AIMCo’s investment strategy seeks upside on market turn
After sitting on the sidelines when it comes to energy investment, AIMCo has now completed four related deals since November — the latest a $500 million US investment in Texas-based Howard Energy Partners.
In recent months, the Alberta Investment Management Corporation has made several investments in the energy space spanning the renewable, traditional exploration and development, service and midstream sectors.
On Monday, it announced a US$500-million investment in Howard Energy Partners, a midstream company based in San Antonio, Tex., through the purchase of preferred shares in two tranches: $300 million now, with a commitment to buy another $200 million.
Unlike recent deals involving TransAlta, Calfrac Well Services and Pine Cliff Energy, Howard Energy Partners is a private entity, meaning the normal level of disclosure — such as the coupon rate on the preferred shares, factors that would trigger a conversion, and into which securities — was not disclosed.
After sitting on the sidelines when it comes to energy investment, AIMCo has now completed four related deals since November, when it ponied up $200 million for an eight-per-cent interest in TransAlta Renewables. That was followed by a $200-million June investment in Calfrac and $30 million in Pine Cliff this month.
So what does this say about AIMCo’s strategy?
Is the provincially owned organization showing confidence in the energy space? Changing its investing philosophy to support more Alberta-based enterprises? Or is it simply seizing opportunities in a beaten-down sector?
“There is no change in our philosophy or our mindset around where we invest or how we invest. What you are seeing and perceiving as a shift is a relative shift in where we see, what we hope, are positive, risk-based rewards for investments,” Kevin Uebelein, AIMCo’s chief executive, said in an interview.
“In other words, in periods when the energy sector is running on all cylinders, prices are very high and you are unlikely to see AIMCo playing because if we are doing our job well, we are looking for value and upside opportunities elsewhere. Then it’s a real win-win for us.”
Whether its recent interest in the energy sector is a signal the sector has reached bottom, Uebelein says AIMCo is not in the business of making such calls. Its investments are instead based on the potential to meet the fund’s return objectives.
This means a company such as Calfrac has a service and a technology that AIMCo sees as competitive on a global basis. There must also be confidence in the management team and a strong balance sheet so the combination of capital and a recovery in energy markets will enable the company to gain market share.
“We are not trying to call the market but we are trying to be opportunistic in who we back, so they can be prepared and benefit when the market turns,” said Uebelein.
The important piece to this is how the deals are structured. The Calfrac and Pine Cliff deals involved a component protecting AIMCo on the downside, while also providing exposure to the upside.
“What you see are hybrid structures that we think help give management a stronger balance sheet but one that give AIMCo both the downside protection of a debt hybrid but a lot of upside potential,” said Uebelein.
In recent years, AIMCo has done an impressive job of creating value for Albertans, posting a 9.1-per-cent return on total assets under management in 2015 through a number of investment strategies that involved public and private, debt and equity markets, private equity funds and infrastructure.
There is a growing chorus that AIMCo should be supporting Alberta’s diversification efforts through investment.
However, that’s not something Uebelein is interested in, for a number of reasons.
Chief among them is the legislative mandate of AIMCo is to optimize investment returns on a risk-adjusted basis. Investing in early stage companies lacking earnings and/or cash flow presents a huge risk to Albertans.
Uebelein said he’s loath to have AIMCo step beyond that mandate, no matter how laudable the goal.
“We want to be part of the rich ecosystem of capital deployment in Alberta but not part of the seed capital, early-stage venture capital investors,” he said.
With more than $90 billion of assets under management, adding value to the portfolio requires investing in size, which isn’t as likely with startup ventures.
The NDP government’s October budget did include allocating $540 million from the Heritage Savings and Trust Fund toward “growth-oriented companies.” To date, about $100 million has been put toward that goal, though AIMCo is clear the government has had no influence over how those investments are decided.
If there is one elephant in AIMCo’s portfolio it’s exposure to Calgary real estate, even if it is weighted toward Class A space.
“That same portfolio of properties buoyed our returns on the other end of the cycle and we are hoping our other illiquid investments and infrastructure and private equity are the ones that carry us through this point in the cycle — because it isn’t going to be Calgary real estate.”
AIMCo’s ability to make the returns it has for Albertans is testament as much to the team it has built and retained as it is to the governance of the organization.
One can’t help but think of how big AIMCo could have been today with the benefit of current governance practices and if past governments had followed the vision of former premier Peter Lougheed when the Heritage Fund was established in 1976.