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Under new leadership, OMERS widens its Infrastructure definition

With one of the highest allocations to infrastructure of any pension plan, the Canadian Ontario Municipal Employees' Retirement System (OMERS) has always been a pioneer infra investor.  

OMERS was one of the first pension plans to invest in infrastructure, entering the sector in 1999, and has been an active player ever since. A recent decision to shift its investment focus to five newly-defined sectors — energy transition, mobility, connections, community and natural systems — from classic sectors such as energy, transportation, and social infrastructure is in many ways emblematic of broader changes in infrastructure investing.

The changes came alongside a leadership shuffle under which Annesley Wallace took over as global head of infrastructure in January 2021 after years as managing director for the Americas and a stint as chief pension officer.

In an interview with Infralogic, she talks about OMERS’ infrastructure strategy and plans.

OMERS in numbers

  • 2021 Net Assets: ~CAD 121bn
  • Infrastructure AUM:  ~CAD 32bn (including third party-capital)
  • Current infrastructure allocation:  ~20%
  • Long term allocation target to infrastructure: ~25%
  • Infrastructure team: ~70+ people
  • Offices: Toronto, New York, London, Amsterdam, Singapore, Sydney

Why infrastructure?

Infrastructure is an asset class that can see through market cycles. We've delivered between an ~8% and ~12% return in each of the last five years, which demonstrates that the long-term nature and the essential service of infrastructure allows it to continue to deliver those results despite headwinds and challenges.  

The rationale was that infrastructure, as a unique asset class matching liability streams for pension plans, could offer strong, stable, long term investment opportunities. Today we're at CAD 32bn [USD 25bn] of [infrastructure] assets under management. About three-quarters of it is OMERS’ capital, and about a quarter of that is capital from other investors.  

How has the infrastructure asset class changed in the years you’ve been actively working and investing in it?  

The risk profile of infrastructure assets has changed. Some of the very early investments that OMERS Infrastructure did were in very traditional P3 type investment models. Now, infrastructure can take many different forms and it’s more about it being an essential service, with high barriers to entry, which constitutes a broader definition of infrastructure. Moving forward, I think we're in for a more significant change. For example, transportation as an asset class used to mean roads and airports, and now it can be all about e-mobility or autonomous vehicles.  

Recently the risk spectrum has widened. It's not just that there are more investors who are looking at core-plus or value-add (IRR of over 10%).  Now there are also investors who are looking at super-core investments, with an IRR between ~6.5% and 8%. That differentiation allows investors to tailor their strategies a little bit more.

What’s OMERS’ infrastructure strategy from a risk perspective?

Our focus is more on the core to core-plus, and perhaps even value-add range. We built a platform where we want to take a more active asset management approach and really be able to drive value creation. By investing in assets that have a little bit more risk/return opportunity, we think we can deliver better results. We also think that we're very well positioned to acquire portfolio companies that may be core to a core-plus risk return range and de-risk them so that they then ultimately can fit into the super-core asset class.  

We tried to align around five global themes to shape the portfolio for the future: energy transition, mobility, connections, community, and natural systems.

Leeward Renewable Energy, one of our renewables platforms in the US, develops renewables power projects. As such, we wouldn't think of it as super-core. But once the renewables assets are developed, we hope that they could be considered more in that super-core range. That's a good spot for us to participate in, focusing our new investment opportunities in that mid-to-upper end of the risk spectrum, and then de-risking them.

We always go into an investment thinking about it from the perspective of being indefinite holders of the asset. It's an important discipline around really understanding what risks there could be for that asset in the long term. We certainly have also sold assets, so we can't and we don't always hold them indefinitely. And more and more we will look at active strategic capital rotation as something that we will undertake. But it's very unusual for us to go into an asset thinking about a specific short term time horizon.  

What’s OMERS strategy going forward?  

We did a strategy reset at the beginning of last year and tried to align around five global themes to shape the portfolio for the future: energy transition, mobility, connections (which is how we think about digital infrastructure), community (which is how we think about social infrastructure) and natural systems.

Historically, we have had a higher portion of our portfolio in energy than probably any of those other themes. On a go forward basis, we will leverage the expertise that we have in the energy space to continue to make significant investments into the energy transition space.

But part of structuring the strategy around those five themes is to make sure that we're thinking as broadly as we can about the potential opportunities that might fit our definition of infrastructure. Last year, for example, we did a number of deals in the renewable space, building on the energy transition theme. We acquired a new distributed solar business in the US, we acquired a renewables platform in India and our renewables platform in Australia. Then we also made our first community investment in Europe with the acquisition of Amedes, which is a German labs business.

We’re keen to invest in some other parts of Southeast Asia where we think we can benefit from the higher potential growth.

The reason for aligning our strategy to these new themes is to try to be as open to different types of investments if they meet our definition of infrastructure: they're essential services, they have high barriers to entry, they have a long-term nature to them.

Our portfolio is more or less evenly split between Canada and the US, and Europe. We've got just less than 10% of the portfolio across Asia-Pacific, predominantly in Australia. But we also have two investments in India. Going forward, we would like to increase our overall exposure to Asia-Pacific. We’re keen to invest in some other parts of Southeast Asia where we think we can benefit from the higher potential growth.

What do you look for in partners and co-investors?

We've always been open to thinking through who would make the best investment partner on each particular asset. In some cases, we would love a strategic partner who has deep sector experience in a particular area, [or] a local organization, and in some cases, other institutional investors like us.

Unlike most pension plans, OMERS manages third party capital as well. How does the structure work?

We look for strategic partners who have alignment with us in terms of wanting access to high quality large infrastructure investments, but don't have the direct investment platform or capabilities that we do.  

When OMERS Infrastructure started investing capital on behalf of others, we had the view that the demand for access to the infrastructure asset class was going to continue to grow and equally there was going to be an increase in need for more private investment in infrastructure.  

Managing capital on behalf of other investors allows us to take bigger positions in larger investments and ultimately to make sure that we have significant governance, rights and influence so that we're able to drive more value in applying our active asset management approach.

Have you ever taken into consideration indirect investments?

Not seriously. We've always been able to leverage our own platform to get the exposure that we want to the asset class. Our perspective is we can deliver more value for OMERS that way.