OMERS chief: infrastructure is ‘almost perfect’ asset class

Michael Nobrega also said at a speech in New York that the 2-and-20 compensation model no longer works and active infrastructure investing is the wave of the future. He urged pensions to make allocations to the asset class and to make them large enough to invest in big-ticket assets.

Infrastructure is an “almost perfect” asset class for large pension funds and active investors who wish to take control of their investments will “inevitably” find their way to a short-list of Canadian pension funds to partner with in infrastructure investing.

That was the message delivered today by Michael Nobrega, chief executive officer of the C$60 billion  ($56 billion; €38 billion) Ontario Municipal Employees’ Retirement System at the World Pension Forum in New York City.

Michael Nobrega

In prepared remarks made available to InfrastructureInvestor, Nobrega mentioned infrastructure assets’ inflation-adjusted revenue streams as an “ideal match” for pension funds that pay inflation-indexed benefits. This was one of many reasons why they are an “almost perfect” investment for pension funds, Nobrega said.

Furthermore, pensions are the “ideal partners” for infrastructure investing because their prudent practices and long-term investment horizons make them trustworthy buyers in the eyes of governments who wish to sell their assets.

To take advantage of this fit, Nobrega urged investors to take an active approach by joining an ad-hoc investment consortium or a programmed co-investment alliance.

Our proprietary research shows that large infrastructure assets make a substantial difference to investment returns

Michael Nobrega

“Should you take this approach,” Nobrega said, “your path will inevitably lead to a short-list of Canadian pension funds that actively manage infrastructure investments.”

OMERS is a member of this short-list. The pension has been investing in infrastructure directly since 1998 through its subsidiary, Borealis Infrastructure. Other Canadian pensions that have direct investment programs for infrastructure include the C$69 billion Alberta Investment Management Corporation and the C$87.4 billion Ontario Teachers’ Pension Plan.  Canada’s C$116.6 billion national pension fund, the Canada Pension Plan Investment Board, also invests in infrastructure assets directly.

Though he did not say so in his speech, Nobrega is currently in the process of creating a programmed co-investment alliance for pension investors in infrastructure and real estate assets. The Global Strategic Investment Alliance would piece together four large-scale pools of pension capital around the world to jointly invest $20 billion over five years in what he calls “alpha assets”: large infrastructure assets requiring more than $500 million equity capital.

“Our proprietary research shows that large infrastructure assets make a substantial difference to investment returns,” Nobrega said at the World Pension Forum. “The difference between investments greater than $500 million and those of $200 million or less is 200 to 300 basis points annually.”

“Think what that means over 20 or 30 years to your plan members’ retirement security,” he added, urging pensions to make an asset mix allocation to infrastructure and to make it a large allocation.

In an interview with InfrastructureInvestor two weeks ago, Nobrega said that he found the US pension universe to be “fractured” with respect to infrastructure because many pensions have yet to make an allocation to the asset class, while those that have done so have made them quite small.

For example, CalPERS, the US’ largest pension, has a 5 percent allocation to inflation-linked assets, within which infrastructure can take up to 3 percent of the overall portfolio value. OMERS, by contrast, has spent the past year almost doubling its allocation to infrastructure, with 16.1 percent of its portfolio now dedicated to the asset class.

As a result, OMERS has partnered with private equity firm Yucaipa to create a feeder fund that would aggregate pension capital here in the US for participation in the Global Strategic Investment Alliance, Nobrega told InfrastructureInvestor.

He suggested an a alliance of this sort was the best alternative to investing in infrastructure passively through managed funds, which have often charged compensation of 2 percent in management fee and 20 percent performance fees on investments.

“The 2 & 20 private equity model . . . and the ownership of infrastructure as a relatively short-term over-leveraged profit play . . . has fallen out of favour,” he said, adding that “active infrastructure investing is a proven idea whose time has come”.