Ontario Municipal Employees’ Retirement System, one of Canada’s big public pension plans, is considering investing in infrastructure in new markets in Asia and may as much as double its allocation to such assets in the region within five years.
The C$109 billion ($83 billion) fund is an infrastructure specialist; its 20% allocation is a lot bigger than that of most institutional investors. It started to invest in the asset class some 20 years back and has only ever done direct deals.
Asia Pacific only accounts for about 8%, or $1 billion, of the global allocation at present – 7% in Australia and 1% in India – but that is set to change.
“Our aspiration is, in five years’ time, to have between 5% and 15% of the infrastructure portfolio in Asia Pacific, as our overall global portfolio continues to grow,” Ralph Berg, global head of infrastructure at Omers, told AsianInvestor.
Omers sees six to eight countries in Asia Pacific as having “investable” infrastructure markets, Berg said. These are nations with a strong fiscal situation, a sovereign credit rating of at least investment grade, healthy credit markets, good governance, independence, and respect for foreign investors’ rights and the sanctity of contracts, Berg added.
They must also be home to experienced partners and be able to offer a regular stream of opportunities. “We don’t want to find ourselves stranded in a small economy with a large asset, without the ability then to repeat and use that accumulated knowhow in more situations,” he explained.
Omers is looking to broaden its scope beyond its Australia and India holdings and is considering projects in Singapore, Taiwan, Japan and South Korea, and increasingly also Indonesia and Malaysia.
But to make direct investments, it takes time to get comfortable with certain markets and their legal and regulatory frameworks, and to build relationships with local partners. It has some six or seven firms it works with in Asia now, and that number is likely to rise as it moves into new markets.
“We have to keep in mind that we are still new to the region,” Berg said, with the fund opening its Singapore office only two years ago. “We have been looking at Asia in an organised, systematic way for less than three years.”
After all, the region is huge, and infrastructure is labour-intensive. Omers has five professionals in Singapore and six in Sydney, noted Berg. One of them is Prateek Maheshwari, the new Asia head of infrastructure. He will move from London to Singapore in 2021 to replace Bruce Crane, who has just this month joined fellow Canadian fund Ontario Teachers’ Pension Plan (OTPP) as its first infrastructure head in the region.
“[Given the size of the team,] there’s a limit to how many things we can look at at any given point in time, and we want to concentrate where we can be most effective,” Berg said.
Another challenge is finding deals of sufficient scale. Omers tends to invest in large infrastructure deals, in tickets of between $500 million and $1.5 billion, with a “sweet spot” of around $1 billion, he added. And it’s very unusual for the fund to own less than 25% of any particular investment because it wants to ensure it can influence the asset management decisions.
While Japan, Singapore, South Korea and Taiwan are very attractive markets, Berg said, India generates a much larger flow of prospective deals. The Singaporean economy, for instance, “is smaller and the infrastructure universe is dominated by a few incumbent players, which means there are fewer opportunities there”.
Omers has made investments in Asia in conjunction with firms such as Indian corporates Larsen & Toubro and Tata, and alongside other asset owners like German insurer Allianz and fellow Canadian pension fund CPPIB.
Omers bought into the Port of Melbourne in 2016 and made its first investment into Indian infrastructure early last year via the IndInfravit Trust, the third infrastructure investment trust to list in India, in May 2018. The trust holds toll road concessions in the country and also received investments from CPPIB, Allianz and other institutional investors.
Perhaps Omers’ most active sector focus in Asian infrastructure right now is renewable energy, as it is for several other asset owners.
“Clean power enjoys a lot of political support,” noted Berg. “It is already very competitive in markets like India, supported by the rise in electrification, the growth in electricity demand and the fact that the cost of power there is already below the alternative cost of carbon-based power-generation technologies.”
Another area of major importance in the region and “a big pillar of our strategy” is digital infrastructure, he added. Omers is targeting investments in data centres, telecommunications towers and fibre networks in places like Singapore, Australia, Japan and Korea.
When it comes to expected yields on infrastructure, Berg said that the fund targets returns in a range between 8% and 12% for developed, mature economies such as the US, Australia, Germany, the UK and developed Asia.
Omers would expect assets in Japan, South Korea, Taiwan and Singapore to price at the lower end of that range, he noted, and developing Asia to be at or slightly over the upper end of the range. In developing Asia, infrastructure is a local-currency play, and there will be a considerable amount of greenfield investment required, Berg added.
That said, yields have come down as a result of the ultra-low interest rates in the past decade and have been pushed further down by the central bank and government interventions in response to Covid-19, Berg said.
Omers' infrastructure plans reflect a wider expansion push in Asia, where it is also expanding its capital markets team. Other Canadian pension funds, such as CPPIB, OTPP and PSP Investments, are similarly building out in the region with an eye on its growth prospects, despite geopolitical challenges and Covid-related uncertainty.