CDPQ Acquires Plenary Americas

The Australian Financial Review reports that Plenary gets out of North American infrastructure as CDPQ swoops in:

Infrastructure investment group Plenary will bid for more projects in Australia and Asia after reaching a deal to sell its North American operations to Canadian pension fund Caisse de dépot et placement du Québec (CDPQ),

CDPQ has had 20 per cent stake in Plenary's Asian Pacific operations since 2016 but has not had any direct exposure to its North American projects, which include bridge, tollroads and hospitals.

It is understood that CDPQ approached Plenary to buy the North American business, and that Plenary welcomed the chance to snare capital to invest in more projects in Australia, including more stages of the Sydney Metro.

Plenary has a 10 per cent stake in the first stage of Sydney's Metro North West as part of the Northwest Rapid Transit consortium.

In November, the consortium reached a $3.7 billion deal with the NSW government to extend their contract to the next stage, allowing it to to operate the North West as well as City and Southwest lines until 2034.

Plenary is currently bidding on five transactions, including Melbourne's $15.8 billion North East Link road project where it is part of a consortium led by John Holland, and Melbourne's new Footscray Hospital.

The investment group, which says the North American sale is not related to the coronavirus outbreak or stock market plunge, expects ongoing government spending to boost the economy will lead to more investment in social infrastructure projects like schools and hospitals.

Plenary will retain a stake of just over 10 per cent in its North American business while CDPQ will keep its 20 per cent stake in Plenary's Asia Pacific business.

CDPQ already owns stakes in electricity network TransGrid and the Port of Brisbane and spent $167 million in November buying a 24.9 per cent equity stake in the public-private partnership contract to build, operate and maintain the Sydney Metro alongside Plenary.

The Canadian group, which likes investing in electrified transport systems because they help the group meet targets for lowering its carbon footprint, has also been pitching its own public transport projects in its Montréal home.

It is developing, building and operating the $C6.3 billion ($7 billion) Réseau express métropolitain (REM), a 67-kilometre automated light rail network that is scheduled to open in 2021.

The sales of Plenary's North American business is expected to take about six months to complete because government approvals will be needed to transfer projects to CDPQ.

CDPQ put out a press release on this deal earlier today:

Caisse de dépôt et placement du Québec (“CDPQ”) and Plenary Group (Canada) Ltd. (“Plenary Americas”) today announced CDPQ’s acquisition of Plenary Americas, a leading investor, developer and operator of public infrastructure in North.
With this investment, CDPQ acquires Plenary Americas’ operating business, as well as a controlling stake in its existing public-private partnership (PPP) portfolio. With 36 projects, Plenary Americas’ leading collection of social and civil infrastructure assets is unique in both its geographic and sectoral diversification.

“Plenary Americas is recognized for its highly skilled project development team and solid operational expertise. It is well positioned to act on growth opportunities, notably in the United States, where infrastructure needs are rising and long-term investors, such as CDPQ, can play a role in bridging the funding gap,” said Emmanuel Jaclot, Executive Vice President and Head of Infrastructure at CDPQ. “For CDPQ, it is an opportunity to strengthen our presence in social infrastructure and create a powerful platform to develop assets that are at the heart of communities.”

John O’Rourke, Plenary’s global Chairman, explained that CDPQ and Plenary have been partners since 2012 when CDPQ first invested in Plenary’s Australian PPP projects. “Our long standing relationship gives us enormous confidence in the success of the acquisition for both CDPQ and the North American business. The acquisition validates Plenary’s global standing in the PPP market and our long-term partnership model”, he noted.

“There is a natural fit between CDPQ and Plenary Americas, and we are closely aligned with their investment philosophy, their culture and their values,” said Brian Budden, President and CEO, Plenary Americas. “We are very enthusiastic about the potential of this new platform, and we are confident that our PPP expertise, combined with CDPQ’s strength and investment experience, will allow us to seize new opportunities.”

