Scott Lawrence’s first day at the helm of Canada Pension Plan Investment Board’s infrastructure group felt more like a homecoming than a new job.
Joining the pension fund in 2005 to help launch its infrastructure programme, Lawrence took over leadership of the C$28.6 billion ($21.7 billion; €18.7 billion) portfolio on 1 June, following a nine-year hiatus from the industry spent managing a public markets-focused strategy.
Lawrence is feeling “really lucky” to be back at the group he helped start and the sector that’s the background of his career, but he’s well aware of how much things have changed.
When Lawrence left infrastructure in 2009 to become head of relationship investments and later fundamental equities, CPPIB was only three years into building its direct investment programme, becoming one of the early institutional investors to venture into active management of its pensioners’ assets.
At the time, infrastructure counted for 4.6 percent of CPPIB’s C$105.6 billion portfolio. Today, 8 percent of the C$356.3 billion pension fund is infrastructure – and there is room to grow that exposure to 10 percent. As Lawrence readily admits, things now operate on a much larger scale.
“The amount of investment capital that has flowed into the space has been enormous and it continues to flow in,” he says – not just of CPPIB, but the entire industry. “It’s an intensely competitive space full of much more sophisticated investors than we were back then. Thankfully, our own capabilities have also grown enormously and enable us to compete,” he says.
Returning to infrastructure may feel like a new ball game to Lawrence, but in other ways, he says it feels like he never left.
From the start, part of CPPIB’s infrastructure strategy has been to hold and improve assets over a long period, certainly longer than the typical closed-end 10-year fund. For Lawrence, this means parts of the portfolio looked familiar, as he got back up to speed on his first day.
“I felt like I came full-circle two weeks ago, when we did a semi-annual review of our investment in Transelec, an electricity transmission grid in Chile. It was the very first deal I worked on here,” Lawrence explains, noting specifics from that deal – the $350 million CPPIB committed, consortium partner Brookfield Asset Management and the asset’s $1.55 billion enterprise value – came back to him quickly during the review.
“It’s a bit of a homecoming,” he continues. “To be able to come back here and [Transelec] is still part of the portfolio and living up to our promise to be long-term investors – to me that is very exciting.”
‘Sign me up’
Lawrence arrived at CPPIB in 2005 after building a career first at General Electric and then Onex, one of Canada’s largest private equity firms. While at Onex, the firm used a strategy that invested on “an unlimited time horizon” and not through fixed-term funds. That appealed to Lawrence, he says.
But he left in 2004 after Onex narrowed its strategy and began raising their first fund. “It didn’t really resonate with my own investment orientation,” Lawrence explains.
His inclination towards long-term investing eventually led to a conversation with Mark Wiseman, the former CPPIB chief executive who around 2005 was also thinking about joining the pension from fellow Canadian pension Ontario Teachers’ Pension Plan. Lawrence recalls Wiseman getting in touch with him that summer to talk about the private equity group he was going to launch at CPPIB.
“What else are you thinking about,” Lawrence recalls asking him. “He said, ‘Infrastructure, and we’re going direct. It’s long term and so are we.’ And I said, ‘That’s the one. Sign me up’.”
Lawrence joined as a senior principal, along with Chris Koski, who’s now at Morgan Stanley Infrastructure Partners, and Graeme Bevins, who was previously at IFM Investors and was hired to head the group (Bevins is now the chief executive-elect of Australia’s Atlas Arteria, previously Macquarie Atlas Roads).
Around a year later, in June 2006, 12 years before Lawrence would take charge of the group, CPPIB and a consortium of investors purchased Transelec.
Room for growth
Now leading the portfolio he helped start, Lawrence says his plan is to continue the old way of doing things, with a little bit of the new thrown in for good measure. The infrastructure group – and CPPIB as a whole – will be buttressed with new capital to invest beginning next year, when pension members can increase their contributions to replace up to a third of average work earnings, according to the pension’s annual report. “Additional contributions mean the CPP fund will grow larger and faster,” it says.
This means the billions of dollars by which the infrastructure portfolio already grows annually – C$24.3 billion to C$28.6 billion from last year to now – could increase. “In the next five years, that number will be north of C$40 billion,” Lawrence says. He adds his team already has multi-billion-dollar deals in the offing that are moving “full speed ahead”.
Lawrence stressed it is early days in his tenure, but right now he foresees investments in infrastructure doubling down on the three sectors the portfolio is already exposed to: transportation, utilities and energy. Change may come from zeroing in on specific sub-sectors CPPIB has yet to acquire, airports being a good example, according to Lawrence.
