On February 26, 2013, the NSIA’s sovereign wealth enterprise, NSIA Motorways Investment Company (NMIC) signed a deal with Julius Berger Investments Ltd. for the NMIC to act as an investment partner to the Second Niger Bridge Project. This infrastructure project is a public-private partnership (PPP) with the Federal Government of Nigeria.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Sovereign and Public Investor Topics: Asset Allocation and Policy
Alternatives - Hedge Funds and Private Equity
Real Estate and Infrastructure |
Central Banks and Monetary Authorities
Japan’s Government Pension Investment Fund (GPIF) is moving forward with its infrastructure investment program by partnering with the Development Bank of Japan (DBJ) and the Ontario Municipal Employees’ Retirement System (OMERS). OMERS is a major public institutional investor involved in infrastructure investing globally.
Approaching US$ 1.3 trillion in assets, the world’s biggest pool of retirement assets is trimming Japanese government bonds (JGBs) and using that allocation for infrastructure. Norway’s Government Pension Fund Global made similar modifications in its asset allocation by chopping fixed income and using that portion for institutional real estate piece.
At a formal briefing today, as much as US$ 2.7 billion could be deployed into infrastructure by the GPIF in the next few years. Taking into consideration the massive size of the GPIF, that would be around 0.2% of current assets under management.
The GPIF has taken a cautious approach to investing and conducted a series of studies on alternative assets and infrastructure. The GPIF was attracted to the concept of capturing a liquidity premium and broader asset diversification.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
GMR Group, the Bangalore-based infrastructure developer, announced plans last Friday to restructure investments in GMR Energy Limited made by Singapore public investor Temasek Holdings Pvt Ltd and a consortium led by Indian private equity firm IDFC Alternatives Ltd. Subject to satisfaction of conditions precedent, GMR Infrastructure Ltd will issue US$ 183 million worth of compulsorily convertible preference shares (CCPS) to Temasek and the consortium through a preferential allotment.
GMR Infrastructure will issue shares worth 7.89 billion rupees and 3.48 billion rupees to Temasek and the IDFC consortium, respectively. These investors had bought 13.95 billion rupees in CCPS of GMR Energy in 2010, and they will retain their residual investment in the company.
GMR Infrastructure gave clarification on the deal to the Bombay Stock Exchange, explaining that the new CCPS would be converted into equity shares of GMR Infrastructure between September and October, 2015. At the time of conversion, the price would be the higher of the average of the weekly high and low of the closing prices of the equity shares during the 26 weeks or the average of the weekly high and low of the closing prices quoted on a recognized stock exchange during the 2 weeks ending 30 days prior to the conversion date, as per the Securities and Exchange Board of India.
GMR Energy is valued at 60 billion rupees.
Concluding a February California State Teachers’ Retirement board investment committee meeting, the board revised the system’s infrastructure policy. CalSTRS staff possesses discretion up to US$ 300 million to invest in their US$4 billion allocated infrastructure program. Additional allocations exceeding US$ 750 million by a single firm may be subject to review by the CalSTRS investment committee.
CalSTRS Infrastructure Allocation
[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
On February 6, 2014, the European Investment Bank (EIB) signed a loan agreement in the amount of €205 million (US$ 279.6 million) to finance the El Shabab power plant project in Egypt. The project will be co-financed by the European Bank for Reconstruction and Development (EBRD) and the Saudi Fund for Development (SFD). Funds will be used to convert an open-cycle power plant to a combined-cycle gas plant. The conversion is expected to increase efficiency and output by 50%.
EIB Vice-President Philippe de Fontaine Vive took part in the signing ceremony. “Our aim is to support the new Egypt’s social and economic transition by financing projects encouraging growth and employment,” he said at the event. “We aim to contribute to the improvement of the daily life of the Egyptian people and to the building of a future for the younger generation.”
The EIB has approved €1 billion (US$ 1.36 billion) in loans for projects in Egypt in the last two years, and has signed €637 million (US$ 868.7 million) “so far in key economic and social sectors.”