“Plenary Americas’ unique model is the result of its management team’s sophistication and sense of innovation in developing, structuring and operating its projects,” added Olivier Renault, Managing Director, Infrastructure, North America, at CDPQ. “We look forward to working with this strong team in the next chapter of the company’s history.”

In addition to this investment, CDPQ maintains its close relationship and 20% ownership interest in Plenary Asia Pacific. Plenary Americas and Plenary Asia Pacific will continue to work together closely, sharing knowledge and resources, and potentially exploring new markets.

I commend Emmanuel Jaclot, Executive Vice President and Head of Infrastructure, and Olivier Renault, Managing Director, Infrastructure, North America, for striking this deal, and I think it's a great time to do it regardless of what's going on with coronavirus and plunging global markets.

You can read more about Plenary North America below:

Plenary is North America’s leading long-term investor, developer and operator of public infrastructure.

With a reputation built on having delivered diverse and challenging privately-financed public infrastructure projects, we pride ourselves on delivering innovative, first-class infrastructure on-time and on-budget.

We are recognized for our holistic approach to projects – embracing finance, planning, design and construction, complementary commercial development, asset management and operations.

With 36 projects throughout the United States and Canada, we bring infrastructure to life for government clients and local communities across North America.

View our board and management team.

In 2018, Business View Magazine interviewed Brian Budden, President/CEO of Plenary Group North America, for their series on developing infrastructure in North America:

Specializing in public-private partnerships (PPP or P3), Plenary Group has a portfolio of 32 P3 infrastructure projects worth more than USD$13.5 billion across the U.S. and Canada. The company provides innovative, sustainable infrastructure solutions using their holistic approach to finance, design and construction, complementary commercial development, and the ongoing management and operation of the asset.

In North America, Plenary is the largest dedicated long-term investor, developer, and operator of P3 projects in the health, transportation, education, defence, justice, and government accommodation sectors. Brian Budden, President and CEO of Plenary Group North America, explains, “We began in North America in 2005 with the start of the Canadian P3 infrastructure market, bidding our first project in 2006 and closing it in 2007. It’s taken off from there and we’ve grown from a handful of people to more than 100, spread across primary offices in Los Angeles, Denver, Tampa, Vancouver and Toronto.”

Plenary Group North America operates with four divisions: 1. Business Development: early stage project discovery and teaming. 2. Origination: structuring, bidding and closing deals. 3. Delivery: overseeing construction and operations, split across building and civil projects. 4. Finance and Tax: administering the reporting and cash flow processing for the portfolio of projects. These divisions cover the full North American platform of active projects in addition to multiple bids at any given time.

Historically, P3s have been procured by the public sector but, more recently, there have been an increasing number of private sector applications. Plenary Group North America, for example, has recently partnered with Facebook to explore addressing growing traffic congestion along the Dumbarton Transportation Corridor in San Francisco. They are jointly advancing a project that would re-establish passenger rail service on the Dumbarton Rail Bridge across the Bay, with connections to existing commuter and inter-city rail services, enhanced and expanded bus and shared-ride options, and potential complementary bicycle and pedestrian connections. This is an encouraging example of well-positioned private parties initiating a public infrastructure project, working closely with the public sector, importing the efficiencies of the traditional P3 model.

“Most of our projects have a design, build, finance, and maintenance scope for anywhere from 20 to 50 years”, says Budden. “We maintain and lifecycle our projects and invest our own money into them for that period of time. Typically, there is a performance-based contract that requires us to rectify any issues within a set timeframe to avoid penalties. This is at our risk and cost and we work closely with select subcontractors to assume and manage these obligations.”

According to Budden, “There are different types of P3 bidders. We are a pure development player, specializing in P3s, and we structure and provide all of the required private financing. We don’t do construction ourselves. We will self-perform operations, maintenance, and lifecycle where it makes sense, particularly in the civil context, but often we’ll also contract these roles out to specialized subcontractors. One of our key differentiators from other stand-alone P3 developers is that we’re very active and get intimately involved with the design, construction, maintenance, and operations and lifecycle planning and oversight. This is in contrast to the more passive model we see from many developers under which they provide funding but no real, involved oversight or active interface and instead rely primarily on the contractors to run the project.”

