launched Firelight in 2006 with Canada-based Dundee Real Estate Asset Management (DREAM). According to an OPTrust newsletter, the fund was created to capitalise on the “compelling market opportunity” the pension fund had identified to partner with smaller developers in Canada’s renewable energy market.
Firelight currently has 13 projects in its portfolio – nine solar projects, three wind projects and one hydro project, according to its website.
While OPTrust doesn’t favour nor rule out any particular sub-sector – “we look across the board,” Ingram says – renewables seem to account for a good portion of OPTrust’s infrastructure portfolio.
In 2007, OPTrust partnered with UK-based Carbon Trust Enterprises and InfraRed Capital Partners to launch the Partnerships for Renewables (PfR), a developer and operator of commercial-scale onshore wind projects located primarily on public sector land in the UK. According to the PfR website, the company currently has 18 projects in various stages of development.
More recently, in June, OPTrust announced it would be financing – along with Switzerland-based Partners Group, UK-based developer Renewable Energy Systems (RES) and US’ General Electric – Ararat, a 240-megawatt (MW) wind farm estimated to cost €450 million. Once completed – the target date for commercial operation is 2017 – Ararat will be Australia’s third-largest wind farm.
“That was an exciting investment for us, particularly in that market,” Ingram says.
Australia marks OPTrust’s most recent move towards expansion. After establishing a presence in Europe with the opening of an office in London in 2010, the pension fund set up shop in Sydney in 2013 to expand its private markets programme in the region.
While private equity and infrastructure are separate and distinct portfolios, the team responsible for both functions as one which, according to Ingram, provides a number of benefits.
“Because of our combined grouping – I also cover a lot of our oil and gas exploration and production (E&P) under the private equity banner as well – we have a bit of insight allowing us to pick our spots more effectively,” Ingram says, referring to the fund’s midstream investments.
That insight also enables OPTrust to move slightly further up the risk spectrum.
“We’re comfortable with the basins we are in right now,” he says. “I wouldn’t want to be sitting on a pile of shallow dry gas exposure at the moment, but having oil exposure in the right spots is something that we’re comfortable with.”
One such asset OPTrust has invested in is the Harvest Pipeline Company, an affiliate of Houston-based Hilcorp Energy. Founded in 1989, Hilcorp is one of the largest privately-held oil and gas E&P companies in the US and the largest oil producer in the state of Louisiana. Like its other investments, OPTrust has not disclosed the interest it owns in the company. It also does not specify the investment date, although it lists Harvest Pipeline as a current investment on its website.
Other investments it lists include: Star Atlantic Waste Holdings, now known as Advanced Disposal, a portfolio company of infrastructure investment fund manager Highstar Capital, now owned by Los Angeles-based Oaktree Capital Management; and UK water company Thames Water (Kemble Water Holdings), OPTrust’s first infrastructure investment, made in 2006.
Ingram goes on to elaborate on the other benefits that are the result of having a combined private equity and infrastructure team.
“We can apply some of the private equity-type toolbox to infrastructure investments,” Ingram notes. “And that I think has been helpful over the years, certainly with some of the transactions that are complex, where we’re trying to re-position the business, trying to turn it from a run-off portfolio to a growth portfolio.”
Because OPTrust doesn’t seek to acquire controlling stakes in the assets in which it invests, it takes an active role at the board level.
“When we have 20 people set up globally covering two portfolios, that’s a sizeable team. But we’re not set up like a typical private equity fund that has an operation team to parachute in,” he explains. “So we are active at the board level; recognising our strengths and where we can add value.”
“Even when we hold five percent of an asset, we’ve banded together with other investors and joint director arrangements to scale our influence. But we normally do look to scale our cheque size around an amount where we are able to get effective minority control.”
Speaking of cheque size, the question is what amount is OPTrust comfortable with?
“Anywhere between $50 million and $200 million on a single-asset basis is really our range,” Ingram says, adding that OPTrust’s infrastructure programme is flexible enough to deviate slightly from those end-points.
“With the flexibility of our programme, we’re able to do more structured transactions – that’s where we’re seeing a lot of opportunity,” he says, adding that the big marquee assets that tend to be sold through auction is not where OPTrust is focusing. Furthermore, it’s a segment of the market Ingram describes as expensive.
‘IT’S ALL EXPENSIVE’
That comment inevitably steers the conversation towards high valuations, increased competition and declining returns. As someone who has been active in the infrastructure space for nearly two decades – before his time at Macquarie, Ingram was associate vice president at the Commonwealth Bank of Australia – he has seen the changes the asset class has undergone since the late 90s.
Asked how he sees the space evolving in the short- to medium-term, Ingram responds: “You’re still seeing a lot of capital trying to get access to the sector. Maybe you’re seeing a bit of bifurcation in terms of the market. There are those who trail after what they label as ‘core infrastructure’ which is pushing returns down to what people now admit is single digits. They’re not trying to pretend anymore that it’s at 10 or 12 percent,” he says.
“And then you’re seeing what people are calling ‘value-add’, pushing into the higher risk, higher return spectrum. So you’re seeing a bit of a bifurcation going on.”
Still, none of this seems to worry him or to shake his faith in infrastructure, which he describes as a very stable asset class.
“I don’t think we’ll see a big blow up that will shock the system and send private capital running for cover. The asset class is here to stay, the capital is here to stay,” he asserts.
As for OPTrust, “you’ll continue to see us,” Ingram says. “We’ll never be the biggest, flashiest player out there, but we’re happy with our returns, the organisation is happy with our returns, so we’ll just keep doing what we’re doing. It’s been pretty successful to date,” he concludes.