Also present at the signing ceremony was Mr. Nidal E. Assar, Deputy Governor of the Central Bank of Egypt.
According to the EIB’s website, in 2012 it lent out €52 billion (US$ 71 billion), €7 billion of which was lent out for projects outside the European Union.
The Queensland Investment Corporation (QIC) is looking to sell the toll road company Queensland Motorways Ltd. With the thirst for Australian transportation infrastructure from institutional investors, QIC is seeking to dispose the highly-regulated motorways to the highest bidder.
The government of Queensland transferred the Queensland Motorways to the QIC in 2011 – being valued at A$ 3.088 billion. The motorways had A$ 2.9 billion of debt before the asset transfer. Some policymakers were surprised at the time, many believed the motorways would be sold off immediately. The justification in 2010 was that the government wanted legislative protections to make certain the tolls would not increase more than the consumer price index.
The motorways are a 43 mile network, counting around 80 million vehicles per annum.
Currently, three groups of investors are bidding for Queensland Motorways. Analysts say bids will be around A$ 5 billion.
Three Investment Consortia
Hastings Funds Management
Kuwait Investment Authority
Abu Dhabi Investment Authority
IFM Investors (owned by 30 superannnuation funds)
Ontario Teachers’ Pension Plan
On January 31, the Canada Pension Plan Investment Board (CPPIB) acquired a 10.4% stake in Transportadora de Gas del Perú S.A. (TgP) from Graña y Montero for US$ 200 million. Graña y Montero is the biggest engineering and construction company in Peru. Graña y Montero also sold a 0.91% interest to Corporación Financiera de Inversiones for US$ 17.3 million. After both deals, Graña y Montero will hold a 1.64% equity stake in TgP. In November 2013, Graña y Montero bought the 12.38% stake in TgP from Argentina-based Pluspetrol Resource Corporation.
In addition, Spanish energy giant Repsol SA sold their 10% stake in TgP to Madrid-based Enagás SA for around US$ 219 million. Enagás SA also entered into a deal to acquire U.S.-based Hunt Oil’s stake in TgP for nearly US$ 272 million.
TgP is the largest mover of natural gas and natural gas liquids in Peru. In fact, in 2012, the asset delivered nearly 95% of Peru’s total volume of natural gas from Blocks 88 and 56 of the Camisea gas fields. Located in the Peruvian Amazon, the Camisea gas fields are near the Urubamba River. Natural gas extraction in the area isn’t without controversy as the gas fields are near the Nahua-Nanti Reserve.
The CPPIB is keen on Latin American energy infrastructure. TgP’s clients include the largest power generators, natural gas distributors and industrial firms in Peru.
Borealis Infrastructure Acquires Interest in Bruce Power B
On the same day as CPPIB’s stake investment in TgP, Borealis Infrastructure, the infrastructure arm of OMERS, signed a deal to acquire 31.6% of Bruce Power B for $450 million from Cameco Corporation, a Uranium miner. Bruce B operates 4 of 8 reactors in the world’s large nuclear generating facility in Tiverton, Ontario – generating 30% of Ontario’s 2013 electricity. Borealis’ ownership in Bruce Power B post-deal rises to 56.1%. Other investors in Bruce Power include: TransCanada Corporation, the Power Workers’ Union and the Society of Energy Professionals. Canada’s largest public-private partnership is Bruce Power – the assets remained owned by the government of Ontario.
Michael Rolland, president and CEO of Borealis, commented in a press release, “Bruce Power is an investment that continues to fit with our long-term strategy to invest in core, large-scale and high-quality infrastructure assets. It also plays a critical role in meeting the supply needs of the province of Ontario.”
CIBC World Markets Inc. acted as a financial advisor to Cameco Corporation.
