One of Canada’s largest pension plans teamed up on Thursday with Japan’s pension funds and some of its major conglomerates to help raise $20-billion (U.S.) for the world’s largest infrastructure fund to invest in assets such as roads and airports.
While a handful of the world’s biggest pension funds have the capacity to lead their own investments in infrastructure assets, the initiative represents an unprecedented effort to cut out asset managers as middle men in infrastructure investment.
Ontario Municipal Employees Retirement System (OMERS) said on Thursday it, along with Japan’s Pension Fund Association and a consortium led by Mitsubishi Corp., Japan’s largest trading house, had committed a total of $7.5-billion toward the new fund.
Infrastructure funds have traditionally been sponsored by investment banks, private equity firms and independent asset managers. If successful, the new fund could have major implications for the infrastructure asset management industry.
Much of the world’s infrastructure is struggling to meet the needs of a growing and aging population. The Organization for Economic Co-operation and Development estimates $53-trillion of investment, equivalent to an annual 2.5 per cent of global gross domestic product, will be needed to meet demand over the coming decades.
Dubbed Global Strategic Investment Alliance (GSIA), the new fund will invest in assets such as railways, ports and gas pipelines that have a value of more than $2-billion each and are located primarily in North America and Europe.
The initiative is led by OMERS, which administers the pensions of 420,000 public sector employees in Ontario such as police officers, fire fighters and municipal workers, and has more than $55.1-billion in net assets under management. It’s infrastructure arm, Borealis, is a serial acquirer of infrastructure assets and its portfolio includes the Detroit River Rail Tunnel linking Michigan to Ontario and a high-speed rail line in Britain.
“Based upon the feedback in the market, we anticipate welcoming a number of other forward-thinking pension plans and other long-term institutional investors from around the world into the GSIA over the next 12 to 18 months,” Jacques Demers, strategic investments chief executive for OMERS, said in a statement.
OMERS has committed $5-billion to the fund, Japan’s Pension Fund Association has committed $1.25-billion, and Mitsubishi’s consortium, which includes Mizuho Corporate Bank Ltd. and Japan Bank for International Cooperation, has also committed $1.25-billion. GSIA’s fundraising target is $20-billion.
Infrastructure has emerged as a separate asset class to private equity in the last decade, offering lower returns but also stable cash flows that are hedged against inflation and are underpinned by physical assets such as roads and pipelines.
Infrastructure typically has a longer investment horizon than private equity, which tends to flip assets within three to seven years, and so it appeals to pension funds looking to match their long-term liabilities with long-term assets.
But the developing world sees little of such infrastructure fund investment. Political risk and patchy regulation often drive pension funds to skip on emerging markets, despite their attractive demographics, for the safety of infrastructure assets in Europe and the United States, which have a track record. GSIA will be no different.
Benefits Canada also reported on this new fund:
You can read the OMERS press release here. OMERS' Borealis Infrastructure is a leader in infrastructure and this deal will allow them to compete directly with investment banks and private equity firms bidding for global infrastructure assets. By cutting out the middle man, OMERS will cut down fees and focus on investing in long-term assets that are better suited for pensions than for private equity firms or banks.
OMERS has joined with two Japanese partners in officially launching a US$7.5-billion global investment fund.
The newly minted Global Strategic Investment Alliance brings together the investment arm of OMERS, Japan’s Pension Fund Association (PFA) and a consortium led by Mitsubishi Corp.
Initial commitments include US$5 billion from OMERS and US$1.25 billion each from PFA and Mitsubishi-led Japan Infrastructure Investment Partners LP.
“We’re very pleased to be partnering with these sophisticated investors in pursuit of high-quality, large infrastructure investments that we can own over the long term,” said Jacques Demers, president and CEO of OMERS Strategic Investments.
“Based upon the feedback in the market, we anticipate welcoming a number of other forward-thinking pension plans and other long-term institutional investors from around the world into the GSIA over the next 12 to 18 months.”
That would being in billions of dollars more in commitments to the fund, he said.
The GSIA’s goal is for like-minded, long-term institutional investors in North America, Europe, Asia-Pacific and the Middle East to work together in pursuit of attractive, large-scale infrastructure investment assets, mainly in North America and Western Europe, OMERS said in a release.
All GSIA investments will be originated and managed by OMERS’ infrastructure investment arm, Borealis Infrastructure. Administrative support services will be provided by Rosewater Global, an OMERS affiliate.
If I were a mid or large pension fund looking to invest in infrastructure, I would steer clear of infrastructure bonds (the latest investment bubble) and contact the folks at Borealis to see if I can be part of this new fund.
Importantly, when it comes to infrastructure, many pension funds don't have a clue of the risks involved and are being preyed on by financial sharks peddling all sorts of nonsense where they're completely mispricing risk. Buyers beware, infrastructure assets are fraught with risks and you're better off investing with experts who know what they're doing than investing in bonds or some fund of funds that will eat you alive in fees.
OMERS isn't the only Canadian pension fund investing in infrastructure, but it is the largest infrastructure investor in North America. Other Canadian pension funds are snapping up infrastructure assets. The Canada Pension Plan Investment Board (CPPIB) recently announced that it has entered into an agreement to acquire significant minority stakes in five major Chilean toll roads from the Atlantia Group.
In November, the Alberta Investment Management Corporation (AIMCo), acquired a 50% stake in Grupo SAESA, a regulated electricity transmission and distribution company in Chile. The other 50% stake is owned by the Ontario Teachers' Pension Plan.
AIMCo posted an excellent white paper on benchmarks for unlisted infrastructure assets (part 1). Leo de Bever, AIMCo's President and CEO, was one of the first investors in this asset class and this white paper written by Jagdeep Singh Bachher, Ryan J. Orr, and Daniel Settel is excellent, going over all the benchmarks used by Canadian pension funds for unlisted infrastructure, explaining in detail the diversity in these benchmarks (click here to read it).
The authors note the following:
At AIMCo, the view is that “infrastructure shouldn’t just be another form of equity. It should be a somewhat higher return, somewhat higher risk substitute for real return bonds.” The emphasis is on finding the relatively small subset of “unrisky” projects that generate predictable, long-term, inflation linked cash flows with low volatility. These so-called “core” infrastructure investments offer a sort of holy grail, generating equity-like returns with bond-like risks and serving as a first-order proxy for long-dated liabilities.And on the various benchmarks used for unlisted infrastructure, they conclude that "different benchmarks produce quite different return expectations and volatility levels."
As I stated, infrastructure is an excellent asset class for pensions but it isn't "riskless" and if investors don't know what they're doing, they're better off investing in listed infrastructure companies to gain exposure to the 'beta' of the asset class, recognizing full well that this isn't a proxy for unlisted infrastructure nor as efficient as matching liabilities with long-duration unlisted infrastructure assets.
Below, British Chambers of Commerce Director General John Longworth talks about the outlook for the U.K. economy and the need to build up infrastructure. He speaks with Manus Cranny on Bloomberg Television's "Last Word."