Local partners help Ontario Teachers' Pension Plan spot infrastructure opportunities
March 28, 2019 |
Partnering with local players reduces risk, says Dale Burgess, head of the pension fund's infrastructure business
When the Ontario Teachers' Pension Plan made its first investment in infrastructure in Mexico, it decided to do it through a three-way partnership that included a Mexican infrastructure company controlled by billionaire Carlos Slim.
Under the deal, Ontario Teachers’, along with Canada Pension Plan Investment Board (CPPIB), two of Canada’s largest pensions funds, acquired a 49% stake in a subsidiary of Slim’s company, IDEAL, which operates one of the largest toll road concessions in Mexico.
Ontario Teachers’ took a 20% stake and CPPIB bought 29%, with the two investing a combined $1.35 billion in 2016 in the 233-kilometer road that connects several Mexican states and is a link to major trade corridors. In 2018, Ontario Teachers and CPPIB expanded the partnership with IDEAL, taking minority stakes to invest in another toll road in Mexico, Pacific Sur.
“It is a very, very successful partnership,” says Dale Burgess, the head of the infrastructure and natural resources at Ontario Teachers’. “With the right opportunities, we will continue to do more with IDEAL.”
Like other Canadian pension funds, Ontario Teachers’ has invested in Latin American infrastructure assets for years. It has largely relied on equity as the preferred form of investment and in recent years sought partnerships to put its money to work.
With $145 billion in assets, the fund has found that partnering with a local player helps it better spot opportunities and navigate a region that has had a mixed history when it comes to risk.
“Over the last 10 years, partnerships and platforms have been a part of our success in the region,” says Burgess. “And I see us looking to expand those partnerships. You need to have a partner that either brings local expertise or construction expertise and who helps you de-risk.”
Weeks after the IDEAL transaction, Ontario Teachers’ added to its Latin America investments. Along with another Canadian pension plan, PSP Investments, the two funds increased their stake in Cubico Sustainable Investments by jointly acquiring Santander’s interest in the London-based energy and water infrastructure company. Cubico has wind, solar and water infrastructure assets across eight countries in Europe and Latin America, including Brazil, Mexico and Uruguay.
The Latin American assets of Cubico, which was founded in 2015, include the 210 MW Ventos de Araripe I project. It also owns some 800 MW of development-stage wind assets in Mexico.
“We select and pick our partners extremely carefully,” says Burgess. “When we invest, we invest not just to seek a return against a certain risk but to advance the broader and longer-term investment capability of Ontario Teachers’. That comes from being deeply involved and engaged with portfolio companies and our local partners. We feel we can generate more return at less risk.”
Fallout from a series of corruption scandals like the one involving Brazilian construction firm Odebrecht has at times made finding local partners challenging.
“Given the corruption issue that Latin America has faced over the last couple of years, that really reinforces the point of having the right partners,” says Burgess. “The availability of local partners is a challenge.”
Still, he is encouraged by the legal and regulatory response in the region to the Odebrecht scandal, which triggered a wave of judicial investigations across a number of countries. “We see signs that institutions are working in the countries that face these issues the most,” he says.
Ontario Teachers’ plans to continue to focus on its core infrastructure target markets of Mexico, Colombia, Peru, Chile and Brazil. The pension fund’s investments in Latin America extend beyond infrastructure across different asset classes to real estate and private equity.
Among them is a stake in Multiplan Empreendimentos Imobiliarios SA, one of Brazil’s largest mall operators. “If you’re making investments, as we have been, in fixed direct investments for 10 years, you have the ability to leverage the information, the insight, and the experience in one asset class when looking at another,” says Jonathan Hausman, Ontario Teachers’ managing director and global head of strategic relationships.
In a January interview at the World Economic Forum in Davos, Switzerland, the pension plan’s CEO, Ron Mock, said the fund is ready to invest billions in Brazil as its economy recovers. The country’s newly-elected president, Jair Bolsonaro, recently announced plans to privatize airports and seaports. More privatizations are expected.
Burgess says he expects there might be opportunities in consumer and technology markets in Latin America. “There are themes that played out in North America that have to do with consumer and technology that are beginning to play out in Latin America as well.”
Turning back to infrastructure, Burgess says the fund continues to pursue opportunities in the region. Asked what advice he would give to officials in the region who are consistently saying they want more investment in infrastructure, he says: “We want to see more opportunities to invest.”
“There is a healthy level of appetite from investors,” Burgess adds. “Governments need to do more to make sure the right agencies are in place to bring projects to market. I would encourage them to have a track record on regulatory stability. That will set a very important benchmark for attracting investors likes us.”