infrastructure investment | Pension360

Ontario Pension Invests $200 Million in European Infrastructure

The Ontario Pension Board has invested $200 million with AMP Capital’s Global Infrastructure Fund.

The fund invests in European utilities, communication and transport infrastructure.

More details from SuperReview:

The Ontario Pension Board (OPB), the administrator of the 80,000 member defined benefit Public Service Pension Plan with $22 billion in assets, invested the sum which will make up 10 per cent of the strategy’s target size of US$2 billion.

AMP Capital Global Head of Infrastructure Equity Boe Pahari said the investment was an endorsement of the strength of the strategy which accesses diversified European infrastructure equity in sectors such as transport, communication and utilities.

OPB Private Markets’ managing director Glenn Hubert said the pension fund board was impressed with the longevity, scope and success of AMP Capital’s infrastructure investments as well as it growing market presence in North America which includes an infrastructure equity investment team based in New York.

AMP Capital Head of Americas, Infrastructure Equity Dylan Foo said the group would continue to grow in that region by focusing on mid-market opportunities where it could see relative value versus larger transactions.

The move by the OPB follows reports that Canadian pension funds were also being drawn to invest in Australian infrastructure projects and developments resulting from the Federal Government’s efforts to boost spending in that sector.

The Ontario Pension Board manages $22 billion in assets.

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Benchmarks, Transparency Could Bring More Pension Funds to Infrastructure, Says Group

The European Association of Paritarian Institutions (AEIP) last week called for greater transparency and more performance data in the infrastructure sector.

These changes, according to the AEIP, could help attract more pension funds to the sector.

From Investments and Pensions Europe:

Infrastructure markets need to be more transparent, with greater emphasis placed on the development of sector benchmarks, according to the European Association of Paritarian Institutions (AEIP).

Setting out its views on infrastructure, the association said that while pension funds were long-term investors – and therefore well-suited to invest in the asset class – they first and foremost needed to abide by their fiduciary duties to members.

“The reality is that infrastructure represents a valuable asset class and for sure a viable option for long-term investors, but these latter face several hurdles to access it,” the AEIP’s paper noted.

It said the lack of comparable, long-term data was one of the hurdles facing investors and that the absence of infrastructure benchmarks made it difficult to compare the performance of the asset class.

It also identified an organisation’s scale as problematic to taking full advantage of the asset class.

“Direct investments, those that yield the most interesting returns, are the most difficult to pursue, as their governance and monitoring require skilled individuals and a strict discipline regulating possible conflicts of interests,” it said.

“National regulation does not always simplify direct investments, and pension regulators in some cases limit the use of the asset class in a direct or indirect way.”

The association called on governments to play their part in making infrastructure accessible.

“Often the lack of infrastructure investments is not due to a lack of projects but not finding the right match with investors,” the AEIP added. “Some form of standardisation might be investigated.”

Read the paper here.

Kolivakis Weighs In On Canada Pensions’ Clean Energy Bet

This week, two Canadian pension funds — the Ontario Teachers’ Pension Plan Board and the Public Sector Pension Investment Board – teamed up with Spanish bank Banco Santandar S.A. to manage a $2 billion portfolio of renewable energy assets.

Leo Kolivakis of the Pension Pulse blog weighed in on the clean energy bet in a post on Wednesday. The post is re-published below.

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Originally published at Pension Pulse

This is a big deal and I expect to see more deals like this in the future as more European banks shed private assets to meet regulatory capital requirements. In doing so, they will looking to partner up with global pension and sovereign wealth funds that have very long-term investment horizons.

The Spaniards are global leaders in infrastructure projects (Germans and French are also top global infrastructure investors led by giants like HOCHTIEF and VINCI). When it comes to renewable energy, Spain is the first country to rely on wind as top energy source:

Spain is the first country in the world to draw a plurality of its power from wind energy for an entire year, according to new reports by the country’s energy regulator and wind energy advocacy group Spanish Wind Energy Association (AEE).

