Canada Pension’s Green Team Aims for $2.6Bn a Year: Q&A

By Vandana Gombar, BloombergNEF. This interview first appeared on the Bloomberg Terminal

Canada Pension Plan Investment Board, or CPPIB, has exceeded expectations for its new power and renewables group by investing more than C$3.5 billion ($2.6 billion) in its first year, and is now eyeing annual commitments of around the same scale.

The Toronto-based investor, with total assets under management of C$370 billion, says it will look at “very early-stage” projects and development companies, including opportunities in wind and solar and in India and emerging markets.

Bruce Hogg, head of power and renewables at CPPIB, told BloombergNEF in a phone interview that his almost-20-strong team, formed in December 2017, invested more than expected in its first year. “We found very quickly that we had a differentiated capital product.” He added: “We would like to be doing that kind of potential volume – on average – on an annual basis.”

Q: It has been 12 months since the power and renewables group was set up. What has been your experience so far? Have the targets you began with a year ago been met or been exceeded?

A: The establishment of a dedicated group shows CPPIB’s recognition of the significant growth that has been seen in the power and renewables space, and how significant the capital need is expected to be over the next few years. Our key objective in our first 12 months was to define global and regional strategies, figure out the best fit for our capital in what can sometimes be a crowded market, put together the team, and then move forward to look at opportunities. We exceeded our targets, because what we found very quickly was that we had a differentiated capital product, and that led to us completing over C$3.5 billion of transactions in our first year which is well in excess of what we had thought we would do.

We completed a transaction in Brazil at the very beginning of the year [Votorantim Energia joint venture, C$272 million]. We then picked up on ongoing conversations with NextEra Energy Inc. and bought a portfolio of operating assets in Canada and then, very quickly thereafter, announced the transaction with Enbridge Inc. to buy over C$2 billion of equity in operating and in-construction assets across North America and Europe. So, we literally hit the ground running and never stopped running.

Q: What was the target you had in mind?

A: It was a much smaller target for the first year as our focus was on just getting the business up and running. However, at CPPIB, we are careful not to have annual investment targets. What we try and do is assess what we think we can find in the market that will achieve good risk-adjusted returns for us and focus on executing on that portfolio of opportunities. What we did in the first year exceeded our expectations. Now that we are up and running, we would like to be doing that kind of potential volume – on average – on an annual basis. Some years we will do a lot, and some years we might do nothing.

Q: What is the strategy that has been finalized by the power and renewables group? What are the kind of investments you prefer and the kind you avoid?

A: At CPPIB, given our scale and scope of capital, we can provide very flexible partnership solutions that are attractive to strategic investors in some cases, or management teams or developers. We have the ability to provide capital in scale at very early stages, so we deliberately set our strategy with the expectation that we will look at very early-stage investment in development projects and development companies.

Secondly, we have the flexibility to fund construction. We can provide levered or unlevered capital and all the types of financing required to support the construction of projects. We also then have significant scale and liquidity, which is attractive for larger operating companies, or integrated companies that might be facing liquidity constraints.

In all these cases, the size of our balance sheet means that we can quickly increase the amount of capital we can provide if a partner or management team sees more opportunity. For example, we are seeing this in India where there is an explosion of new development and construction – our ability to rapidly scale up in those markets, and our appetite to be in emerging markets, makes us quite a good fit.

Take the Enbridge transaction – a large integrated energy infrastructure company based in Canada. It was facing capital constraints given the funds required for its Line 3 expansion [$7 billion replacement and expansion of the line linking Alberta’s oil fields to refineries in the U.S.]. Enbridge was looking to monetize a part of its renewables portfolio, and at the same time find a capital partner that would be able to grow with it once Enbridge got through its near-term liquidity requirement. So, we found ourselves incredibly differentiated. We could very quickly provide the C$2.25 billion Enbridge was looking for across multiple markets and we could enter into a long-term funding arrangement to build out its pipeline of offshore wind projects in Europe. We also have a reputation of being a very good and easy partner. So when we put its requirements against us and our capital, we found that, in the end, we were the only entity that really could deliver.

Q: In these investments that you made, did you get a lot of competition from other pension funds, or private equity investors?

