Water and electricity don’t typically make for a good pairing, but Teachers’ Private Capital, the private equity arm of the Ontario Teachers’ Pension Plan, has no qualms about rolling the two into its infrastructure portfolio. Teachers, in the span of a couple days, agreed to acquire power plant operator InterGen NV in a $1.75 billion deal and just two days later made a C$615 million investment to acquire a stake in the publicly held Northumbriam Water Group plc.
Teachers is no stranger to the infrastructure space. The pension plan launched an initiative to invest in the sector in 2001, and since that time has committed almost C$3 billion to infrastructure investments. Within the space, Teachers’ main areas of focus include toll roads, pipelines, gas distribution, electricity transmission and airports.
The attraction to infrastructure is rooted in its stability. On its Web site, the pension plan compares its infrastructure investments to real-return bonds, citing the strong cash flows derived from the assets, as well as the low risk and reliable returns. James Leech, a senior vice-president at Teachers, said that because of this, the pension plan approaches infrastructure with a long-term mindset, identifying that it will hold onto these investments for 15 years or more. Among its more notable infrastructure deals, Teachers acquired the transmission assets of TransAlta in 2001 and last year acquired the gas distribution networks in Scotland and Southern England from National Grid Transco.
“The theme behind these types of assets is that they have a very low volatility and very consistent rates of return,” Leech says, noting that many infrastructure assets essentially have a built in monopoly either through regulation or geography. Because of this, he says, “The whole infrastructure space has become a hot area for pension funds, and everyday we’re seeing more and more people getting into the asset class.”
In the acquisition of InterGen NV, Teachers’ paired itself with AIG Highstar Capital, the infrastructure fund of American International Group, and the pair is buying the assets from Royal Dutch/Shell Group and Bechtel Group. Teachers and AIG is acquiring 10 facilities in all, located in the U.K., the Netherlands, Mexico, the Philippines, China and Australia. Shell and Bechtel, meanwhile, will hold onto seven plants located in the U.S., Colombia and Turkey.
Teachers and AIG last year acquired Northern Star Generation, a collection of ex-El Paso Corp. power plants, in a deal valued at over $700 million. Leech noted that there are not yet any plans to merge the two entities, Northern Star and InterGen, although he would not rule out such a move in the future.
The Northumbrian investment, meanwhile, gives Teachers’ a 25% stake in the water company. Suez S.A. is the selling party in the deal. Northumbrian focuses on the regulated supply of water and the provision of wastewater services in England. The company provides water and sewerage services to more than 2.5 million people located in and around northeast England and water services to people in the southeast area of the country.