OMERS Seeks Infrastructure Opportunities in India, Acquires UK's Network Plus
OMERS Infrastructure began its journey in India approximately five years ago. Today we have investments in two companies: road company Indinfravit and energy transition firm Azure Power. In any country, it is important to spend time understanding the landscape, building relationships and identifying investable trends. We have significant ambition to grow our investment in India and so naturally, we were excited to plan a first post-COVID visit.
It was an incredible week, with 20 meetings, including time in both Delhi and Mumbai. We met with investment partners, key banking relationships, government ministries, and potential investment opportunities and partners. Most importantly we spent time with the leadership teams at our two portfolio companies.
After reflecting on all that we heard and discussed over the course of the week, we have six important takeaways we believe are shaping the infrastructure opportunity in India.
Private capital in infrastructure: We view private capital as an integral part of the solution for funding India’s infrastructure needs. It should be embraced versus avoided, and there is no debate – it simply is. This shouldn’t be taken for granted, and is part of what makes it such an attractive geography for investors. The government has very ambitious plans, for example 450MW of new renewables by 2030 and 27,000 km of road to be privatized by 2025, both leading to multi billions of dollars of potential opportunity.
Demographics: India’s growing middle class could be the world’s largest by 2025. The power of this to shape consumer culture – and the infrastructure required to serve it – is immense. Approximately two-thirds of India’s 1.4 trillion population still live outside major urban city centres. We expect this to change. The investment in infrastructure needed to support a rural to urban shift is massive, and while the government is hoping to assuage the impact by building new hubs, the need for cities to accommodate more people will have significant impact.
GDP growth: India is one of the fastest growing economies in the world, fuelled by strong fundamentals and growth-enhancing policies. The emphasis on manufacturing in India, the digitization and technology transformation drive, and the increased infrastructure spending are some of the trends we’ve observed that give the infrastructure sector a strong tailwind. There is a need to build power generation capacity and power lines to meet the growing electricity demand; telecom towers, fiber networks and data centers to meet the digitalisation drive; roads, airports and ports to transport a growing population and middle class, and an increasing freight volume.
Evolving governance: We heard about the focus on good governance and progress being made in India. Companies recognize the importance of maintaining strong governance practices, and that this should be rewarded with higher returns. The drive to make improvements is to help attract more foreign capital, and consistent with the core values of many leaders in the country who appear to be making it a priority.
Value in the value chain: There are several strong group organizations, or conglomerates, that approach investing in a way that captures value across the value chain in a way that we believe is somewhat unique to India. Elsewhere, investors tend to acquire interests in a series of companies that are a part of the infrastructure sector. In India organizations are not just focused on a single asset class, but are in some cases building whole sectors, capturing all the value that might otherwise be lost moving across a value chain or multiple asset classes.
Technology: Infrastructure has been slower to adopt technology and digitally transform than other industries. Perhaps with the significant capabilities in India, supplying much of the world’s technical workforce, India will precipitate accelerated adoption. In fact, we believe India is already providing infrastructure investors opportunities in sought-after digital infrastructure sectors.
The visit emphasized the incredible opportunity for infrastructure in India and we are excited to continue our journey leading change and building value.
I thank Neil Hrab, Manager Media Relations, Strategic Communications at OMERS for sending me this earlier today.
In my last post, I covered why CDPQ increased its stake in India's Apraava Energy, creating a 50:50 joint venture with CLP, its strategic partner on this investment.
I also discussed why Canada's large funds have been investing in India over the last few years, highlighting the country's growth, governance and infrastructure and clean energy ambitions.
CPP Investments and CDPQ have taken the lead there but OMERS, OTPP and other large Canadian pensions are also ramping up their investments in India.
The comment above outlines six factors which are critically important to understand for investors looking to make long-term commitments in India.
Apart from favorable demographics and strong growth, government policy is what has attracted foreign investors:
The government has very ambitious plans, for example 450MW of new renewables by 2030 and 27,000 km of road to be privatized by 2025, both leading to multi billions of dollars of potential opportunity.