“We’ve been interested in airports and have been working at them for a long time, but maybe we do ask the question of: ‘Why is it we’ve never managed to buy one?’”
In fact, CPPIB came close to buying an airport in 2008 – Auckland International Airport in New Zealand – but the deal fell apart shortly before Lawrence moved over to relationship investments.
CPPIB had circled Auckland International Airport as an asset the infrastructure team could build into a platform that acquired airports around the world and offered to pay C$1.4 billion for a 40 percent stake. However, the New Zealand government rejected the pension because the deal didn’t meet the criteria outlined in its Overseas Investment Act.
“Our inability to buy into Auckland International Airport 10 years ago certainly hurt,” Lawrence recalls.
Another potential change that’s coming is an evaluation of who CPPIB partners with and for how long they are invested in existing assets.
Lawrence says increased competition for infrastructure has raised valuations and led some investors to exit partnerships agreed to with CPPIB. For example, Brookfield Asset Management announced last December it was exiting its 27.8 percent stake in Transelec and selling to China Southern Power Grid International for $1.3 billion.
“We’re seeing that more traditional funds need to recycle capital and exit, which creates question marks and concerns, not only by investor bases but management teams and regulators,” Lawrence explains.
He adds that CPPIB might also take a page out of Brookfield’s and Global Infrastructure Partners’ book and beef up its operational capabilities. Lawrence says these managers “roll up their sleeves” and get involved in managing their assets much more than CPPIB historically has, which has helped them “drive economic performance while meeting regulatory objectives”.
When asked about changes CPPIB can’t control, such as the US Federal Reserve raising interest rates to between 1.75 and 2 percent in June, Lawrence acknowledges them, but seems unnerved. “It remains to be proven there is a direct link between inflation and returns in this space, but I think that is more of a short-term reaction,” he argues. “We have a remit to continue investing regardless of the economic cycle and regardless of interest rates and inflation.”
To understand how Lawrence might reach the growth he wants to achieve, it’s helpful to look back at how his predecessor did it.
Cressida Hogg left CPPIB’s infrastructure group in April following two-year chief executive Mark Manchin’s “planned renewal of senior management” announcement earlier in the year. Other departures include Graeme Eadie, who headed real assets, and chief operating officer Nick Zelenczuk.
Hogg is now chairwoman of Land Securities, one of the largest commercial property developers in the UK.
Based in London, CPPIB hired her in 2014 to manage its fast-growing infrastructure portfolio, which had reached C$13.3 billion when she joined, according to the fund’s annual report. During her tenure, she more than doubled the portfolio, thanks to significant deals in Latin America and Western Europe.
In 2015, CPPIB partnered with the UK’s Hermes Infrastructure to acquire around a third of Associated British Ports, an operator of 21 UK ports. The investors became shareholders in the company along with Borealis Infrastructure (now OMERS Infrastructure) and the Government of Singapore Investment Corporation.
Hogg led CPPIB to increase its exposure to Latin American infrastructure in 2016, with the purchase of Mexican toll road company Arco Norte for C$745 million. More recently, the pension fund invested €900 million, alongside €600 million from Allianz Capital Partners, to purchase a 20 percent stake in Spanish gas distribution business Gas Natural Fenosa.
The portfolio she left Lawrence grew by C$15.3 billion in her four years at the helm, comprising 17 investments and generating a 15.2 percent return over the last fiscal year, according to CPPIB data.
“Look what happened when I went away. Maybe I should stay away,” Lawrence says jokingly, adding: “I’m very fortunate to be able to step into her shoes.”
CPPIB’s infrastructure group works with a “competitive advantage” Lawrence says existed when he helped launch the programme and that is still around: the pension fund has no cash needs or cash outflows until 2022 or 2023, so yield is less important than it is to other investors.
“Whenever we approach an investment, it’s not about maximising the immediate short-run value and squeezing out every nickel and dime,” Lawrence says. “For CPPIB, infrastructure is not just a yield play. It’s also an opportunity to grow our capital and show real capital appreciation over the long term.”
With Lawrence now in charge, it’s likely CPPIB’s approach to infrastructure investing will continue in the future. But market changes such as inflation or returns compression due to heightened competition might force his team to adjust.
Importantly, Lawrence seems open-minded about what assets to invest in.
“There’s a whole swath of low-volatility companies or businesses that can be labelled infrastructure-like revenues or infrastructure-like returns,” Lawrence says. “The question is where that fits into our portfolio. We’ll see.”