The other type of P3 investor that has emerged is construction firms that look to invest into the equity of the projects they construct. While some of these groups will invest for the longer term, many plan to stay involved for a shorter period of time, selling their investment when the project reaches an operational state – something Plenary Group North America does not do. “We believe it is important to have full alignment with the infrastructure users throughout the whole project term,” says Budden, “which is why we believe in hands-on oversight. We’re focused on the long-term, and are staffed with 100 people to properly, actively manage these partnerships – we have never exited a project.”

Employee turnover isn’t an issue. A thin layer of management (one person at the top of each division that reports to Budden) means a very flat organizational structure with many opportunities for people to take on interesting and advanced work. Budden credits the positive corporate culture to “a fairly young employee base; one of the smartest collections of 30- to 40-something professionals from across a wide range of disciplines. They like to have fun and share our successes and I think they appreciate that we’re a nimble, flexible company that is always looking to innovate and be at the forefront of the industry.”

Partnerships are huge for Plenary Group North America. Before bidding on a project, time is spent choosing the right partners for construction, operations and finance, and the company has developed standing relationships with many of the largest, strongest, contractors in North America. Working with its partners, Plenary also looks to bring in local labor wherever possible. On a big project, it’s not unusual to have 1,000-plus people onsite during peak construction periods; that’s a massive, local employment initiative.

Giving back is also important. Over the last five years, Plenary Group North America has donated more than $1 million to the North American communities in which it operates, supporting some exceptional causes, including local hospitals and health facilities, at-risk youth, mental health initiatives, library foundations and arts councils, veteran and military family associations, community food banks, local schools, fire relief and community safety groups.

The company also believes investment in environmentally-sustainable infrastructure solutions is not only responsible, it is smart. As well as being socially responsible by reducing carbon emissions, energy-efficient infrastructure saves governments and operators money by reducing total energy and lifecycle costs. Budden reports, “Many of our projects are LEED© Gold or even Platinum Certified by the Green Building Council and we are typically very focused on energy outputs, often guaranteeing them to set, aggressive, levels. We’ve also issued “green bonds” on certain projects, where our financing has been recognized to meet set environmental criteria.”

He adds, “Looking ahead, we certainly plan to stay at the forefront of delivering infrastructure in Canada, where it’s a more mature market. At the same time, we’re seeing a lot of growth opportunities in the U.S. and believe we’re particularly well positioned for these. Many American states and municipalities are doing this for the first time, and in many cases they are exploring slightly different models – that works well for us. We have no real tick-the-box institutional requirements and, where there is a committed and realistic project sponsor, we appreciate the opportunity to be dynamic and flexible.”

The P3 sector is seeing more new deal types, beyond simple building or roads infrastructure – it might be broadband, or wireless, or have a real estate component. Plenary, for example, has projects that involve not only efficient P3 delivery of the core public infrastructure but also an offsetting of this cost through acquisition and development of ancillary real estate. And there are different types of procurements as well, especially in the U.S., where projects may not necessarily follow the more standard short-listing and fully priced RFP, with a selection and a closing soon after. Instead, projects may result from an ENA (exclusive negotiating agreement) or a PDA (project development agreement), where the core project concepts are defined but the developer, sometimes with construction or operating partners and sometimes without, are engaged early to bring the project to fruition in a way that continues to drive efficient, creative, technical and financial solutions.

Budden notes, “In Canada, there were agencies set up to advise on P3 infrastructure solutions. Infrastructure Ontario and Partnerships BC, in particular, have done an excellent job of bringing a large number of P3 projects successfully to market. It would be great if similar agencies could evolve in the States but this is difficult because the U.S. is so diverse, geographically and politically. In the absence of dedicated agencies, what we really need is strong representation on the public side – a champion – who wants to advance the project; somebody with the ability to understand what is involved in a public-private partnership, and with an openness to sit down and work out exactly how it should best proceed. As more governments explore P3 delivery and as we see a growing number of successful P3 procurements, we expect the model will continue to gain traction in the U.S. and we’re excited to be part of that evolution.”

