Wednesday, October 3, 2018

CPPIB and OTPP Bet on Mexican Toll Roads?

Benefits Canada reports, CPPIB, Ontario Teachers’ partner with Mexican toll road:
The Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan are among the investors teaming up to invest in a 309-kilometre toll road in Mexico.

Details of the deal include IDEAL retaining a 51 per cent ownership of the highway’s concessionaire, the Guadalajara-Tepic, S.A. de C.V. with the CPPIB and the Ontario Teachers’ taking a 29 and 20 per cent stake, respectively.

“Pacifico Sur toll road offers CPPIB a resilient income stream underpinned by a highly diversified traffic base and a strategic location within the country,” said Scott Lawrence, managing director and head of infrastructure at the CPPIB, in a press release. “Broadening our partnership with IDEAL and Ontario Teachers’ through our second investment in Mexican infrastructure will allow us to build on our track record of care and good governance.”

The road, Pacifico Sur, is the second investment by the trio, which includes Mexican construction engineering company Impulsora del Desarrollo y el Empleo en América Latina. The first was the acquisition of Arco Norte, another toll road in Mexico, in 2016.

“The Pacifico Sur toll road represents an important addition to our Latin American portfolio of long-term, inflation-linked infrastructure assets,” said Dale Burgess, the Ontario Teachers’ senior managing director of infrastructure and natural resources. “We are excited to be building further on our partnership with IDEAL and CPPIB with this second shared investment in core infrastructure in Mexico.”

Pacifico Sur runs from the country’s central valley to its northwest, linking Guadalajara and Tepic for both commercial and tourist traffic.
As stated above, this is the second toll road in Mexico that CPPIB, OTPP and IDEAL have invested in. The first was Arco Norte two years ago:
Two of Canada’s largest pension funds — the Canada Pension Plan Investment Board and the Ontario Teachers’ Pension Plan — are partnering with an infrastructure company in Mexico to invest in the country’s largest toll road.

The CPPIB and Ontario Teachers’ will jointly invest $1.35 billion dollars in exchange for the CPPIB gaining a 29 per cent ownership interest and Ontario Teachers’ a 20 per cent stake. The remaining 51 per cent will go to the infrastructure company IDEAL.

Arco Norte, the 223-kilometre toll road bypass, acts as a major corridor for trade by connecting various states of Mexico and surrounds a large perimeter of Mexico City’s northern border.

“Arco Norte represents our first infrastructure investment in Mexico and enables us to invest in an established, modern ‎toll road of significant size,” said Cressida Hogg, managing director and head of infrastructure at CPPIB, in a news release.

“This investment fits well with CPPIB’s strategy to invest in core infrastructure assets with long-term, stable cash flows in key global markets.”

“This investment provides a strong foundation for continued growth of our infrastructure portfolio in Mexico and the rest of Latin America,” said Andrew Claerhout, senior vice-president, infrastructure and natural resources at Ontario Teachers’.

“Arco Norte is an attractive asset with long-term growth potential that will provide income to pay pensions.”
Please note Cressida Hogg is no longer with CPPIB nd Andrew Claerhout is no longer with OTPP. I never met Cressida but have met Andrew and think very highly of him.

For their part, Dale Burgess and Scott Lawrence are doing a great job in their respective roles leading the infrastructure groups at OTPP and CPPIB.

So why invest in Mexico's toll roads? If you read the news, all you hear about is how bad Mexican crime is getting:
And on and on it goes, reading the news, you'd think Mexico is nothing but a crime-ridden hellhole run by powerful drug cartels.

Don't get me wrong, some parts definitely are hellholes but Mexico signed the new USMCA deal before Canada, it's the manufacturing base of Latin America and will grow nicely over the long run despite the current weakness in education and productivity.

Toll roads are just a long-term play on the economy. A solid economy over the long run means more Mexicans will be driving on these highways paying tolls.

When infrastructure companies take on construction risk (which they typically share with some government), they also do revenue projections to know how much yield they can collect over the long run. If it's attractive, they can share that revenue risk with potential investors like CPPIB and Ontario Teachers' which took an equity stake in these highways.

In this case, CPPIB and OTPP partnered up with IDEAL, a leading infrastructure company in Mexico and part of Carlos Slim's vast conglomerate. Note IDEAL kept the controlling interest of these toll roads which is exactly what you want in a partner.

For those of you who don't know, Carlos Slim Helu is the richest man in Mexico and one of the richest in the world. If you want to invest in a toll road or other big infrastructure investment in Mexico, it probably helps to invest with a company owned by him.

Anyway, I trust the infrastructure groups at CPPIB and OTPP so this should turn out to be a great deal over the long run.

Below, President Trump made renegotiating NAFTA a priority of his administration. What's really in the new United States-Mexico-Canada Agreement and what does it mean for the US economy? Amna Nawaz learns more from Edward Alden of the Council on Foreign Relations.

Note what he says about stagnant wages in Mexico following NAFTA and why the hope is the new deal will help boost wages so Mexicans can buy more US and Canadian goods and services.

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