When you think about the world’s largest infrastructure managers, Global Infrastructure Partners, Brookfield Asset Management and Macquarie Infrastructure and Real Assets are among the names that are likely to come to mind. And when you think about the managers of the biggest pools of capital – the mega-funds of more than $10 billion – the first two of these would be the names that sprang to mind first.
What might not spring to mind is the fact that the manager of one of the first $10 billion-plus infrastructure pools did not come from the private sector. It was the Ontario Municipal Employees Retirement System, a Canadian pension fund with more than two decades of direct-investing experience under its belt.
“When people think of us, a lot of them think about the OMERS balance sheet, which amounts to the lion’s share of our investments,” acknowledges global head of infrastructure Ralph Berg. “But we have invested over C$5 billion ($3.8 billion; €3.3 billion) through the Global Strategic Investment Alliance.”
“It’s a bit of a fallacy to say you can only show performance when you sell and otherwise you can hide underperformance – you cannot.”
Although the GSIA investments might seem like a comparatively small proportion of OMERS’ C$18 billion infrastructure portfolio, their importance to the pension fund is arguably outsized. After all, this $12.5 billion co-investment programme, which closed fundraising in June 2014, has an institutional investor as its GP (charging 50 basis points on invested capital, but no carry) and some of the world’s largest investors as its LPs.
The latter include Japan’s $1.4 trillion Government Pension Investment Fund, Pension Fund Association of Japan, Development Bank of Japan, a group of Japanese pensions and firms spearheaded by Mitsubishi, and an infrastructure fund raised by McMorgan & Co (arguably the group’s outlier). However, OMERS often contributes the lion’s share for each GSIA investment.
“The GSIA is now a core pillar of our strategy,” says Berg, noting that its investment period came to an end last April, with the majority of the capital invested. “We learned a lot from managing a pool of third-party capital, which helped us secure large investments, optimise the flow of opportunities and capture a larger share of them. But it’s not just external facing – it’s also helped us evolve and capture best practices internally and for our investors.
“In a way it’s like training on your own versus playing against a team. When you train on your own, you can get better and improve, but it doesn’t come close to the test of playing against the competition. Some of the internal learnings that come with attracting sophisticated investors into your programme – such as helping them manage their processes, the reporting, sharing of strategies and business plans – have been a great catalyst for us to continue to evolve.”
To say the GSIA is unusual in the world of direct investing would be an understatement. From its scale to its programmatic nature, it is nothing less than unique. Berg thinks it works for two main reasons: “The fact that we invest typically more than half of the capital required for every GSIA investment – which requires a minimum enterprise value of $2 billion-plus – brings very tangible alignment. But not only are we putting our money where our mouth is, we are putting that capital into those investments with very similar – if not identical – objectives.”
There is a third reason behind the platform’s success: its 15-year duration. “A lot of people today want to get exposure to the asset class over long periods of time,” says Berg. “It’s difficult to scale up as an institution if every five to seven years you have to liquidate your position. Our partners at the GSIA very much enjoy the long-term symmetrical alignment.”
That ability to go long – either directly through the OMERS balance sheet or via the GSIA – is, in Berg’s opinion, a definite plus: “The flexibility of the time horizon of our capital is one of the biggest advantages we have.”
That does not mean OMERS is averse to selling assets, though. “We rotate our capital in a very dynamic way. Last year, we sold Airports Worldwide, which we owned 100 percent, to VINCI in a deal that achieved significant outperformance over acquisition costs. Prior to that, we sold our stake in the UK’s High Speed 1 [rail link]. We’re just not forced to sell by a limited hold period.”
What Berg does not subscribe to is the oft-repeated criticism that long-term direct investors, who are not bound by the discipline of forced exits, can use their long-term horizons to sweep underperforming deals under the carpet.
“Nothing proves performance as much as a disposal, but there are other ways of proving it too. Fundamentally, very few of our assets are owned 100 percent by ourselves. We have partners, and you cannot escape the scrutiny that comes with having partners with their own opinions. So there are many control points, and I think it’s a bit of a fallacy to say you can only show performance when you sell and otherwise you can hide underperformance – you cannot.”
Still, being able to hold on to good assets for the long term is particularly important at a time when the competition is tight in certain sectors and geographies. Europe, which Berg says was “disproportionately busy” for OMERS between 2013 and 2017, is a good example.
“There was a period where, if you had capital in the worst years of the crisis, you could find a lot of compelling opportunities – provided you had the wherewithal and long-term perspective. You had a situation where some governments and corporates had to de-lever quickly at a time when it was probably hard for managers to raise capital, because infrastructure was less understood as an asset class. So, if you were a Canadian investor, you probably faced a less competitive market.”
For OMERS, its European streak started with the 2013 acquisition of NET4GAS, which operates more than 3,800km of gas pipelines across the Czech Republic and which it has retained. In its most recent investment on the continent it led a consortium of Allianz Capital Partners and AXA Investment Managers to invest alongside French company Altice in a fibre-optic platform – its first French deal.
