OMERS, which handles the retirement benefits for municipal workers in the province of Ontario in Canada, is set to expand its portfolio of infrastructure assets in Asia.
The investment manager is eyeing major stakes in installations from telecommunications networks to renewable energy facilities and road networks. OMERS Infra, the infrastructure investment advisory and management arm of OMERS, is particularly interested in Indonesia and India, given the countries’ large, fast-growing and urbanising populations.
“We see such attractive opportunities that I would expect that if you look, for example, five years down the road, India could be probably something between five and 10 per cent of our portfolio,” Ralph Berg, Global Head of Infrastructure at OMERS told DealStreetAsia in an interview.
Given the region’s secular growth trend, a key sector of interest is transport, Berg added. At the same time, with infrastructure a critical component of economic growth, OMERS expects to find supportive conditions for investment.
“I think the government has shown a very high commitment to continue the modernisation of the infrastructure stock in India, and we’re seeing the same in Indonesia and Malaysia,” Berg explained. “Those countries would probably have the largest number of opportunities for us.”
OMERS is one of Canada’s largest defined benefit pension plans, with $109 billion in net assets as at the end of 2019. Currently, its global infrastructure assets account for 19 per cent of the fund’s total portfolio of assets; there are three assets in the Asia Pacific, accounting for 8 per cent of the portfolio.
These are a stake in Port of Melbourne acquired in 2016; a 22.4 per cent interest in IndInfravit Trust, which operates toll road concessions in India, acquired in 2019; and a 19.99 per cent interest in TransGrid, the electricity network operator in New South Wales and the Australian Capital Territory in Australia, acquired last month.
For 2019, OMERS recorded an 11.9 per cent net investment return total across its strategies, or $11.5 billion.
Meanwhile, the fund has also beefed up its infrastructure unit by roping in Prateek Maheshwari, who joined the Asia Pacific team last year.
Maheshwari was with Global Infrastructure Partners for 12 years, working in the energy and transport sectors across the globe. He was appointed Head of Asia for OMERS Infrastructure in June and is expected to relocate to Singapore next year from London, where he is based now. His move will bring the OMERS’ private equity and infrastructure team in Singapore to six.
Edited excerpts of an interview with Berg:
Are you seeing opportunities in distressed assets at this time?
Distress in infrastructure is rare. It is one of the quintessential features of infrastructure that the resiliency means that you don’t see distress situations often. Probably one of the periods which was more fertile in terms of opportunity for infrastructure investors was the immediate aftermath of the 2008 global financial crisis that put a lot of corporates that are natural developers, builders and owners of infrastructure into a situation where they had to sell assets in order to reduce the levels of debt that they had.
So you saw a large number of European utilities, European construction companies, Spanish construction companies, US utilities, selling assets or selling equity in projects, because they needed to reduce debt and they needed to reduce the debt levels, fast. And we also saw some countries embrace privatisation as a way of recycling capital out of capital-heavy infrastructure sectors.
This time around, my assessment is that it’s still very early. We are not seeing distress, probably because of the magnitude of the government intervention on the monetary side, on the fiscal side, the furlough schemes that have held the economy in good stead. When some of this support has to be taken out because governments cannot sustain them any longer, or don’t want to politically sustain them any longer, I think there will be more pain that will become more visible in the real economy.
What you’re seeing is probably some slowing down in the flow of opportunities in the infrastructure space, because there is uncertainty about supply and demand. So the sellers of assets prefer to wait until things improve a little bit, and the buyers are not finding those opportunities, or are also being more disciplined in how they value things. We have seen transactions announced and getting done in core infrastructure situations in the UK, in the US. I think both the renewable sector, and the digital infrastructure telecommunication infrastructure sectors have continued to be very active.
Do you see more governments now looking at options for either long-term leases or selling core infrastructure during this time that will make up for the slowing opportunities, especially in these times with governments being stretched?
I don’t think we would expect to see it now. It’s still too early. And we’ve had a very decisive, very significant response from governments in the last four or five months, so it’s still early. Politicians and government officials will need to feel that the pandemic has been managed before they go back to taking a colder and more factual look at the respective fiscal situations. And that is the point at which some countries may see a need to bring debt levels down by recycling assets or looking for private sector involvement in the development of new infrastructure. I think that’s not with us yet. I think that will come.
At the same time, you have a countervailing force in that interest rates are so low now that politically, it is easier for politicians who need funding to go into the debt market because they are paying very little for that debt, especially in industrialised countries in Western Europe or North America.
Where in Asia do you see the most opportunities for OMERS?
