AIMCo's Unconventional Investments?

Scott Haggett of Reuters reports, Pension manager AIMCo turns unconventional to boost returns:

Alberta Investment Management Corp (AIMCo), the C$80 billion ($73.7 billion) provincial pension manager, is steering clear of investments tied to existing roads, bridges and transmission lines as their growing popularity squeezes returns.

AIMCo Chief Executive Leo de Bever said on Monday the company is pushing into late-stage venture capital and newly constructed infrastructure as it looks for above-market returns for the pension and provincial government funds it manages.

Investment in land or transmission lines "has become commonplace," de Bever told reporters. "The returns on it have started to diminish."

De Bever was one of the early pioneers of investing pension funds in infrastructure. While a senior vice-president at Ontario Teachers' Pension Plan in the 1990s, de Bever bought a 25 percent stake in AltaLink, which controls half of Alberta's electricity-transmission network. Warren Buffet's Berkshire Hathaway Energy acquired the company from SNC-Lavalin Group Inc last month for C$3.2 billion, a price that kept pension funds out of the bidding.

"The price gives ... about a 5 percent return on equity," de Bever said. "To me, that's a little skinny. These assets are trading at very, very high prices."

Rather than look to existing assets to provide the long-term payouts needed by pension funds, de Bever said AIMCo is looking to play a role in funding new infrastructure construction in fast-growing areas like Fort McMurray, Alberta, a booming city of 77,000 in the heart of Canada's oil sands. As well, it is looking at providing late-stage venture capital for energy-technology companies.

"We have to get more innovative in different areas," he said at a press conference. "We have to stretch ourselves and stretching ... means going for the more difficult assets."

De Bever points to AIMCo's investment in bankrupt Australian timberlands controlled by Great Southern Plantations as an example of the fund manager's search for unconventional assets offering above-market returns.

"It was a huge mess and everybody else looked at it and said it's going to take a long time to sort it out so why would we get involved?" he said. "Us being long-term investors said 'Hey this is a perfect opportunity because if we can straighten this out and we can buy it cheaply then presumably the return is going to come'."

AIMCo is looking to its unconventional investments to replace low-return assets like bonds whose prices are threatened by rising interest rates.

De Bever, 66, plans to retire from the fund manager once an executive search for his replacement is complete.

I recently covered how AIMCo scored huge on timberland and covered AIMCo's 2013 results here. In aggregate, AIMCo earned 12.5% net in 2013 led by a strong performance in public markets but there were significant gains in private markets too.

I also had a chance to chat with Leo de Bever following another comment on why he is stepping down. Leo told me he was somewhat disappointed that I quoted the aiCIO article which was "factually wrong" and he told me that he will be focusing his attention on this new fund looking to help innovative Alberta companies commercialize their technology, which is what he always wanted to do.

AIMCo has indeed turned to unconventional investments. For example, together with OMERS, it bought a stake in Vue Entertainment, one of Europe's  top movie theater chains. This new fund providing late-stage venture capital for energy-technology companies is a miniscule part of AIMCo's total assets but it has huge potential.

I told Leo that I'm highly skeptical of pensions investing in venture capital. My experience at the Business Development Bank of Canada (BDC) cemented my skepticism as the BDC lost a lot of money in their VC investments.

Also, there is another story I forgot to mention when I discussed why Gordon Fyfe is leaving PSP to head bcIMC. When I was helping Derek Murphy set up private equity, I reached out to Sequoia Capital, one of the best VC funds in the world.

I don't know how but I got through to Doug Leone, a senior partner, and told him PSP was interested in meeting them. Initially, he didn't want anything to do with us and warned against investing in VC. "Listen, we don't deal with public pension funds. We're having internal squabbles as to whether to allocate more to Harvard or Yale's endowment fund and our last $500 million fund was oversubscribed by $4.5 billion. My advice to you guys is stay out of venture capital, you will lose pension money."

I called Leone three times that day and practically begged him to meet Gordon Fyfe and Derek Murphy. "I like your persistence kid, so I'll meet your guys for 15 minutes." When Gordon and Derek came back, they were in awe. Derek muttered "fuck did I feel poor" and Gordon said something along those same lines (but more diplomatically). They both loved that meeting and said venture capital is definitely not an area PSP will touch (it changed somewhat as PSP does invest a miniscule portion into clean tech, which is a hot area).

Anyways, Leo de Bever told me that is why he is focusing on late-stage technologies so that he can work to commercialize these technologies without the risks of seeding some new tech company. It's still risky but not as risky as start-ups.

What I like about Leo is he doesn't blindly follow the herd into the infrastructure bubble or the private equity bubble. He prefers to invest between the cracks and use AIMCo's long-term investment horizon to scoop up deals that others are not looking at. They look at the merits of each deal independently of what others are doing and see whether it makes sense. It's not easy but once in a while, you will find gems out there that nobody else is looking at.

I can't help but wonder whether Leo has been approached to take over PSP Investments now that Gordon is leaving to head bcIMC. It's a huge job and I'm not sure he wants to take on such a demanding position at this stage of his career but he's definitely a prime candidate. There are a few others on my list of potential candidates, including Julie Cays over at CAAT which is also delivering exceptional results. We shall see who the board of directors at PSP chooses but for now they appointed John Valentini, PSP's CFO, as the interim CEO.

Speaking of board of directors, CPPIB just appointed Heather Munroe-Blum as chairperson of its board of directors. Ms. Munroe-Blum, who was previously principal and vice-chancellor of McGill university, replaces Robert Astley, who has been chairperson since 2008. She had a controversial style while at McGill and she is tough as nails but she will focus on results and be very vigilant in this important position (hope she read my last comment on CPPIB's struggle with big, bold investments).

Below,  George Whitehead, partner at Octupus Investments, talks with Caroline Hyde about the challenges of venture capital investing in the next generation of robots. He speaks on Bloomberg Television’s “The Pulse.”