Wind accounted for 20.9 percent of the country’s energy last year — more than any other enough to power about 15.5 million households, with nuclear coming in a very close second at 20.8 percent. Wind energy usage was up over 13 percent from the year before, according to the report.

The news is being hailed by environmental advocates as a sign that Spain, and perhaps the rest of the world, is ready for a future based on renewables. But the record comes at the end of a very rocky year for Spain’s renewable energy sector, which was destabilized by subsidy cutbacks and arguments over how much the government should regulate renewable energy companies.

Despite the flaws in Spain’s system, the numbers are promising for green energy fans. The renewable push brought down Spain’s greenhouse gas emissions by 23 percent, according to another industry report from Red Electric Espana (REE).

Spain also has one of the largest solar industries in the world, with solar power accounting for almost 2,000 megawatts in 2012. That’s more than many countries but still just a fraction of the energy produced by wind in Spain. In 2013, solar power accounted for 3.1 percent of Spain’s energy, according to the AEE report.

By contrast, the U.S. produced only 9 percent of its energy with renewable sources last year, and wind accounted for only 15 percent of that.

But as the world reaches for more renewables, Spain’s record-breaking year is also a cautionary tale.

Going into 2014, it’s unclear how wind will survive steep government cutbacks.

At the moment, Spain heavily subsidizes its renewable energy sector, which costs billions of dollars in a country still in the depths of a financial crisis. When the country tried to raise individual rates for renewables, people complained bitterly and the government backed off, leaving the country with a nearly $35 billion renewable energy deficit.

The idea that renewables can’t survive without heavy subsidies might be cooling off the market in Spain and elsewhere, bringing the future of renewable growth into question. Global investment in renewable energy slipped 12 percent last year, despite the fact that the European Union and the UN have set ambitious energy goals for the next decade.

It remains unclear how the world will meet those goals given the spending-averse climate of most Western governments, but there’s no doubt they’ll be looking to Spain in 2014 to see if it can be done without going broke.

Indeed, over the summer, Spain’s government dealt a death blow to renewable energy:

In the latest move to draw down Spain’s energy sector debt, Madrid unveiled a new clean energy bill this week that will cap earnings on power plants as well as introduce retroactive actions, earning a quick rebuke from the country’s already ailing renewable sector. According to a Bloomberg report, clean energy “generators will earn a rate of return of about 7.5 percent over their lifetimes,” adding that the rate may be revised every three years and is based on “the average interest of a 10-year sovereign bond plus 3 percentage points.” The new plan will be retroactively applied to programs active from July 2013.

The new plan was presented by Spain’s Industry Minister Jose Manuel Soria as a necessary evolution of the country’s renewable energy subsidy system, which he said would have gone bankrupt if no changes were made. Since taking over the country’s leadership in 2011, the right-leaning Partido Popular has continued to expand on earlier efforts to chip away at the country’s renewable energy support programs, which many critics have called unsustainable. Once hailed as one of Spain’s most viable sectors for strong growth, renewable energy has suffered under a steady restructuring of government support programs.

In addition to slowing the country’s solar and wind growth, the restructuring garnered legal action on the part of both international investors and domestic trade organizations, the latter of which has appealed to the European Commission for some level of protection from tariff and agreement reductions. Early cuts resulted in legal action against Madrid from over a dozen investment funds with stakes in the country’s solar market, adding to the unease of foreign investors.

I can tell you the cash strapped Greek government did the exact same thing on solar projects in Greece. One of the biggest risks in infrastructure projects is regulatory risk as these governments can change regulations at a moment’s notice, severely impacting the projected revenues.

What are the other risks with infrastructure projects? Currency risk and illiquidity risk as these are very long-term projects, typically with a much longer investment horizon than private equity or real estate.

But both PSP and Ontario Teachers’ are aware of these risks and still went ahead with this investments which meets their objective of finding investments that match their long-term liabilities. The Caisse has also been buying wind farms but I am wondering whether they’re blowing billions in the wind.