When we look at Asia, where we have historically seen the bulk of the opportunities is in India. Which is not a surprise – it is one of the largest economies in the world, a large population. Great demographics, a need for more infrastructure, and a government that is very keen to attract the private sector, and both domestic and international private capital to fund the development and construction of that infrastructure. And I think that will probably accelerate. As a result of this, I think the government has shown a very high commitment to continue the modernisation of the infrastructure stock in India, and we’re seeing the same in Indonesia and Malaysia. So those countries would probably have the largest number of opportunities for us.
What are your plans for expansion in Asia? And at what pace?
Things in infrastructure don’t move as fast as in capital markets. Everything that we do in infrastructure in some way is a public service. We are very aware that there’s always a high level of government and regulatory scrutiny. So you want to be very comfortable with the situation that you’re going into.
We have the appetite and room to do a lot more. And we are in no rush. But we see such attractive opportunities that I would expect that if you look, for example, five years down the road, India could be probably something between five and 10 per cent of our portfolio.
Which sectors are attractive to you?
There are some sectors in Asia, and India and Indonesia, particularly, that are especially attractive again because of the demographics, because of the growth in the middle class, because of the infrastructure deficits in those countries that are perhaps more attractive than say in North America or Europe. And I’d say globally today, digital infrastructure, renewable energies and energy networks are probably the three most attractive sectors for us in Asia. Renewable energies and digital infrastructure are probably the most attractive of those three.
Transport is probably one of the most attractive things in Asia, and in India and Indonesia especially, again because of the growth that we all see – in the number of people that travel by aeroplane, in the container volumes that flow in and out of ports, and the number of cars as car ownership continues to increase. A lot of investment has gone into roads in India and I think the transport sector in India is especially attractive. We’re probably like most people today, taking a more cautious view until we can understand what the pandemic and the various lockdown requirements’ impact will be on transport. But in the long term, transport remains a very attractive sector across most of Asia.
As infrastructure investors, what are your investment horizons and what are the advantages of that?
We can go very long. It creates an alignment between our investment objectives, the needs of the business, the preferences of regulators and governments. It helps us adapt and adjust the capital needs of those businesses, the growth opportunities that those businesses, or those activities, bring to the communities where they operate and to us as an investor.
If you look at our portfolio, we manage roughly 35 investments in 14,15 different countries. And many of them have been with us for more than 15-18 years. We have assets in our portfolio that we have owned for 20 years.
We are not permanent capital, but we do expect that we will be owners and responsible owners of these assets for a very long term. We need to marry that with the need to design and manage an efficient portfolio.
So there will be situations where either because we need to manage risk concentrations, or because we understand that our objectives [are no longer aligned] with the objectives or the preferences of regulators, or quite frankly because somebody is a better owner or a keener owner of that same activity we will rotate out of certain investments. In the last few years, we have made a handful of exits – we sold out of the high-speed train system in the UK and we sold a portfolio of airports two years ago, which probably proved very wise and timely.
What is very important for us is that we always have the necessary amount of control over those businesses, to have sufficient control to ensure that our objectives we can carry forward.
How do you demonstrate your returns?
Our main objective is to create and manage a portfolio that as an aggregate produces a stable and healthy rate of return. We rely less on realisations than a classic private equity investor. So, more of the emphasis is on a very rigorous valuation process that is internally led but is externally validated.
We also focus a lot on the cash generation of these businesses. One of the big missions for us as part of the OMERS pension plan is to contribute a significant part of the cash that the plan then needs to go and pay pensions which have to be paid in cash.
If you look at our performance, the returns have been consistently very healthy. I can’t think of more than one year where we have not had a double-digit return in infrastructure. And more than two-thirds of that return has come in the form of cash.
And for those [investments] that have the strongest growth profile, we are less focused on the cash and more focused on the quality of that growth. Our portfolio of roads in India is in many ways a portfolio of very fundamental main roads for the Indian economy. It is a growth investment that is predicated on the continuing growth in car ownership, in traffic, and the expansion of those roads, the privatisation programmes of the National Highway Authority of India.
Given that markets are back to pre-COVID levels, how tempting is it for OMERS to allocate larger portions to public equities?
[Market recovery] has not been universal. We have seen that in the recovery of the last four months some of the older economy stocks have not done as well as the new technology stocks.
At the end of the day, it’s always about building a balanced portfolio that allows a long term investor, particularly a pension plan, to manage through the economic cycles. And the role that infrastructure plays, that real estate plays, is to bring that stability and predictability, for a meaningful part of that portfolio. In our case, at 20-22 per cent, we are one of the largest investors in infrastructure, both by the absolute size of the portfolio, but especially by the relative allocation within the OMERS balance sheet to infrastructure.