Reaching for the stars

A Global Strategic Investment Alliance for ‘alpha’ infrastructure and real estate assets? One pension’s chief executive officer is working hard to make it a reality.

It’s often said that Canadians are ahead of the curb on infrastructure issues. After all, some of their pension plans have gotten around to launching satellites into outer space as a way to help public employees retire, while others have gobbled up entire Macquarie infrastructure funds in one gulp.

But if you think any of these are overachievements, don’t worry – they may just be getting started.

In July, when Michael Latimer assumed the position of chief investment officer of the C$60billion Ontario Municipal Employees’ Retirement System, a press release announcing his appointment stated very nonchalantly – almost as an aside – that the appointment would allow the pension’s chief executive officer, Michael Nobrega, to focus on the pension's “ambitious plans to form a multi-billion-dollar global strategic investment alliance with like-minded investors to jointly own large-scale infrastructure and real estate assets”.

Say what?

Over a morning meeting in New York, Nobrega chuckles as he is read this statement from the press release. The so-called “Global Strategic Investment Alliance” is something he’s been thinking about for years. He is now preparing to give the effort the final push it needs to become a reality.

Why create such an alliance? His pension – the same one that founded the Ciel Satellite Group in order to earn its pensioners money in outer space – likes to invest in big-ticket items.

“We have found from empirical evidence that large-scale investments tend to have a higher degree of return than we’ve found with smaller assets in these two asset classes,” Nobrega said. The return spread, he said, is about 200 basis points annually.

To get that alpha one must invest in what he calls “alpha” assets: large-scale, dominant assets with sustainable cashflows in the real estate and infrastructure arenas.

But not just anybody can buy these crown jewels of the real assets world. It often takes many, many billions of dollars. Which is why anyone hoping to do so – whether through a GP-LP structure or some other means – must ultimately line up the heft of someone like a CalPERS, a GIC or an APG.

From his conversations with like-minded investors such as these, Nobrega discovered that they would like to make decisions on their investments and free themselves from the confines of 2-and-20 compensation structures.

His solution is an alliance that marries the interests of several large-scale investors and gives them the chance to invest together in opportunities brought to the table by OMERS’ two in-house direct investment teams: Oxford Properties and Borealis Infrastructure.

“There will be no negotiation fees, there will be no financing fees, there will be no acquisition fees, there will be no fees on committed capital on the alliance. All that we will charge the system is a fee structure which will pay Borealis or Oxford – depends if it’s a real estate or infrastructure asset – approximately 50 basis points to manage the assets. And there is no carry either to Borealis or Oxford in the arrangement. That is, in essence, the deal,” Nobrega said.

That’s a lot of fees to turn down. And since managers in the asset class have already been accused of charging limited partners too much, should they fear for their livelihoods if this kind of alliance takes off and becomes mainstream?

“I don’t think it challenges them very much,” Nobrega says. On the contrary, he believes it may benefit fund managers in some respects: “I think this may offer them opportunities in certain circumstances to be able to co-invest with this alliance”.

The shape of things to come? It may yet be too soon to tell. But one thing’s for certain: in more ways than one, this pension’s reaching for the stars.