GIC Private Limited, one of Singapore’s sovereign wealth funds, became an anchor investor in IFC Global Infrastructure Fund, LP. IFC Asset Management Company, LLC, wholly-owned by the International Finance Corporation, raised US$ 1.2 billion for their infrastructure equity fund. IFC has been raising capital for this fund for months.
IFC Global Infrastructure Fund, LP received commitments from 11 investors, including sovereign wealth funds and public pensions. The IFC has had success in raising capital to fund private equity infrastructure investments in developing countries. The fund will be managed by a team based in Washington, D.C. and Singapore.
IFC Asset Management Company, LLC – Fundraising – Billions USD[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Norway’s massive sovereign wealth fund has been at the front and center of the SWF community for years. Its gargantuan size places it among the top few institutional investors in existence. Norway’s sovereign wealth centers itself as a working model that many emerging market countries want to emulate.
Every suggestion or implied change in investment strategy causes a stir in the global investment community. For example, this past Monday, incoming Conservative Party leader Erna Solberg and Progress Party leader Siv Jensen jointly submitted a 70+ page platform outlining their path for the oil rich nation. The report was immediately gobbled up by news outlets and disseminated with the fevered reporting of a breaking news headline.
But it’s apparent even conjectures regarding the 1% owner of all global stocks command attention.
[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
OPSEU Pension Trust, more commonly known as OPTrust, opened up a Sydney office. The Toronto-based pension institutional investor has C$ 14.7 billion in assets under management.
Their private markets program was launched in 2006, and OPTrust has 30% of assets marked to be allocated toward private equity and infrastructure. In 2012, OPTrust’s infrastructure investments returned 23.7%, smashing their infrastructure benchmark return of 5.7%. OPTrust is keen on honing in on infrastructure and private equity investments in Asia and Australia. OPTrust already has investment exposure in Australia. They have invested in Renex Group, a Victorian-based soil treatment facility – alongside Macquarie Bank and Cleantech Ventures.
Investment Allocation – Private Markets
- 40% North America
- 40% Europe
- 20% Developed Asia and Emerging Markets
Source: OPTrust Website – Dated: October 6, 2013
In 2012, OPTrust’s infrastructure investments returned 23.7%, smashing their infrastructure benchmark return of 5.7%.
Boots on the Ground
Increasingly, both asset managers and Canadian public investors are opening up operations in Australia – to engage in more complex investments in Australia, New Zealand and Asia. In fact, Borealis Infrastructure, OMERS’ infrastructure subsidiary, opened up an office in Sydney in August 2013. Asset managers like Blackrock, Morgan Stanley and Goldman Sachs have also invested immense company resources in Australia.
Two London employees from OPTrust, Managing Director Stan Kolenc and Portfolio Manager Morgan McCormick, will be relocating to Sydney.
The Queensland Investment Corporation (QIC), through its global infrastructure arm, bested competitors in a bid for Brisbane’s Clem Jones tunnel (CLEM7). The A$ 70.3 billion QIC purchased the toll road for AS 618 million through its toll road business Queensland Motorways. The road was built at an original cost of A$ 3 billion.
The impending acquisition of CLEM7 will bolster the toll road portfolio of Queensland Motorways. According to a statement, “The addition of the CLEM7 tunnel will further expand and diversify the growing Queensland Motorways asset portfolio of toll roads, which currently includes the Gateway, Gateway Extension and Logan motorways, and will include the Go Between Bridge by late 2013, followed by Legacy Way Tunnel on construction completion in mid-2015.”
The original intent of CLEM7 was to help facilitate traffic between the suburbs north and south of the Brisbane River; however, traffic projections proved to be inflated, and Brisbane’s first private toll-way sunk under its own borrowing.
The acquisition can be seen as a bittersweet result for the northeast Australian state. On the one hand, it picked up a recurring revenue stream for pennies on the dollar. On the other hand, private infrastructure investors might think twice about investing in Australia’s recently proposed infrastructure bonds.
