Canadian pension fund OMERS is seeking to tap opportunities in the areas of energy transition, digital infrastructure and transportation as it steps up its infrastructure investments in the Asia Pacific, a top executive told DealStreetAsia.
“Energy transition is a theme we focus on globally and I think is a theme which is going to be very strong in Asia, as it tries to decarbonise,” OMERS Infrastructure managing director and Asia head Prateek Maheshwari said in an interview.
OMERS Infrastructure invests in infrastructure assets globally on behalf of OMERS, a C$105 billion ($83.2 billion) fund that invests and administers pensions for municipal workers in the province of Ontario. The infrastructure investment manager had a net investment portfolio of C$22.1 billion ($17.5 billion) at the end of last year.
The Asia market is a “strategic priority” for OMERS Infrastructure, Maheshwari said, although it offers its share of challenges.
“There are a lot of opportunities in Asia, [but] I think there are complications in the execution, and there are complexities in terms of getting the transactions down,” he said.
“The good thing is that there is such a strong tailwind of growth behind this and when things get more balanced out, the opportunities will definitely increase from where it is.”
In line with the fund’s growing focus on the Asia Pacific, Maheshwari will relocate to Singapore from London this year to lead investments in the region.
On its website, OMERS Infrastructure lists three assets in the Asia Pacific – infrastructure investment trust IndInfravit, which operates toll road concessions in India; the Port of Melbourne; and Australian utility company TransGrid.
The asset manager is currently focusing on India, Indonesia and the Philippines in the Asia Pacific as these countries offer attractive opportunities on account of their growing population, emerging middle class and rapid urbanisation, Maheshwari said.
Edited excerpts of the interview:
Given your experience in Europe, what are the key differences you observe in the market in Asia?
In Europe, infrastructure is an asset category that has been prevalent for a good decade. Infrastructure investment in Europe started in the early 2000s, so there is a very well defined and well-trodden path. It’s catering to a market that is seeing more policy-based shifts, rather than fundamental underlying growth.
In Asia, infrastructure as an asset category has been evolving over the last few years, but I think it still has a long way to go before it matures into an independent asset category as you see in Europe. One observation would be that infrastructure has a lot of overlap with real estate, private equity, and typical energy investments in Asia.
Another difference is the infrastructure needed in Asia is defined fundamentally by the underlying structural growth, which is happening on the back of population growth, rapid urbanisation, propensity to spend, fundamental shifts in consumer habits, penetration of smartphones as well as data usage. These trends relate to increases in tower capacity, increase in electricity and water consumption, among others.
On the regulation side of things, it is evolving. India and a few other countries have come up the curve where a lot of the regulation is more or less defined. I also think COVID-19 has changed that dynamic a little bit where the budgets of a lot of countries are going to be stretched. Therefore, they are going to be a lot more appreciative and welcoming of private investments. However, Asia still has a lot of governmental hands, which I am sure is set to change – some of the countries, like India, have privatised their roads and large parts of airports, so it is a matter of time before the other countries follow suit.
OMERS has invested in Australia and India. Where else do you see investment opportunities?
India is a priority market within Asia, and I think it will remain so going forward. It’s a function of the number and type of deals, the regulatory system that comes with the lending markets, the comfort with the corporate markets, as well as the receptiveness to foreign capital – India checks most of those boxes.
Beyond India, we are spending time and focus in some of the largest Southeast Asian countries such as Indonesia and the Philippines, which share similar characteristics to what we like about India such as the growing population, rising middle class, urbanisation and structural growth elements.
In terms of developed Asian countries, we also look at Japan and Korea, although the transactions there are few and far in between.
Would it be a fair characterisation that opportunities in Asia offer higher growth than in Europe?
There are a lot of opportunities in Asia, [but] I think there are complications in the execution, and there are complexities in terms of getting the transactions down. In terms of transactability, I think Europe is higher because it is effectively private capital dealing with private capital.
However, I think the Asian market will evolve over the next couple of years. The governments will adjust the system and it gets its heads around the direction they want to take regarding how much private capital is needed and what sort of private investments will be there. The good thing is that there is such a strong tailwind of growth behind this and when things get more balanced out, the opportunities will definitely increase from where it is.
