How Is IMCO Weathering the Pandemic?

Barbara Shecter of the National Post reports on how IMCO is weathering the pandemic:
Having kids or undertaking a home renovation has a lot in common with setting up a multi-client investment manager, according to Bert Clark, who has done at least two of the things on that list.

“You underestimate the amount of work,” the chief executive of Investment Management Corp. of Ontario (IMCO), and a father of four kids under the age of 10, said during a recent interview.

That assessment of the three-plus years he has spent building IMCO — which manages $70.3-billion worth of assets for the pensions of Ontario judges and government employees as well as the Workplace Safety and Insurance Board (WSIB), making it one of the country’s top 10 pension managers — also now applies to responding to the global coronavirus pandemic that has shut down economies and ground business-as-usual to a halt.

“Anyone who says ‘I know what you do in this scenario’ is making it up,” Clark said, pointing to a never-before-seen combination of events, including negative oil prices, the shutdown on widespread swathes of the economy and significant fiscal and monetary intervention by governments around the world.

On the investment front for IMCO, the crisis has meant taking stock and embarking on a slow, measured approach to new investments. Clark said he’s also looking for partners to take advantage of the disruption. Again, he’s biding his time.

“Balance-sheet restructuring doesn’t happen in three weeks” with private assets such as infrastructure, real estate and credit, he said. “We’re waiting patiently.”

For a taste of what Clark is looking for in partnerships to propel growth in these areas, he points to IMCO’s participation in a consortium that in 2018 bought 25 per cent of a portfolio of hydro-electric assets from Brookfield Renewable Partners LP.

But before any pandemic-related deal-making gets done, he said, IMCO is likely to focus on rebalancing portfolios where market declines have pushed weightings out of whack, even if that means buying stocks when others are steering clear out of fear.

“It’s a pretty understandable psychological response, but it’s a poor investment strategy,” Clark said, adding that devising and sticking to a sound asset mix is one of the three value proposition pillars that IMCO can offer. “Whether the mix is 60/40 or 40/60 matters more than if you outperform on an asset class.”

Clark, a lawyer by training who was CEO of Infrastructure Ontario before taking on IMCO’s launch, said another pre-pandemic priority was developing a liquidity management regime that would ensure there was enough available cash to weather “an intense storm” for the duration.

“You don’t want to be a forced seller … (It’s better) to be the one with dry powder,” he said. “You never want to have to sell … in a downturn.”

Despite the challenges presented by the global health and economic crisis, IMCO was able to add the judge’s pension to the funds it manages in mid-April, fulfilling its key role as an investment management consolidator for small public-sector funds and pensions across Ontario.

Participation in IMCO is voluntary, unlike consolidated pension managers in other provinces, such as the Alberta Investment Management Corp. (AIMCo).

Clark’s hope is that smaller funds will choose to join in order to benefit from the manager’s scale, which reduces investing costs, as well as its size and expertise, allowing it to diversify into alternative asset classes such as real estate, private equity and infrastructure.

His sales pitch touches on a theme that’s prevalent in the pension world: companies and organizations that run large retirement plans can become distracted and pull time and resources from their primary business.

“(It’s the) same logic here,” Clark said.

At the end of December, IMCO had $11.6 billion invested in real estate, $5.7 billion in infrastructure and $2 billion in global credit, though the bulk of its funds — about $40 billion — was invested in a combination of public equities, fixed income and government bonds.

Clark said IMCO should be able to further scale up investments if other pools of money come under its umbrella.

“There are pools of public capital spread across the province,” he said, adding that his targets include 90 or so funds and pensions at universities, municipalities and Crown corporations. Together, they represent nearly $100 billion in assets under management.
So why is Bert Clark appearing in the papers all of a sudden?

Answer: Unlike other large Canadian public pensions with captive clients, IMCO has to hustle to gain new clients to grow.

To do that, they spent the last three years ramping up their front and back office operations to make sure they can pass any rigorous due diligence.

Jean Michel, IMCO's CIO, has been busy ramping up his investment team and they're now ready to manage existing assets and take on new assets.

Earlier this week, I shared insights from IMCO's investment experts and believe that's a terrific initiative everyone should follow.

But again, the reason behind this initiative is to market their investment expertise to prospective clients.

And there are plenty of new clients. For example, a former senior pension manager told me he wouldn't be surprised if Ontario's new university pension plan (UPP) gives IMCO a huge mandate.

If it was up to me, all of Canada's large Crown corporations (BDC, EDC, Canada Post, etc) would have to fork over their pension assets to IMCO to be properly managed.

I'm dead serious about this and there is a very rational and logical case to be made.

Is IMCO perfect? Of course not, nobody is, but I trust their governance and investment expertise a lot more than I trust what is going on at the pension plans of Canadian Crown corporations.

What about Bert Clark? I don't know the man personally. His critics think he got the job because his father is well connected with Ontario Liberals and while that helps, it doesn't help you be a good CEO when the going gets tough and it guarantees nothing now that Doug Ford's gravy train has set its sights on IMCO and its board.

Mr. Clark has to prove himself like everyone else. There are no free rides at Canada's large pensions, especially when Bob Bertram and and Brian Gibson are sitting on your board (not that the other board members are pushovers).

He needs to get the message out that coronavirus or no coronavirus, IMCO is open for business and is ready to deploy capital patiently across public and private markets.

In private markets, they need to partner up with great partners to capitalize on major market dislocations. The timing is right now that private equity's Minsky moment is here.

Today, we learned the coronavirus pandemic has hit the Carlyle Group hard. It reported a $1.2 billion investment loss and said it is withdrawing earlier financial guidance, citing the fallout from the coronavirus pandemic. Its stock price got hit, down 10% for the day.

I suspect a lot of these large private equity shops are going to take their lumps in 2020, and move on to focus on capitalizing on this pandemic and making some solid returns over the next three years.

There will be plenty of opportunities as global unemployment soars to unprecedented levels and distressed assets are put on the selling block.

IMCO and other large Canadian pensions with lots of dry powder will capitalize on these opportunities by leveraging off their strong relationships with top private equity partners to co-invest alongside them on big deals as they arise.

Bert Clark, Jean Michel and other senior executives at IMCO have to focus on their existing clients and start bringing in new clients which will benefit from IMCO's scale and investment expertise across public and private markets.

That extra level of 'marketing to new prospective clients' is a bit of a pain but that's primarily Bert Clark's job and I'm sure he's up for the challenge.

Like I said, all of Canada's Crown corporations should seriously consider having their pension assets managed by IMCO (the focus will be on Ontario but I'm thinking bigger).

Below, CNBC's "Halftime Report" team breaks down investment strategies and the outlook for the US economy with Marc Lasry of Avenue Capital. Great insights, listen carefully to Lasry.