Infrastructure bonds are being suggested as a way to help augment Australia’s limited resources dedicated to infrastructure investment. But a recent slew of bankruptcies including Lane Clove Tunnel in Sydney are undoubtedly concerning.
According to the Sovereign Wealth Fund Institute’s transaction database, from the beginning of 2008 till August 2013, over US$ 76.3 billion has been directly invested in energy-related assets and companies. This illustrates the story of a five-year trend of sovereign wealth funds plowing billions into energy – betting heavily on world energy demands. The US$ 76.3 billion includes energy companies, exploration firms, utilities and energy-related infrastructure. This does not include energy-related technology companies or real estate. In addition, this aggregated transaction amount includes only direct sovereign wealth fund transactions, not fund investments. It is crucial to highlight that sovereign wealth funds are limited partners in some of the world’s highly-desired private equity energy funds.
And the winner is?
Europe appears to be the prime recipient of direct sovereign wealth fund investment in the energy sector from 2008 till August 2013 – totaling US$ 40.8 billion (254 recorded transactions). Within Europe, the United Kingdom and the rest of Western Europe receive the bulk of it. Sovereign wealth fund energy stock favorites include Royal Dutch Shell Plc, BP Plc, BG Group Plc and Total SA. Eastern Europe and Russia pocket a far less substantial amount of sovereign wealth fund investment in energy mostly through fund investments.
Direct Sovereign Wealth Fund Investments in Energy-Related Assets and Companies
Billions USD – Jan 2008 to Aug 2013
Click on Image to Enlarge
Source: Sovereign Wealth Fund Transaction Database
North America follows Europe with US$ 11.8 billion (191 recorded transactions). Both regions prospered in direct sovereign wealth fund investments through open market transactions and negotiated deals. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Sovereign wealth funds, infrastructure funds and public pensions have been investors of power grids and other energy infrastructure assets in Europe. As of July 31, 2013, the Finnish State controls 50.8% of Finnish utility Fortum. Fortum is publicly traded on the Helsinki Stock Exchange.
The power generation and electricity distribution are highly fragmented in the Nordic power market. Good for energy consumers, this eats at the profit margins of many utilities. In addition, several European energy providers are seeking to offload networks and shed debt. This cleansing of the balance sheet allows utilities to focus on power generation and renewable energy.
Nordic Electricity Distribution[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
Courted by the Russian Direct Investment Fund (RDIF), sovereign wealth funds and large institutional investors are allocating capital to Russian companies, infrastructure and other assets. In previous months, Abu Dhabi-based Mubadala Development Co. became part of a US$ 2 billion fund with the RDIF to invest in various Russian industries.
Sovereign wealth funds like the State Oil Fund of Azerbaijan (SOFAZ) and public pensions like CalPERS have embraced Russian real estate, especially in Moscow and Saint Petersburg. However, policymakers in Russia want to drive institutional investment toward Greenfield developments and infrastructure like the Central Ring Road around Moscow.
The government of Abu Dhabi may invest up to US$ 5 billion toward Russian infrastructure through a venture with a state-backed private equity fund. This fund would target toll roads, ports and airports. Already, the Abu Dhabi Investment Authority and Abu Dhabi Investment Council are major investors in infrastructure.
Russian President Vladimir Putin is bent on improving Russia’s transportation infrastructure which is critically in facilitating economic growth.
The thirst for real assets has not abated for sovereign wealth funds. Clear statistics derived from the Sovereign Wealth Fund Institute’s transaction database sheds light on the impact sovereign wealth funds have in acquiring investments in the real asset economy. The Sovereign Wealth Fund Transaction Database has recorded over $600 billion worth of direct transactions made by sovereign funds. The increase in direct transactions reveals that large institutional investors like sovereign wealth funds have built up sufficient internal capacity to go out on their own. For the time being, there is no slowdown in sovereign wealth funds investing in real assets.