These days Berg, like many others, is aware of the changed competitive landscape in Europe: the wall of capital chasing core assets in AAA jurisdictions with strong regulatory regimes. However, he points to Altice to highlight where deals can still be found.
“We’re going into new areas, like telecoms, which is what we’ve done through our joint venture with Altice. We find the opportunity to participate in the rollout of a network very exciting. It’s a greenfield investment, but we are well equipped to manage the complexity. We feel that the combination of a good market like France and the gap between where technology needs to be to meet user demand provides a good opportunity to grow the network by three to four times.”
However, the Canadian pension has taken the opportunity to increase its footprint in other geographies. “We’ve deployed a lot of capital over the last 15 months, especially in North America, and that was deliberate and an outcome we wanted. We felt for some time that we were light in North America in relation to the opportunity and the overall quality of the economy. We felt with 15-16 percent of our portfolio in the US and some 28 percent in Canada, we were a few percentage points lighter in the US than we wanted to be.”
That increased footprint came through thanks to deals like the acquisition of Leeward Renewable Energy, an owner and operator of wind farms across the US; Puget Sound Energy, a regulated utility in Washington; and BridgeTex Pipeline Company, a crude oil transportation provider in Texas.
OMERS has also been venturing further into developing markets. “We have equipped ourselves, especially on the people front, to be much more effective in places like Latin America and now Asia. We have a number of people in our New York and Toronto offices who grew up in Latin America and have experience there. As a result, it’s no accident we made our first investment in Chile about two years ago, and we’ve found very good partners there. This is a model we’re replicating in Asia, and we’ve opened an office in Singapore to do that. We’re very excited about the macro picture in Asia, but we are very new to the region, so we are developing our understanding of it.”
Berg points to OMERS’ investment, together with CPPIB and Allianz, in IndInfravit Trust – a REIT-like structure created by India’s government to attract capital to the country’s infrastructure sector – as an example of how the pension fund is feeling its way across Asia: “[It] is a very modest and controlled investment into an entity with a good portfolio and a strong seven-year track record, giving us exposure to the country’s economy and growth story.”
However, he stresses that these more emerging economies “are not our priorities for the time being. We are North America-, Europe- and Australia-focused.” To demonstrate this, he points out that Chile accounts for less than 5 percent of OMERS’ infrastructure portfolio.
Waiting on quieter times
Be that as it may, we are living through a period where some of OMERS’ key markets are being affected by adverse headwinds. That is nowhere truer than in the UK, currently rattled by the Brexit process, and since our interview takes place in London, it seems remiss not to ask Berg whether he is losing much sleep over the whole thing.
“It may sound paradoxical, but I don’t worry very much about the long term of the UK, or any of the markets where we are invested or [that we have] identified as target markets today. The UK, where we have been invested for more than 15 years, is a country with a long and strong tradition of the rule of law, effective governance and private sector involvement in infrastructure. As much as we try to anticipate various scenarios, Brexit has become very complex. Having said that, the bottom line is we continue to be very confident about the quality of the regulatory framework, the competence of the regulatory agencies and our dialogue with them.”
But although he does not seem unduly worried about the heightened political and social uncertainty in the UK and elsewhere, he is well aware that its root causes have to be confronted.
“The risk of political intervention and greater regulatory scrutiny to protect consumers has to be understood, as it’s one of the main reasons regulators exist and why regulatory regimes were created. We have come out of a big crisis seven or eight years ago that has left challenges with a large majority of the population.
“It hasn’t escaped anybody that we are going through times where the ‘S’ and the ‘G’ in ESG have become more relevant than they have been for a long time. Hopefully, we will go back again to a time where these factors require less attention, due to continued improvements in these areas.”
Meet the new additions to OMERS’ 60-strong infra team
Gisele Everett, managing director (New York)
Everett joins as a member of the Americas asset management team. She was most recently at Anchorage Capital Partners where she worked in due diligence and value creation with companies in the energy, real estate, media, telecoms and other sectors. She previously spent six years as a private equity investor at Deutsche Asset Management.
Tom Frazier, managing director (New York)
Frazier joins the Americas transaction team after 12 years at Global Infrastructure Partners, where he was most recently responsible for investing across the energy value chain. He previously spent two years at Lehman Brothers in investment banking and six years at Deloitte & Touche and Arthur Andersen in audit.
Michael McNicholas, managing director (London)
McNicholas brings more than 35 years of experience in leadership positions in the public and private sectors, heading large organisations with operations in Ireland, the US and across the world. Most recently, he was chief executive of Ervia, a state-backed utility company responsible for the delivery of Ireland’s gas and water infrastructure and services.
Marco Pugliese, managing director (London)
Pugliese will focus on the origination, execution and management of infrastructure investments in europe, with a particular focus on telecoms and digital infrastructure. He joins OMERS from Bank of america Merrill Lynch in london, where he led the origination and execution of the bank’s telecom infrastructure assignments in Europe, the Middle East and Africa.