The Canadian Pensioners Who Own Britain?
In less than ten years, a handful of the country's biggest funds have bought outright or own stakes in some of the UK's most prized infrastructure. That includes High Speed One, the railway line that connects London to the Channel Tunnel; Scotia, Scotland's biggest gas network; the ports of Southampton and Grimsby; Birmingham and Bristol airports and Camelot, the operator of the national lottery.
They've also been part of consortiums that have purchased engineering company Tomkins and, in May of this year, software maker Logica. Just three weeks ago one of them secured a slice of the national game when Goals Soccer Centre, the biggest operator of five-a-side football pitches in the country, was acquired.
Britain is far more open to foreign takeovers than large parts of Europe, the US and even Canada itself. Even so, it is hard to imagine such a land grab unfolding without dissent if the buyers were perceived to pose any political threat. Whichever angle you are looking from, it is hard to see one.
The pension funds behind the deals are the CPP Investment Board, the Ontario Teachers Pension Plan (OTPP), Ontario Municipal Employees Retirement Scheme (OMERS) and the Caisse de depot et placement du Quebec. Sitting on about 315bn pounds in assets, they collectively manage the pensions of teachers, fireman, policeman and employees from both the public and private sector across Canada.
Dismissed a decade ago by some as provincial funds, the financial crisis has strengthened their hand. Having begun investing in infrastructure, property and private equity before the crash, their willingness to invest over a horizon measured in decades, rather than years, has now left them sought after by governments looking to overhaul decaying infrastructure and private equity companies hunting partners for deals.
"The Canadian phenomema is something that has been underway for quite a while," says Michael Latimer, chief investment officer at OMERS, which invests 35bn pounds of assets on behalf of pensioners in Ontario. "But now that the quantum of investments have built up, that creates a level of recognition."
The confidence that brings is evident on a visit to some of their offices in Toronto from where they size up potential opportunities. Britain was the first country most of them bought into outside North America, and most of the funds have more money invested there than anywhere else other than Canada and the US. Four years on from the financial crisis, it remains attractive.
"We have a disproptionate weighting to the UK," said Mark Wiseman, the chief executive of CPPIB, a C$161bn (104bn pound) fund whose investments in Britain include a stake in Anglian Water. "The role of law is well-established. It is a highly predictable investment market. We continue to be quite bullish on the UK as a place to invest."
It is a view echoed by OMERS, which in late 2010 teamed up with OTPP to pay £2.1bn for a 30-year contract to operate the high-speed rail link between London's St.Pancras station and the Channel Tunnel.
Over the next couple of years, the fund plans to double the size of its office in the UK capital to about 75 to 80 people despite the embattled state of the City of London.
"We have to look through this economic environment and see that there is real opportunity on the other side," in the UK, says Latimer. "And we believe that."
The economic backdrop that the funds confront in Britain is in sharp contrast to Canada. Although a slowing US economy is beginning to weigh on its northern neighbour, Canada is not having to grope for growth in the way that Britain is.
The Bank of Canada expects the economy to expand 2.1pc this year and 2.4pc in 2013. Canadian banks avoided the implosion that hit the City of London and Wall Street, and its budget deficit remains a modest one. As some of the biggest foreign investors in Britain, the pension funds are encouraged that the Coalition goverment is seeking to tackle the country's public debt pile.
"They've got to get their debt down, they've got to get their fiscal house in order, but they appear to be taking action in that way," said Jim Leech, chief executive of OTPP, which spent some of the $117bn it manages buying national lottery operator Camelot for almost £400m in 2010. "I think if they weren't - if they were playing Greece - then we would have concerns."
With the seventeen governments in the Eurozone still wrestling for a solution to the continent's debt crisis, the mere fact that the Coalition government has a plan appears to offer some comfort. "I like the fact politically there is a strong view, I guess a plan," explains Latimer of OMERS. "I think as a business, you may not necessarily agree with it, but if you understand it, you can plan your business."
But with the UK economy shrinking 0.7pc in the second quarter of the year, it is a plan under increasing fire from critics who argue it lacks a strategy for restoring growth. The government's originally 2010 forecast expected growth of 2.8pc this year.