Great interview, it gives you a good representation of why CDPQ jumped on the opportunity to acquire Plenary Americas. These are top-notch P3 investors/ developers who take a long-term view and place sustainability high on their list of priorities (aligns well with CDPQ's responsible investing focus).

In other words, these people are experts in PPPs and CDPQ sees an opportunity to acquire a controlling stake in their North American operations to develop North American bridges, toll roads, hospitals and other infrastructure assets.

And remember, unlike its large Canadian peers, CDPQ is the only pension fund which has developed a massive greenfield infrastructure project from scratch, the $C6.3 billion Réseau express métropolitain (REM).

There is tremendous technical expertise at CDPQ Infra which is complementary to what the folks at Plenary are doing and I see many synergies between their activities.

Remember, many P3s take on construction and availability risk and some revenue risk, albeit not much. If they can build it under budget, maintain and operate it profitably, then they can collect nice yield, but most construction firms look to sell early to realize on their investment.

As Brian Budden explains, Plenary does not take on construction risk, it's a pure development player, specializing in P3s, and they structure and provide all of the required private financing.

The folks at CDPQ Infra know all about construction risk even if they too subcontract it to players like SNC Lavalin. They also know about developing, operating and maintaining infrastructure. 

CDPQ Infra took on some revenue risk with the REM project, set up user rates in consultation with the provincial government which subsidized this rate for users (or else it would be prohibitively expensive for people to ride on this new light rail project).

A full discussion on the risks of P3s (or PPPs) is beyond the scope of this comment but you can see some material here and here. Also be aware, P3s have their share of critics.

Still, a merger between Canada's second largest pension fund and one of the world's leading investor, developer and operator of public infrastructure mitigates a lot of these risks, especially since there are great synergies here.

In closing, it's clear this is a great deal for both CDPQ and Plenary which will focus more on Australian projects.

I did notice Plenary's offices are dispersed across North America with offices in Vancouver, Toronto, Los Angeles, Denver and Tampa, so I expect them to open one up in Montreal too or they will likely report to someone at CDPQ Infra.

These are details which will be ironed out, the important thing to remember is this is an exciting new chapter for Plenary North America and CDPQ Infra. They will both be much stronger after this deal.

Below, an older clip (2013) where World Finance interviewed John O'Rourke, then Principal of Plenary Group, on the challenges of PPP projects and the success of the Victorian Comprehensive Cancer Centre.

Also, Jean-Marc Arbaud, managing director of CDPQ Infra, explains the REM's origins in the third episode of "Destination REM" (French with English subtitles).

Lastly, since it was another insane day in the markets, two must watch interviews for my readers.

Earlier today, CNBC's "Halftime Report" spoke with Chamath Palihapitiya, CEO of Social Capital, this is like “the Great Financial Crisis and the dotcom bubble together” and that “we’re nowhere near a bottom”. The discussion took place right before the Fed’s bazooka, but the market resumed its selloff after a brief pop. Take the time to listen to him, he offers great insights and I hope politicians take his warnings seriously.

And Guggenheim Global CIO Scott Minerd discusses today's massive sell-off with CNBC's Brian Sullivan and the Fast Money traders, Tim Seymour, Brian Kelly, Dan Nathan and Guy Adami.

What we are witnessing in markets is insane, indiscriminate selling across sectors and asset classes, and it will have ripple effects in every sector, including construction. Let's hope this coronavirus nightmare ends soon but I'm afraid the worse is yet to come in North America.

Dr. Anthony Fauci gave an update this afternoon on coronavirus outbreak and how the White House is trying to combat the pandemic. He once again stressed "containment and mitigation" and said we're "going to get a lot more infections" so we need to act now.