A: We generally stay away from situations where there are multiple funds or investors that can provide relatively undifferentiated capital solutions. We haven’t participated in a number of monetizations, because we find other investors are a better fit. Typically, we’re looking for situations where either we are talking to a management team, or developer, or a strategic partner that is looking for a longer-term capital solution. In some situations, we have done things where there may not be a long-term relationship but there is an immediate capital requirement that we can fulfil. The portfolio we bought from NextEra in Canada was a situation where we were able to provide significant capital in a very tight time period. It is a competitive market, and people are always looking at alternative capital sources. That said, we generally find that in most of the transactions that we look at, by the end, it is typically just us or maybe one other investor.

Q: At a given point of time, how many investments is the power and renewables group looking at? Just wanted to get an idea of investment ratio: is it 10 you look at and pick up one or five you look at, and finalize one, or do you just begin dialogue on investments you are 90 percent likely to finalize?

A: I wish it were that easy – it is more the former. At any point of time, we are actively looking at opportunities across the globe – in Latin America, North America, Europe and India. We are also spending more time in Asia-Pacific. We identify situations or partners that we think are interesting, and we will then prioritize them. While we are monitoring a lot of things, and making sure we are building a forward pipeline of opportunities, at any point of time, we typically focus on executing no more than two-to-three transactions, and that is the constraint for us.

Q: Renewables – storage – electric vehicles, they are all interlinked. Was the Power and Renewables group involved with the recent investment in ChargePoint [electric vehicle charging network] as a part of a $240 million funding round led by Quantum Energy Partners?

A: The ChargePoint acquisition was done by separate teams that focus on earlier stage technologies, but there is increasingly an integrated approach at CPPIB to the energy transition – we think the transition to electric vehicles will happen. Our group’s focus is mainly on the generation side, and on renewable energy and storage. Our thematic investing group broadly looks at big evolutionary changes – be they demographic or technology – and takes a firm-wide perspective of things that will be important going forward. There is another group which looks specifically at newer technologies, innovation and services around energy.

It sounds a little bit complicated from the outside in, but there is a concerted effort as a firm to make sure that CPPIB has one body of knowledge and one body of experts – potentially working from different groups – who think about the energy transition on an integrated basis. So we decide – as a firm – which investments related to renewable energy, storage or electric vehicles are likely to yield the best results and which investment group and type of investment is the best fit: it could be equity, it could be credit, it could be public equity, or could be private equities. It could also be venture capital.

Q: In the whole theme of energy transition, which we track at BNEF too, what do you think could be the big surprises?

A: The biggest thing we are focused on is technology. For me, when I look at the energy transition and evolution in North America versus developments in India and other emerging markets, we are seeing a bit of “leapfrogging”. Different jurisdictions might move very, very rapidly and end up with an energy supply structure which will look very different than the more established energy networks in say North America or Europe, which were built based on technology of the time.

Q: How do you define renewable energy? What sectors are on the blacklist? Are you open to investing in large hydro projects?

A: We have a broader sustainable investing and climate change framework that we think about when making our investments. We think there are certain technologies, such as renewables, which will – for the near term – take the lion’s share of new capital investment. We think that is where we can best provide capital solutions and generate returns for our investors. We don’t draw a black line.

Our focus is typically market-driven. We expect the energy mix to be quite broad. In India for example, there is an evolution from thermal to renewable energy, but the power mix will remain diversified for a long time. I think we are cognizant that, to generate the right investment returns, we are going to have to invest in broader more diversified portfolios.

Q: There were recent reports of CPPIB being interested in acquiring the renewable energy assets of non-banking finance company IL&FS [Infrastructure Leasing & Financial Services Ltd.]. What are your plans for India?

A: While we do not comment on rumors and speculation on specific companies, I can tell you that we have been spending a lot of time in India. We are looking at a number of opportunities. We are figuring out what is the right fit for our capital. We are not in a rush. Given the scale of India – currently and expected – we would like to be a significant investor if we can find the right opportunities.

Q: What is the typical holding period for your investments?

A: We have the flexibility to effectively hold-to-maturity, and we also look at shorter term investments when they make sense. It is important to have a long-term perspective in markets like India, where there will be volatility, and our ability to take a long-term view is incredibly advantageous.

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