Think about the need for private capital to realize on these ambitious policies, it's enormous and will create tremendous opportunities for OMERS and other large Canadian investors looking for stable infrastructure assets in a country that is growing very fast.
In fact, in late June, The Hindu reported that India needs $223 billion to meet 2030 renewable capacity goals:
Government has a target of increasing non-fossil power capacity to 500 GW by 2030 and provide half of its electricity supply
India will need $223 billion of investment to meet its goal of wind and solar capacity installations by 2030, according to a new report by research company BloombergNEF (BNEF).
The government has set a target of increasing non-fossil power capacity to 500 GW by 2030. It wants non-fossil fuel power sources to provide half of its electricity supply by 2030.
"To achieve this target, India needs to massively scale up funding for renewables," the report said, adding that $223 billion is required over the next eight years just to meet the solar and wind capacity targets.
At COP26 in November 2021, Prime Minister Narendra Modi announced that India plans to reduce emission intensity by more than 45% by 2030 to below 2005 levels. He also announced a net-zero by 2070 target.
The report 'Financing India's 2030 Renewables Ambition', published in association with the Power Foundation of India, found that corporate commitments from Indian companies could help India achieve 86 per cent of its 2030 goals of building 500GW of cumulative non-fossil power generation capacity, a statement issued by BNEF said.
By 2021, 165 GW of zero-carbon generation had already been installed in the country.
Central Electricity Authority forecasts that the country's reliance on coal to drop from 53% of installed capacity in 2021 to 33% in 2030, whereas solar and wind together make up 51% by then, up from 23% in 2021.
Shantanu Jaiswal, lead author of the report and head of India research at BloombergNEF, said: "To date, the growth of renewable energy in India has been funded by a diverse set of financiers. Debt and equity structures have evolved as the market grew and new risks emerged. India’s ambitious renewable energy targets now require further scaling up of financing with new instruments and learnings from other global markets".
Yet, the scaling up of renewables in India faces regulatory, project and financing risks, with PPA renegotiation, land acquisition and payment delays cited as key risks by industry stakeholders surveyed by BloombergNEF.
In the short-term, rising interest rates, a depreciating rupee and high inflation create challenges for the financing of renewables.
"Scaling up financing to meet 2030 goals requires Independent Power Producers to tap into new or underutilised sources of capital. These could be revolving construction debt, investment infrastructure trusts and funding from retail investors, insurance companies and pension funds.
"Higher funding requirements also need measures that can increase the availability of financing, such as de-risking renewable projects to offering contractual terms that provide greater comfort to investors," Rohit Gadre, an analyst in BNEF’s India research team, commented.
Note, India isn't immune to what is going on around the world. Rising rates, soaring inflation and a depreciating rupee have created challenges for financing of renewables.
This is where long-term capital capital providers like Canada's large pensions can come in to support Independent Power Producers looking for sources of capital.
And this runs across the infrastructure spectrum, not just renewables, which is why Canada's large pensions are building their relationships in India to have the right strategic partners on every deal.
OMERS Infrastructure recently announced it is looking to double its massive infrastructure portfolio.
I covered this here and while developed countries will remain where the bulk of their investments lie, they're looking to invest more in India as part of their focus on the APAC region (Australia and New Zealand remain their primary focus there).
Again, it takes time to develop the right relationships in countries like India to invest properly in infrastructure assets.
In the comment above, it states they had 20 meetings in a week and met with investment partners, key banking relationships, government ministries, and potential investment opportunities and partners. "Most importantly we spent time with the leadership teams at our two portfolio companies" (road company Indinfravit and energy transition firm Azure Power.).
OMERS Infrastructure has significant ambition to grow its investment in India and I am confident it will do so successfully over the next decade.
In other related news, OMERS Infrastructure announced the sale of Midland Cogeneration Venture to Capital Power Corporation and Manulife Investment Management earlier this week:
(12 July 2022, USA) – OMERS Infrastructure has today announced the signing of an agreement to sell OMERS interest in MCV Holding Company, which owns Midland Cogeneration Venture (MCV), to a consortium of Capital Power Corporation and Manulife Investment Management. OMERS initially acquired a 100% interest in MCV in 2012 and subsequently syndicated a minority interest to third-party investors in the Global Strategic Investment Alliance (GSIA) investment program in 2013.
