AIMCo Gets Creative on Real Assets?
Alberta Investment Management Corp. is being forced to get creative in its hunt for real assets like office buildings, timberland and wind-power installations as rival pension-fund managers pile into the increasingly popular sector.Last week, I covered AIMCo's 2018 results here. I had a chance to speak to CIO Dale MacMaster on a number of things covering public and private markets.
Chief Executive Officer Kevin Uebelein, 59, says the manager for 31 Alberta pension, endowment and government funds is looking to buy into companies that have strong existing assets and top management teams that can build on those bases — a practice he refers to as platform investing — rather than just buying into existing projects or those under development. That strategy is necessary as rivals shift more of their funds into illiquid assets, threatening to bid up prices and drive down returns, Uebelein said.
“There are too many dollars chasing too few projects,” Uebelein said in an interview. “That’s one of the reasons why doing things like platform investing is where we’re going to find the opportunity to create greater returns and generate better value.”
AIMCo had 28 per cent of about $108 billion (US$83 billion) in assets under management at the end of last year in illiquid assets. That segment returned about 13 per cent last year, topping the 8 per cent gain of its benchmark, according to the company’s annual report released last week.
An example of AIMCo’s platform strategy is its more than 90 per cent stake in Spanish wind-power developer Eolia Renovables de Inversiones, where the firm “invested as much in the management team to continue to grow its portfolio of renewables as we did in the starter set of solar- and wind-power generators” it already has, Uebelein said.
Overall, AIMCo’s funds returned 2.3 per cent last year, topping their benchmark’s 1.3 per cent return. The biggest gains and widest margins of outperformance came in the illiquid-assets segment. Within that category, renewable-resources investments returned 15 per cent, beating their benchmark by 8.8 percentage points. Private equities returned 14.7 per cent, topping their benchmark by 6.5 percentage points. Infrastructure returned 13.7 per cent, beating its benchmark by 7.5 percentage points.
Fixed Income
AIMCo’s money-market and fixed-income investments also outperformed, rising 1.7 per cent versus a 1.2 per cent advance for the benchmark. Those gains helped make up for sluggish performance in public equities, which declined 4.6 per cent, more than the 3.1 per cent drop for their benchmark index.
Other Canadian provincial pension funds topped their benchmarks last year as well. Caisse de depot et placement du Quebec posted a 4.2 per cent return, topping its 2.4 per cent benchmark. Ontario Teachers’ Pension Plan had a 2.5 per cent gain, beating the 0.7 per cent advance for its benchmark. The performance among funds varies as their provinces require them to manage different types of assets.
Other Canadian pension fund managers have bolstered their holdings of illiquid assets, seeking steadier returns. Canada Pension Plan Investment Board CEO Mark Machin said in May that the company’s real-assets portfolio, which helped it add $32 billion to its assets last year, will continue to grow while its public equities segment will shrink.
AIMCo is headed in a similar direction because the predictability and duration of those types of investments are well-matched to its clients’ liabilities, Uebelein said. They’re also a good bet in the current market, in which much of equities’ current rally has been narrow and fueled largely by dovish talk from central banks, he said.
“You haven’t even seen the markets roll over, but the central banks are already taking very overt action to try to talk those markets up,” Uebelein said. “There’s an interesting period here where you could see the economy roll over and the central banks propping up the risk assets for a while — but not forever.”
Dale told me he's a big believer in private markets and so are clients. Not only are privates a better match to the long-dated liabilities as CEO Kevin Uebelein alludes to above, they're also less volatile (stale pricing, not marked to market) so clients feel they will dampen the blow if there is a huge selloff in public equities (provided it's not a prolonged bear market, then pensions have to mark privates down even if they're not forced to sell them).
I found the article above interesting because Kevin Uebelein is very transparent, admitting there's intense competition for real assets and they need to approach it very differently.
In particular, he discusses platforms, partnering up with a company that specializes in certain assets so they can make sure they have real experts who can assess the projects more intensely and manage them properly.
Kevin is right about this: “There are too many dollars chasing too few projects, that’s one of the reasons why doing things like platform investing is where we’re going to find the opportunity to create greater returns and generate better value.”
He gave the example of taking more than 90% stake in Spanish wind-power developer Eolia Renovables de Inversiones, where AIMCo “invested as much in the management team to continue to grow its portfolio of renewables as we did in the starter set of solar- and wind-power generators.”
I covered that deal here. Kevin Roseke, Director of Infrastructure Investments and Head of AIMCo’s London Office shared great insights with me, telling me "they wanted management to continue having a stake in the company to continue getting good alignment of interests, and that there were no anti-competition issues making AIMCo's platform a perfect fit for this deal to go through."
AIMCo's approach to platforms, however, isn't new as all of Canada's large pensions have specialized platforms covering various assets mostly in infrastructure. There are platforms covering airports, ports, toll roads, wind farms, etc.
Typically what happens at one point is the pension funds buy an asset and then buy the company running this asset because they have the specialized skill set to manage these assets. This is how infrastructure platforms are created.
The senior managing director of infrastructure at the pension has a seat on the board of the platform company but doesn't get involved in the day to day operations of the assets.
In essence, this is how all of Canada's large pensions invest directly in infrastructure, not through funds, because these platforms allow them to attract and retain very specialized personnel to manage the operations of these assets and assess new projects.
In other words, without these platforms, it would be impossible to own a direct majority stake in an airport, toll road, port, or wind farm. Investment managers at these large pensions don't have the skill set to run these operations.
Having a platform also allows them to do a more thorough due diligence on an asset before buying it, and that's critical now that competition is fierce.
So is AIMCo getting creative on real assets or catching up with the rest of its large Canadian peers that already have platforms to invest in real assets? I'd say the latter but whatever the case, it's definitely the right approach.
Below, an older Canadian Club discussion on the evolution of Canadian pensions featuring Jim Keohane, Hugh O’Reilly, Kevin Uebelein, and Kim Thomassin (November 2017). Great discussion, listen carefully to Kevin's comments (fast forward to minute 18).
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