European core real estate is a chief driver for direct sovereign wealth fund transaction growth. $9.26 billion in direct sovereign wealth fund transactions were recorded in institutional real estate for the last half of 2012. In comparison, to the last half of 2011, $7.13 billion worth of direct transactions were recorded. Let’s not let Europe hog all the glory, Norway’s Government Pension Fund Global (GPFG) purchased 49.9% of five U.S. office properties through a joint venture with TIAA-CREF – properties were valued at $1.2 billion. A secondary cause of the increase is the proliferation of sovereign wealth funds being engaged in developmental real estate – particularly with Gulf funds. Hudson Yards and CityCenterDC, two monstrously large U.S. developmental projects are examples of major deals.
Source: Sovereign Wealth Fund Transaction Database, August 2013
In the majority of cases, acquiring infrastructure without intermediaries takes longer than buying property. A smidge after the first quarter of 2013, Tawreed Investments Limited, a sovereign wealth enterprise of the Abu Dhabi Investment Authority, was part of a consortium including Industry Funds Management, Australian Super and QSuper to buy the lease on Port Botany and Port Kembla. Combined, the two port deals equaled AUD 5.07 billion.
For the time being, there is no slowdown in sovereign wealth funds investing in real assets.
Energy and Materials
Spiking in the first semester of 2012, energy-related transactions amounted to $7.53 billion. Singapore’s Temasek Holdings invested hundreds of millions in KrisEnergy, an upstream oil and gas company focusing on Southeast Asia. KrisEnergy started as a portfolio company backed by First Reserve Corporation. Shifting to material-related transactions, in the first half of 2013, it totaled $6.5 billion. By late June 2013, Norway’s sovereign wealth fund owned a little more than 3 percent of BASF SE, the world’s largest chemical company. Another German chemical company in which the wealth fund owns a growing stake is The Linde Group.
The Nigerian Sovereign Investment Authority (NSIA) is partnering with the International Finance Corporation (IFC) to develop, finance and implement infrastructure projects that will stimulate job creation, economic growth and social development in Nigeria. This occurred through the signing of a Memorandum of Understanding (MoU) between the IFC and NSIA. The NSIA and IFC want to channel investment in areas such as housing, healthcare infrastructure, transport, power and gas. By structuring commercially viable investments, the two entities are trying to entice and encourage private investment in much needed infrastructure. Nigeria is one of the largest economies in Africa. There is significant spatial distribution in connecting infrastructure in Nigeria’s northern regions compared to the southern coastal areas.
Uche Orji, Managing Director of NSIA, commented in a NSIA press release, “Our agreement with IFC reflects NSIA’s commitment to enhance partnerships with the private sector that deliver on our shared aspiration of developing infrastructure projects more effectively in Nigeria. Through this collaboration with IFC, NSIA is better positioned to fulfill its mandate of developing infrastructure projects while attracting global investors.”
Apparently, the government of India may permit a direct line of investment for sovereign wealth funds to invest in in tax-free infrastructure bonds. Sovereign funds have expressed interest in India and desire allocating to investments that provide substantial yield. Several large state-owned institutions have had infrastructure bond-issuances in which cash has yet to be spent. Bonded by red tape, many large-scale infrastructure projects are clogged up, preventing further cash disbursements. The Indian finance ministry reprimanded several projects for leaving bond-issued funds sitting in bank deposits.
India’s current account deficit is peaking. The Indian government wants to prevent the rupee from sliding further and augmenting foreign exchange reserves. With signals of possible slowing of quantitative easing from the United States and other developed economies, emerging markets are in semi-panic mode.
London Mayor Boris Johnson is intent on facilitating the creation of a new mega airport for London. The city of London has attracted billions worth of investments from sovereign wealth funds and foreign pension investors. The majority of these public investors have preferred developed infrastructure like Thames Water and Heathrow Airport.
Sources at Sky News have broken news that the Mayor’s advisers have held discussions with regard to the airport project to sovereign investors including the China Investment Corporation and public officials from Seoul. The China Investment Corporation and Qatar Investment Authority are investors in Heathrow Airport through a holding company. Other institutional investors that have considered investing include local city pension funds and infrastructure funds.