MCV is the largest natural gas-fired cogeneration facility in the United States. Located in Midland, Michigan, MCV reliably and safely supplies electric energy and capacity to Consumers Energy, and also supplies electricity and steam to Corteva Agriscience and Dow Silicones, two of the world’s leading materials science and agriscience companies that operate large-scale facilities adjacent to MCV.
Gisele Everett, Senior Managing Director and Head of Americas, OMERS Infrastructure, said: “MCV plays an important role in supporting the local economy and Michigan’s broader manufacturing sector. We have been proud of the work done in partnership with the MCV management team and think this represents a strong example of our active asset management approach in action. We wish MCV’s staff, management and new investors well, as MCV enters the next phase of its development.”
Tom Frazier, Managing Director, OMERS Infrastructure said: “We think MCV’s importance to Michigan’s power supply will increase as the substantial remaining coal-fired generation continues to be retired. We are proud of the transformation MCV has achieved, including the successful completion of multiple programs that improved operational efficiency and enhanced customer confidence in its energy offering, leading to the extension of key contracts which we believe positions MCV well for many years to come.”
Barclays is serving as exclusive financial advisor and Torys LLP is serving as legal counsel to OMERS Infrastructure. The closing of the transaction is expected in H2 2022, subject to customary closing conditions, including regulatory approvals.
SWFI provides more details on this deal:
Capital Power Corporation (TSX: CPX) partnered with Manulife Investment Management on behalf of the Manulife Infrastructure Fund II and its affiliates to acquire 100% of the interests in MCV Holding Company, which owns Midland Cogeneration Venture (Midland Cogen). The 1,633 megawatt (MW) natural gas combined-cycle cogeneration facility is being acquired from OMERS Infrastructure Management Inc. and its co-investors (OMERS) for a total of US$ 894 million, including the assumption of US$ 521 million of project level debt. The transaction is expected to close in the third quarter of 2022, subject to regulatory approvals and other customary closing conditions. Manulife Investment Management is the global brand for the global wealth and asset management segment of Manulife Financial Corporation.
Under the 50/50 joint venture with Manulife Investment Management, Capital Power and its joint venture partner will each contribute approximately US$186 million subject to working capital and other closing adjustments. Capital Power will finance the transaction using cash on hand and its credit facilities and will not need to access the equity markets to finance the transaction. Capital Power will be responsible for operations and maintenance and asset management for which it will receive an annual management fee.
Located in Michigan, it is the largest gas-fired cogeneration facility in the United States.
On October 5, 2012, OMERS Infrastructure acquired utilities company Midland Cogeneration Venture LP from EQT Infrastructure and Fortistar. EQT Infrastructure and Fortistar acquired 70% and 30% respectively in MCV in May of 2009.
OMERS Infrastructure did a great job adding value to this asset and the time was right to sell it, all part of its "proactive capital rotation strategy" which Annesley Wallace discussed here.
In other big news this week, OMERS Private Equity announced an agreement to acquire Network Plus:
Announcement marks OMERS Private Equity’s entrance into the UK’s critical utility/infrastructure repair and maintenance sector, with significant tailwinds from required investment in energy transition and decarbonisation
London, 11 July – OMERS Private Equity announced today that it has entered into an agreement with management shareholders and Livingbridge to acquire Network Plus (the “Company”), a leading utility and infrastructure repair and maintenance service provider in the UK. OMERS Private Equity invests on behalf of OMERS, the defined benefit pension plan for municipal employees in the Province of Ontario, Canada.
As one of the UK’s leading utility and infrastructure service providers, Network Plus partners with blue chip organisations to maintain and deliver essential services – including water, electricity, gas and telecoms – to homes, businesses, and industry. The Company is headquartered in Worsley, Greater Manchester with a team of more than 5,000 professionals working from 85 regional offices and depots across the UK.