How does this impact your allocation targets?
In Infrastructure for OMERS as a whole, Asia as a region is a strategic priority. What our CIO wants is definitely to significantly increase our exposure in Asia across the asset categories – whether it’s capital markets, real estate, or infrastructure.
Within Infrastructure, we really want to increase our exposure in the APAC region from where we are. [But] we don’t box ourselves into [set allocation targets] in Asia – that forces me into doing deals which don’t make sense.
In terms of sectors, what types of assets would be attractive to OMERS?
Energy transition is a theme we focus on globally and I think is a theme which is going to be very strong in Asia, as it tries to decarbonise.
Digital and communication infrastructure is a global priority sector for us, playing on the theme of the population consuming a lot more data than they used to. That necessitates a rollout of strong fibre or extra telecom towers that can cater to the [surge in] data consumption.
Transportation is another one. As mentioned, we are in Asia because we believe in strong population-driven growth. And that obviously means the transportation infrastructure has to be either new or modernised to cope with the incremental demand. We have done an investment in roads in India and we are looking to grow that platform.
Within transportation, airports are also attractive. Aviation has taken a global hit, but the belief in airport assets will always remain strong especially in a region like Asia where the average trip taken by an individual is not even a quarter of what people in Europe or the US take. There is still a long runway to go for the aviation growth to come through.
In terms of energy transition, what is your view on how the sector has evolved over the last decade or so?
In India, renewable power on an absolute basis is the cheapest cost of power. Solar and wind tenders are roughly half the price of thermal power. Renewable power in India has come a long way in terms of prices and regulations.
I think where India is going to go next is figuring out how to make the power more deliverable and more dispatchable. There is also another ecosystem which is expected to develop in India which is around how to decarbonise the industrial processes and how to make gases green.
In some of the other countries, I think they are still where India was four or five years ago in terms of some of the regulatory development. Overall, I would say the theme is there. By and large, the region has taken quite big strides in moving towards greenifying its power sector over the last few years and is expected to continue for years to come.
Do you take on greenfield investments?
There is nothing that stops us from doing a pure greenfield investment. Having said that, I think we would evaluate greenfield, firstly on the basis of which asset category it is in terms of risk characterisation. Building an airport from scratch is very different from building wind farms and solar farms, for example.
What we are more comfortable with is taking an existing operational platform and growing it. So it’s a combination of greenfield and brownfield.
Do you see opportunities in distressed assets? Are you actively looking for them?
I think it is too early to see opportunities in distressed assets. I expected some to emerge, especially in the transport sector where the assets might have been held by players who were over-levered. But so far, we are not really seeing a market flooded with distressed opportunities and people taking advantage of it because there has generally been a much more collaborative environment between the stakeholders, policymakers and asset owners. People are being more patient, rather than pulling the plug on an asset. If it was to become a more substantiated play, I think we would see it happen probably this year-end or early next year.
As a long-term investor, our basic investment thesis is not like an arbitrage-based investment. We’re not set up to actively look for distressed assets – we would rather focus on fundamental-based investing. Having said that, if there is an opportunity in the market which we are aware of and we can make it work, we would definitely look at it.
What can we attribute infrastructure outperforming most of the other asset classes in OMERS’s total portfolio to?
It definitely comes down to the nature of the asset category and our portfolio construction, which emphasises diversification, both in terms of geographical spread as well as the underlying asset categories. We had a good mix of utilities, digital communication infrastructure, regulated assets, and transportation. Within transportation, we had a good mix of people-facing infrastructure such as roads and airports and goods-facing infrastructure. The pandemic has shown us that people can be immobile, but goods cannot be.
Additionally, we have adopted an active asset management approach from the beginning of the pandemic. That helped us navigate a lot of these assets in a way where they were put on a much sounder footing earlier on in the crisis. We basically took preemptive moves to try to make sure that the operational integrity of a lot of our assets is robust enough earlier on. We also made sure that from a liquidity, balance sheet and availability of funds perspective, we have enough resources and support lined up.