The Isle of Grain is a potential location for the proposed airport called Thames Hub Airport. Developmental infrastructure is inherently more risky compared to existing infrastructure. The United Kingdom has incentives and lowered levels of bureaucratic burden relative to other European nations with relation to funding infrastructure through private money. It would take over a decade for the airport to be built. Thames Hub Airport would have capacity to serve 110 million passengers per annum.
It is estimated the Thames Hub Airport project would cost £24 billion.
A July 19th 2013 statement made by Lord Foster reads, “The choice is not about time or money. A new four-runway true hub airport in the Thames Estuary, at £24 billion, costs less to build than two extra runways at Heathrow and can be realised on a similar timescale. Our funding model shows that it could pay for itself within a decade of opening.”
There is a widening gap between the demand for infrastructure and governments’ ability to fund new projects. Western Europe, particularly the United Kingdom, is an example of a country that has allowed extensive private investment to flow into developing infrastructure. With fiscal budgetary deficits rising for many national governments and institutional investors looking for decent yield, the timing of investing in developing infrastructure seems promising. A few major roadblocks seem to be calculating the true underlying risks of investing in developing infrastructure, challenging bureaucratic regimes, onerous regulation, long timelines, and the probability of earning a substantial return. A walk-before-run approach is how many large institutional investors perceive greenfield projects, especially in Asia, Latin America and Africa.
Governments and think tanks like the Brookings Institution have written detailed white papers examining different models to fund needed infrastructure. Multilateral institutions have constructed investment vehicles to back efforts to fund infrastructure while luring private investors. In Africa, the African Development Bank and the International Finance Corporation are two mega institutions that lead these efforts. Some sovereign funds, especially in sub-Saharan Africa have mandates or goals to invest in domestic greenfield projects. There is substantial fragmentation of existing projecting financing facilities making it challenging for private investors to select.
Infrastructure investment provides economic and social benefits for local economies, creating jobs and moving money around.
[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]
According to the press release, “The Global Strategic Investment Alliance (GSIA) is announcing its first investment with the successful syndication of approximately a one-third stake in Midland Cogeneration Venture (MCV) from Borealis Infrastructure.
“We’re very pleased to have completed our first transaction with our GSIA partners, and look forward to announcing our next acquisition in the near future,” said Jacques Demers, President and CEO of OMERS Strategic Investments.
The GSIA currently includes OMERS, one of Canada’s largest pension plans, Japan’s Pension Fund Association (PFA) and a consortium led by Mitsubishi Corporation (MC). It is expected that membership in the GSIA will continue to expand.
MCV is the largest natural gas fired, combined cycle cogeneration plant in the United States. It was acquired by Borealis Infrastructure, which invests in and manages infrastructure assets on behalf of OMERS, in December 2012. Borealis Infrastructure will manage MCV on behalf of all GSIA investors, and OMERS will continue to own the remaining two-thirds interest in the asset.
“MCV is an excellent facility and we are confident that together with the company’s strong management team, we will continue to deliver sustainable, long-term value for all stakeholders,” said Michael Rolland, Borealis Infrastructure President and CEO.
The GSIA announced its US$7.5 billion first close in April 2012. Its goal is for like-minded, long-term global institutional investors to work together in pursuit of attractive, large-scale infrastructure assets mainly in North America and Europe.
“MCV is an excellent asset that we have been able to access through our participation in the GSIA. Through the alliance, we are able to benefit from the expertise of Borealis Infrastructure and OMERS, making investments that will deliver long-term stable returns to pension plans and institutional investors,” said Yuichi Hiromoto, Senior Vice President, Mitsubishi Corporation.
Borealis Infrastructure will originate and manage all GSIA assets. Administrative support services to the GSIA investment program are provided by Rosewater Global, an OMERS affiliate. The MCV syndication is subject to third party approvals.”
Read more: OMERS Press Release