Jonathan Mussellwhite, Senior Managing Director and OMERS Head of European Private Equity, said: “For the last five years, Dan Holland and Stuart Fraser, along with the Network Plus management team, have built a market-leading business with a world-class customer-centric reputation, and we are delighted to have the opportunity to partner with them on the next phase of the business’ development. As long-term partners with evergreen capital, OMERS is uniquely placed to support the business going forward, not least the role it has to play assisting UK infrastructure with the significant investment required across energy transition, decarbonisation and sustainability.”
Dan Holland, Joint-CEO, Network Plus, said: “OMERS share our ambition and vision for the business; delivering essential utility services and playing a leading role in the decarbonisation of the UK. They are committed to further developing our core operations and enhancing our expertise in adjacent infrastructure markets, creating new opportunities for our employees and customers. We look forward to working alongside Jonathan, Simon and the wider team.”
Simon Jones, Director, OMERS Private Equity Europe, said: “As active investors and managers, we have been very impressed with Network Plus’s track record of growth and the speed in which it has established itself as a leader in the critical and resilient UK infrastructure services market. We are excited, not only by the significant whitespace remaining in core markets, but also by opportunities to expand into adjacent sectors with the same need for recurring repair, maintenance and investment services and where customer safety and service are paramount. With OMERS deep experience in bolt-ons and strategic acquisitions, as well as substantial capital to deploy, we are well positioned to support the Company’s strategy.”
About OMERS Private Equity:
OMERS Private Equity manages investments globally on behalf of OMERS, one of Canada’s largest defined benefit pension plans, with C$121 billion in net assets as at December 31, 2021, including approximately C$19.6 billion in net private equity investment asset exposure. With teams in New York, London, Toronto and Singapore, OMERS Private Equity invests across Industrials, Healthcare, Business Services and Technology, deploying an evergreen capital base to partner with strong management teams and transform good companies into industry leaders around the globe. www.omersprivateequity.com
About Network Plus:
Network Plus is a leading utility and infrastructure service provider. Every day, the company safely maintains, constructs and delivers essential services to millions of customers across the UK. Network Plus works across the water, wastewater, gas, power, telecoms, transportation and infrastructure sectors. With a workforce of over 5,000 resources operating out of 85 regional offices and depots, the company covers a broad geographical base. The Group business has undergone rapid expansion, following the award of significant long-term contracts with major UK utility and infrastructure organisations. With its considerable track record of delivering essential services for clients, the Group is proud to be an industry leader.
Even though details weren't disclosed, Dinesh Nair of Bloomberg provides more details on this deal:
OMERS the Canadian pension fund manager, agreed to acquire British utility services provider Network Plus.
The fund’s private equity arm reached a deal to buy Network Plus from its management and private equity firm Livingbridge, Omers said in a statement Monday, confirming an earlier Bloomberg News report. The transaction was set to value the business at around £600 million ($718 million), people with knowledge of the matter have said.
Network Plus is a contractor for major UK utilities and infrastructure firms, providing services such as project planning, construction and maintenance. It helps hook up gas connections, lay power lines, install underground internet cables, inspect water pipelines and fix wastewater blockages.
The company, based in a suburb of Manchester, has a team of more than 5,000 workers spread across 85 locations in the UK, according to Monday’s statement. Its customers include Cadent Gas Ltd., National Grid Plc, Yorkshire Water, Wales & West Utilities Ltd., Manchester Airport Group and Network Rail, its website shows.
Investors ranging from pension funds to private equity firms have been pouring money into infrastructure plays as they seek to generate stable, recurring returns. PAI Partners is exploring a potential $2 billion sale of rival British utility contractor M Group Services, Bloomberg News reported in March.
As one of the UK’s leading utility and infrastructure service providers, Network Plus partners with blue-chip organizations to maintain and deliver essential services – including water, electricity, gas and telecoms – to homes, businesses, and industry.
You can read more about this company here to really appreciate its corporate values and its operations.
Note this isn't a pure infrastructure play but a private company that services the infrastructure needs of its customers, which is why OMERS Private Equity acquired it.
I think this is a great acquisition, one that will provide steady cash flows to OMERS for a very long time and one where the team at OMERS PE will work with management to grow the operations, adding meaningful value over the long run.
