Ontario Teachers’ cautious approach to new infrastructure rights
The Ontario Teachers’ Pension Fund, which owns marine terminal operations at ports in New York and Vancouver, Canada, is actively seeking to grow its portfolio of infrastructure assets. But a scarcity of available assets, especially in the United States, makes it difficult to acquire long-term rights to operate facilities such as ports and toll roads, Andrew Claerhout, who leads the Teachers’ Infrastructure Group, said in an in-depth interview.
Ontario Teachers’ manages CAN $145 billion ($132 billion) worth of net assets, including stocks, real estate and private equity funds, but only 8 percent ($11 billion) in the infrastructure space. It has generated a 10.2 percent return since 1990 for its 307,000 active and retired teachers.
The pension fund’s infrastructure holdings include GCT Global Container Terminals Inc., which operates Global Terminal and New York Container Terminal at the Port of New York and New Jersey and the Vanterm and Deltaport container terminals at the Port of Vancouver, through its subsidiary TSI Terminal Systems. It also owns three water and wastewater utilities and an electric company in South America; a water desalinization plant in Sydney, Australia; and four privatized airports in Europe, including large ones in Brussels, Belgium, and Copenhagen, Denmark; a gas distribution company; and a stake in High Speed One, the company that owns and maintains the tracks and train stations on the London-Paris rail line.
“In the next five to seven years we want to get to $18 billion” worth of infrastructure assets, Claerhout said. There is a huge global need for infrastructure renewal and building, but there are not many assets that are available or attractive for investors. The situation in the United States is made more difficult by a slow political acceptance of privatization, according to financial analysts and infrastructure experts.
“We’re hoping that one day that sleeping giant awakens and there is a much bigger opportunity here in the United States,” Claerhout, who sits on GCT’s board and previously managed Teachers’ private equity transactions in consumer, retail and industrial sectors, said. “The market is much smaller and more difficult than it should be.”
Ontario Teachers’ tends to invest $300 million to more than $1 billion in any deal. The fund’s goal is to make the companies or assets it buys more valuable and it can’t devote a lot of financial or management resources to smaller investments because the “return on effort” is typically low, the former Bain & Co., executive said.
Low infrastructure inventory means valuations are typically higher than a conservative investor might prefer, so Ontario Teachers’ expansion strategy is to focus on industries, such as ports and water works, where it already has a presence and experienced management team. In that regard, it almost acts as a semi-strategic investor and uses its expertise to help optimize the performance of any companies it acquires.
In a separate interview, Claerhout said Ontario Teachers’ is interested in buying Maher Terminals, which Deutsche Bank recently put on the auction block. Maher operates the largest terminal in the Port of New York and New Jersey, as well as the Prince Rupert intermodal container terminal on Canada’s west coast.
“We have an interest in those terminals for obvious reasons. They are in the same regions that we are,” he said, without directly saying whether the fund had placed a bid for Maher.
The Canadian pension fund is also interested in toll road investments, but taking the plunge would require a better regulatory environment and government policies, Claerhout said. It has bid on, but failed to win any toll road competitions so far.
Claerhout said Australia is trying an interesting model to incentivize local governments to engage in public-private partnerships. The federal government Down Under has a plan to offer states a 15 percent premium on top of the sale price for a long-term concession of an infrastructure asset if the proceeds are reinvested in other infrastructure modernization projects. A state, for example, that sells operating rights to a bridge for $1 billion would receive an extra $150 million from the federal government.
“I think airports would be a big opportunity in the United States, as well. You’ve got the most airports of any country in the world. And most of them are still not privately owned,” Claerhout said.
Chicago Mayor Rahm Emanuel last year pulled the plug on a solicitation to privatize Midway Airport for 40 years after one of two consortia vying to operate the facility dropped out. Emanuel is considering the lease of city services to help bring down the city’s mounting debt. He cited the lack of a competitive bidding process as the main reason for his decision. If the deal had gone through, Midway would have become the first major commercial airport in the United States to be transferred to private hands.
Another potential investment opportunity is Brazil. It has inadequate highways, freight rail, inland waterways and ports for efficient cargo movement. The South American giant is currently auctioning concessions of marine terminals at many coastal and inland ports in an effort to inject private capital into an underdeveloped sector that has constrained the country’s ability to trade efficiently with the rest of the world. The government is also launching a major dredging program at several ports. Combined investment is expected to exceed $26 billion in the next four years. But Claerhout said Ontario Teachers’, which has real estate and passive corporate investments in Brazil, is wary about investing in Brazilian infrastructure in part because of yields on long-term government bonds.
“Brazil is one of those markets that’s too large to ignore. It’s got 200 million people. The need for infrastructure is abundant. So we’re approaching it quite cautiously. I wouldn’t put it at the top of my list,” he said.
The rate of return, he explained, doesn’t justify the risk. Investors receive 12.4 percent on 10-year government bonds compared to many infrastructure opportunities that are priced with about a 15 percent return.
“So I’m getting paid 2.5 percent a year [above the bond rate] to run an operating business in a developing country with a host of new risks.
“We need a greater equity risk premium over the government bond in order to motivate us to do deals. And right now in Brazil it just doesn’t feel like the ingredients are right from a risk return standpoint,” Claerhout said.
The pension fund’s low-risk approach means that any port investment is likely to be in established facilities rather than green field projects, especially in countries like Brazil that present great uncertainty.
The Teachers’ executive recently told InfraLatinAmerica the fund would prefer to find suitable local partners in Latin America before jumping into any deals.
Brazil has a reputation as a difficult place to do business, but the country is getting increasingly comfortable allowing engineering companies to also operate infrastructure facilities, Mike Kerlin a principal at McKinsey & Co., said at a recent infrastructure symposium in Washington. Another positive development is the federal government offers batches of public-private partnership projects at one time to create greater incentive for private groups to bid.
Brazil’s ports ministry, for example, is currently offering concessions for terminals in multiple ports to strategic and financial investors that will help modernize the facilities.
Claerhout expressed interest when asked whether Ontario Teachers’ plans to take advantage of the shale energy revolution in North America, stating a mid-stream energy play in storage and transportation is under consideration.
This article was published in the September 2014 issue of American Shipper.