George Osborne's response to the criticism has so far focused on trying to secure infrastructure projects designed both to create jobs and offer the country longer-term economic benefits. In July, the chancellor pledged to underwite £50bn of infrastructure spending. That comes on top of the launch last November of the National Infrastructure Plan designed to drum up investment from funds like the CPPIB, OTPP, OMERS and Caisse.
The worrying news for the government is that the greenfield projects - or those that include building the piece of infrastructure from scratch - that Osborne has envisaged do not hold appeal.
Our "strategy is to invest in infrastructure projects that do not carry construction risks," says Wiseman of the CPPIB. "We need to be able to have comfort that we can assess asset performance and returns at the time of investment."
It is an opinion shared by Caisse, which invests about £102bn on behalf of pensioners in Quebec. “The execution risk associated with greenfield sites is pretty challenging,” said Michael Sabia, the chief executive of Caisse. “Greenfield is not something we have done outside of Canada. That would not be top of our list.”
The opinion is important because the Canadians' muscle has grown since the crisis as some competitors for infrastructure assets have retreated. Deutsche Bank recently sold its infrastrcuture fund, while Austalian fund manager Babcock & Brown, once one of the most aggressive investors, collapsed in 2009.
If the funds are now enjoying a moment in the global limelight, pension experts say it has been two decades in the making. It was in the 1990s that the province of Ontario, in particular, began allowing its public pension funds to be run by professional boards that could compete for the sharpest investing talent.
"The view was taken in Canada that these pension organisations should be wealth creators - should turn savings into wealth," says Keith Ambachtsteer, of KPA Advisory Services, which helps design pension plans. "They started with the basic premise that these institutions should be excellently run."
The combination of being able to pay for top talent, a plentiful supply of funds from Canadian workers and an emphasis on risk management that is required by a pension fund has left them a strong hand after the financial crisis.
It has also given them the confidence to make and manage the vast majority of their assets themselves and avoid the fees that other fund managers or private equity firms would charge.
"This has been an evolution," says Leech of OTPP. "It took us twenty years to build the model. It doesn't happen overnight." OTPP has generated annual average returns of 10pc since 1990.
It is a confidence that has all the funds sizing up opportunities in Europe despite expectations by many that the region's crisis is poised to escalate further in the autumn. "Given the stress that Europe is going through, we feel that there will be investment opportunities that will pop up," says Neil Petroff, chief investment officer at OTPP. "There may well be governments that want to privatise more of their assets."
The Canadian pension funds have grown in clout since they began making direct investments in Britain in the middle of the last decade. Almost ten years on, it is clear that the number of countries now angling for the savings of Canadian firefighters, teachers and policeman is rising.
"The world is now all about finding ways to fuel economic growth,"says Wiseman of the CPPIB. "I think the UK will face increasing competition." The UK has been warned.
The UK does face increasing competition but its legal system is the number one reason why Canadian pension funds are so comfortable investing in private market assets in that country.
Last Friday, I discussed how Canadian pension funds are flexing their buyout muscles, ramping up their private equity activity in Europe and elsewhere. In Europe, they're competing and (more likely) co-investing with the best buyout funds, all of whom are waiting to make a killing in distressed debt. The problem is few European banks are selling.
As far as infrastructure, they are going at it directly, circumventing funds altogether. They have bought prize assets in Britain and are now moving into Latin America and eastern Europe. Of course, Britain still remains the center of activity.
One thing that I will bring to your attention, however, is that Canadian pension funds all make the same mistake of overestimating the risks attached to greenfield infrastructure projects and underestimate the risks of managing a portfolio of mature infrastructure assets. I know there is a political dimension to this decision but it's a bit ridiculous and many infrastructure experts I've spoken to agree with me.
Are Canadian pension funds perfect? Hell no. I've written some highly critical comments on compensation based on bogus benchmarks and have slammed them hard when they took stupid risks which came back to haunt them.
But there is no doubt about it, Canadian pension funds are global trendsetters and many global funds can learn a lot from them. The same can be said about Dutch and Danish pension funds. Their superior governance model is the main reason why they're able to attract top talent to their funds, pay them properly and focus on what is in the best interests of all their stakeholders. To do this, they keep politics out of investment decisions.
Below, Adam Marshall of the British Chambers of Commerce discusses the UK's infrastructure policy. "We need hundreds of billions of pounds of Infrastructure investment just to get back to where some of our rivals are".
Post a Comment