I invite my readers to learn more about OMERS Private Equity and their activities here.
Lastly, OMERS Capital Markets put out a statement that Ultragenyx just announced a sale of a portion of future North American royalties on Crysvita® (burosumab) for $500 million to it:
NOVATO, Calif. – July 14, 2022 – Ultragenyx Pharmaceutical Inc. (NASDAQ: RARE), a biopharmaceutical company focused on the development and commercialization of novel products for serious rare and ultra-rare genetic diseases, today announced the sale of 30% of the company’s royalty interest from Kyowa Kirin Co., Ltd on the future sales of Crysvita® (burosumab) in the United States (U.S.) and Canada to OMERS, one of Canada’s largest defined benefit pension plans, for $500 million. OMERS’ right to receive royalty payments is based on net sales of the product beginning in April 2023 and total payments are capped at 1.45 times the purchase price.
“In North America, Crysvita has generated more than $1.3 billion net sales in the first four years on the market making it one of the most successful launches in the rare disease field. This non-dilutive financing bolsters Ultragenyx’s balance sheet, funds the ongoing commercialization of multiple approved medicines and the advancement of our diverse clinical pipeline,” said Mardi Dier, Chief Financial Officer of Ultragenyx. “We are pleased to partner with OMERS on this transaction who, like us, recognizes the ongoing and future value of Crysvita, the tremendous success of the launch and the significance for patients who will continue to benefit from this important medicine.”
“Ultragenyx has successfully launched Crysvita, meaningfully improving the lives of thousands of pediatric and adult patients with two rare diseases. We are proud to invest in a product that has made a difference for so many and that aligns with the investment strategy at OMERS,” said Rob Missere, Managing Director and Head of Life Sciences, OMERS Capital Markets. “This deal furthers our mandate of delivering steady, long-term returns to our more than 541,000 members.”
Cowen acted as exclusive financial advisor to Ultragenyx on the transaction. Gibson Dunn LLP acted as legal advisor to Ultragenyx. Davies Ward Phillips & Vineberg LLP and Latham & Watkins LLP acted as legal advisors to OMERS.
I will let my readers learn more about this deal here.
From investing in India's infrastructure, to acquiring British utility services provider Network Plus, to receiving drug royalty payments on Ultragenyx Pharmaceutical's Crysvita®, the folks at OMERS are very busy this summer delivering on their pension promise to their 541,000 members.
Below, India wants non-fossil fuel power sources to provide half of its electricity supply by 2030. To achieve this target, the country needs to massively scale up funding for renewables, and to meet its goals by 2030 investment of $223 billion is needed, according to a new report by research company BloombergNEF (BNEF). At COP26 in November 2021, Prime Minister Narendra Modi had announced India's plans to reduce emission intensity by more than 45% by 2030 below 2005 levels, and called out five decarbonisation targets, terming them ‘panchamrit’ (nectar distilled from five ingredients; in this case, the five promises).
To sum up the five nectars Prime Minister Narendra Modi had stated, "First- India will reach its non-fossil energy capacity to 500 GW by 2030. Second- India will meet 50 percent of its energy requirements from renewable energy by 2030. Third- India will reduce the total projected carbon emissions by one billion tonnes from now onwards till 2030. Fourth- By 2030, India will reduce the carbon intensity of its economy by less than 45 percent. And fifth- by the year 2070, India will achieve the target of Net-Zero. These panchamrits will be an unprecedented contribution of India to climate action."
According to India's Central Electricity Authority forecast, reliance on coal will drop from 53 percent of installed capacity in 2021 to 33 percent in 2030, whereas solar and wind together will make up 51 percent by then, up from 23 percent in 2021. India’s power generation capacity grew by 118% between 2011 and 2021. Renewables share of capacity reached 37% in 2021 from 31% in 2012. Solar power has expanded the fastest reaching 60GW in 2021 from less than 1GW in 2011.
I also embedded an interesting panel discussion which examines issues that pose challenges to India achieving its ambitious clean energy target (450 GW or 500 GW by 2030?), clarifying the steps that are urgently required to ensure the country continues on the right path.