Interestingly, this is the second major deal between PSP and OTPP this year. In November, I wrote about how they are nearing a $7 billion deal for Canadian satellite company Telesat Holdings Inc.

And on last week, Bloomberg reported that Riverbed Technology (RVBD), under pressure from activist investor Elliott Management Corp., agreed to be acquired for about $3.6 billion by private-equity firm Thoma Bravo and Teacher’s Private Capital.

In fact, Ontario Teachers’ has been very busy completing all sorts of private market deals lately, all outside of Canada, which is smart.

Photo by penagate via Flickr CC

OECD: Infrastructure Investing Low Among Largest Pensions

The world’s largest pension funds have significantly increased their allocations to alternative investments over the last four years. But allocations to infrastructure haven’t followed that upward trend, according to an OECD report.

Reported by Pensions & Investments:

Infrastructure investing activity remains low among the largest pension funds and public pension reserve funds worldwide, despite increased allocations to other alternative investments, a report from the Organization for Economic Co-operation and Development showed.

[…]

Average allocations to alternatives increased to 19.5% from 17.6% between 2010 and 2013 among the 10 largest pension funds surveyed, while infrastructure allocations were more stable. Of the 71 funds that responded to the OECD survey, unlisted equity and debt infrastructure investments totaled $80 billion, or 1% of total respondent assets, at the end of 2013, up slightly from $72.1 billion, or 0.9% of total respondent assets, at the end of 2012.

Mr. Paula and Raffaele Della Croce, lead manager on the OECD’s long-term investment project and co-author of the report, attributed the slow uptake to unstable regulatory frameworks and a lack of bankable projects.

“Pressure is on the policy side to provide the right conditions for investors to accept infrastructure,” Mr. Della Croce said in a telephone interview.

Although infrastructure investment activity remains low, plan executives are expressing interest in the asset category.

Large pension funds like the €20 billion ($24.5 billion) Etablissement de Retraite Additionnelle de la Fonction Publique, Paris, and $28 billion Afore Banamex, Mexico City, plan to establish new target allocations to infrastructure, according to the report.

Read the full OECD report here.

Canada Pension Invests $157 Million in Indian Engineering Firm

The Canada Pension Plan Investment Board (CPPIB) has made a $157 million in the infrastructure arm of an Indian engineering company.

The investment is the first direct investment in an Indian infrastructure firm by a Canadian pension fund. The $157 million is only the first installment in CPPIB’s commitment, which totals $314 million.

Details from VC Circle:

Canada Pension Plan Investment Board (CPPIB) has invested Rs 1,000 crore (around $157 million) in L&T Infrastructure Development Projects Ltd (L&T IDPL), a unit of Larsen and Toubro Ltd (L&T), by way of subscription to compulsorily convertible preference shares, as per a stock market disclosure.

The investment, made through CPPIB’s Singapore-based wholly owned subsidiary, is the first tranche of proposed Rs 2,000 crore (around $314 million now) investment that was approved by the Foreign Investment Promotion Board (FIPB), the nodal government body monitoring foreign investment in the country, earlier this year.

The two companies signed a definitive investment agreement in June this year.

“A second tranche of Rs 1,000 crore or such higher amount as may be agreed between L&T IDPL and CPPIB’s subsidiary, will be invested after 12 months from the date of the initial investment, subject to any required regulatory approvals at such time,” L&T said in the statement.

CPPIB manages $234.4 in assets.

Sacramento Pension CIO Talks Long-Termism and Investing in Infrastructure

Chief Investment Officer Magazine interviewed Scott Chan, CIO of the Sacramento County Employees’ Retirement System, as part of its 2014 industry innovation awards series.

Some of the more interesting topics touched upon by Chan were the idea of being a long-term, “contrarian value investor” and the fund’s dive into infrastructure and energy.

Chan, on being a “contrarian value investor”:

“The price you buy something at does dictate your long-term returns,” [Chan] says. “I’ll be at pension conferences where people say they don’t think about those things—they just buy, buy, buy. We do define ourselves as long term, but that’s only part of it. We’re also contrarian value investors.” Chan spent seven years in San Francisco managing equity long/short and opportunistic hedge funds. Two years in the trenches with JP Morgan Securities’ technology equity research team came before that, as did an MBA from Duke University. Nearly a decade of living—and living off of—the “buy low, sell high” ethos made Chan uniquely unsuited to the “buy, hold, rebalance” approach so common among US public pension funds. The man can’t help but root out deals and invest to the rhythms of the business cycle.

“Take core real estate,” he says. “A lot of people view that as a ‘safe asset,’ but real estate has a lot of cyclicality risk embedded. In a full cycle, property values could go up 80% or 90%, and then back down. What you’re really getting is net operating income. The risk coming out of a depression is actually pretty low. But as the business cycle matures, and then begins to go down, every time real estate is going to have a problem. We can’t time that, but we know it will happen. Fast-forward to today, and you’re getting maybe 5.5% returns from core real estate. From how we’ve quantified the risk, there’s 25% to 45% upside for the rest of the cycle, but also 30% downside when the economy hands off from expansionary to recession. So you have to ask yourself: Are you getting paid for that risk?”

In Chan’s mind, the answer is “no.” Including real estate investment trusts, separate accounts, and limited partner stakes, the asset class accounts for 8.6% of Sacramento County’s $7.8 billion portfolio, down from 13% when Chan arrived in 2010.

Chan also talked about his fund’s investment in energy and infrastructure:

Like any good hedge fund manager, his next opportunistic play is already underway: infrastructure secondaries. In May, the institution partnered with fund-of-funds Pantheon Ventures to buy deeply discounted energy and infrastructure assets from investors who’ve had second thoughts about the highly illiquid space. In the first deal, the pension picked up two utilities—a power provider to San Francisco and a heating operation on the Marcellus Shale natural gas formation—at a 25% discount. A few months later, the general partner marked up the asset by 40%. “We’re penciling in 15% IRR [internal rate of return],” Chan says proudly, “and we’re trading cyclical risk for non-cyclical risk. When a recession comes, people still need their electricity and heating.” It’s this kind of thinking that wins Sacramento County’s CIO an Innovation Award—if not an invite to the next brunch party.

Read the full interview here.

Lessons In Infrastructure Investing From Canada’s Pensions

Canada’s pension plans were among the first in the world to invest in infrastructure, and they remain the most prominent investors in the asset class.

Are there any lessons to be learned from Canada when it comes to infrastructure investing? Georg Inderst, Principal of Inderst Advisory, thinks so.

In a recent paper in the Rotman International Journal of Pension Management, Inderst dives deep into Canada’s infrastructure investing and emerges with some lessons to be considered by pension funds around the world.

The paper, titled Pension Fund Investment in Infrastructure: Lessons from Australia and Canada, starts with a short history of Canadian infrastructure investing:

Some Canadian pension plans, notably the Ontario Teachers’ Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS), were early investors in infrastructure in the late 1990s and early 2000s, second only to Australian superannuation funds. Other funds followed, and the average allocation has been growing steadily since, reaching C$57B by the end of 2012 (5% of total assets). Here, too, there is a heavy “size effect” across pension funds: bigger pension plans have made substantial inroads into infrastructure assets in recent years (see Table 2), while small and medium-sized pension funds have little or no private infrastructure allocation.

The main driver for infrastructure investing appears to be the wish to diversify pension funds’ assets beyond the traditional asset classes. While Canadian pension funds have been de- risking at the expense of listed equities, regulators have not forced them into bonds, as was the case in some European countries. Real estate and infrastructure assets are also used in liability-driven investing (LDI) to cover long-term liabilities.

Canada frequently makes direct investments in infrastructure, an approach that is now being tested by pension funds around the world. From the paper:

According to Preqin (2011), 51% of Canadian infrastructure investors make direct investments, the highest figure in the world. This approach (known as the “Canadian Model”) has attracted considerable attention around the world, for several reasons:

• lower cost than external infrastructure funds

• agency issues with fund managers

• direct control over assets (including entry and exit decisions)

• long-term investment horizon to optimize value and liability matching

This direct approach to infrastructure investment must be seen in the context of a more general approach to pension plan governance and investment. Notable characteristics of the “Maple Revolutionaries” include

• Governance: Strong governance models, based on independent and professional boards.

• Internal management: Sophisticated internal investment teams built up over years; the top 10 Canadian pension plans outsource only about 20% of their assets (BCG 2013).

• Scale: Sizable funds, particularly important for large-scale infrastructure projects.

Potential challenges for the direct investing approach include insufficient internal resources, reputational and legal issues when things go wrong, and the need to offer staff market-based compensation in high-compensation labor pools.

Despite these challenges, however, the direct internal investment approach of large Canadian pension funds is now being tried in other countries. Other lessons from the Canadian experience include the existence of a well-functioning PPP model, a robust project bond market, and long-term involvement of the insurance sector.

Finally, the paper points to some lessons that can be learned from Canada:

Lessons learned include the following:

• Substantial infrastructure investments are possible in very different pension systems, with different histories and even different motivations.

• Infrastructure investment vehicles can evolve and adjust according to investors’ needs. In Australia, listed infrastructure funds were most popular initially, but that is longer the case.

• Pension plan size matters when investing in less liquid assets. Private infrastructure investing is driven primarily by large- scale funds, while smaller funds mostly invest little to nothing in infrastructure. In Australia, two-thirds of pension funds do not invest in unlisted infrastructure at all.

• Asset owners need adequate resources when investing in new and difficult asset classes. Some Canadian plans admit that their own estimates of time and other inputs were too optimistic at the outset.

• New investor platforms, clubs, syndicates, or alliances are being developed that should also attract smaller pension funds, such as the Pension Infrastructure Platform (PIP) in the United Kingdom or OMERS’ Global Strategic Investment Alliance (GSIA). However, industry experts stress the difficulties of such alliances with larger numbers of players, often with little experience and few resources. Decision time is also a critical factor.

The full paper offers much more insight into Canada’s approach as well as Australia’s. The entire paper can be read here.

Pension Funds Attracted To India’s Infrastructure, Real Estate

Money is flowing into India as The Canada Pension Plan, along with a handful of other pension funds from around the globe, are increasingly investing in the country’s infrastructure and real estate. From the Financial Times:

CPPIB [Canada Pension Plan Investment Board] entered India in 2010 but has recently raised its profile with a series of deals involving long-term assets such as toll roads and residential property, creating a portfolio of planned investments worth $1.4bn that already ranks among the largest investments in the country by a foreign pension fund.

“Because it is a very small percentage [of the fund’s overall assets], clearly it is likely to grow, as India keeps growing and developing,” Mr [Mark] Machin, [international head of CPPIB] said.

“We will almost inevitably have more money focused on India. . . It is one of the most important markets for us in the region,” he added.

[…]

In June, CPPIB announced a $332m infrastructure investment partnership with a division of Larsen & Toubro, India’s largest engineering group by sales. That followed deals to invest in real estate with two family-owned conglomerates, the Piramal and Shapoorji Pallonji groups.

The fund has also built up large portfolios in Australia and China, with deals worth $5.9bn and $4.1bn respectively, in assets ranging from property development to logistics.

The Canada Pension Plan is one of many pension funds turning its focus to India. From FirstBiz:

Many sovereign and pension funds are pumping funds into the Indian real estate like All Pensions Group (APG Group), Abu Dhabi Investment Authority (ADIA), Qatar Investment Authority (QIA), Canada Pension Plan Investment Board (CPPIB), State General Reserve Fund of Oman (SGRF) and GIC of Singapore.

It’s no coincidence that investment interest has perked up following the election of Prime Minister Narendra Modi. Mr. Modi has said he’ll lift some restrictions on foreign investment and kick-start a new wave of infrastructure projects.

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