Well played, pension-fund keeper
With its recent acquisition of a forestry company in Australia, it’s only a matter of time before the chorus of “why is the Alberta Investment Management Corporation investing our money overseas instead of in the Alberta energy sector?” begins. Good question. The returns being posted — especially in the oil side of the business — have continued to be eye-popping and expectations are that the trend will continue.
The line of reasoning continues something like this. As the keeper of Alberta’s pension funds, doesn’t it make sense to make as much money as possible — and therefore capitalize on what’s happening in your own backyard, where you know the players behind the companies?
The answer is both yes and no.
Obviously the goal of the AIMCo is to grow the value of the assets under management — no easy feat for a fund of more than $70 billion.
The other side of AIMCo’s responsibilities is to ensure the pension funds it manages will be able to meet their long-term liabilities; it’s not enough to generate the growth, the cash flow itself has to reasonably match what needs to be paid out in any given year.
And that’s always one of the starting points for AIMCo’s CEO, Leo de Bever, when he is presented with an investment idea.
“We are interested in opportunities like these because we have different asset classes and pension liabilities that we have to meet. This particular investment doesn’t come with exposure to extreme volatility on the upside or the downside,” said de Bever.
It was the prospect of capitalizing on a distressed opportunity, as well as its ability to generate cash, that piqued the interest of de Bever and his staff.
In a nutshell, AIMCo has partnered with the Australia New Zealand Forest Fund and bought the timberland assets of a company down under called Great Southern Plantations for $415 million AUS.
The deal was attractive on a number of levels.
First of all, de Bever likes the forest products sector. He was chairman of Hancock Timber for two years during his stint at Manulife Financial and has been investing in forest products for the better part of a decade — even as that sector has endured some very difficult times.
The interesting thing about wood as an investment is that it is the one commodity that holds its value through inflationary periods.
This is one reason de Bever likes it.
But obviously it doesn’t stop there.
This specific deal — which in aggregate covers an area half the size of Prince Edward Island — is interesting because the company was in receivership — the result of a government-led investment scheme aimed at boosting the number of trees being grown Down Under. Inves-
This . . . investment doesn’t come with exposure to extreme volatility AIMCO CEO LEO DE BEVER
tors bought the right to the trees — not the land — and received a tax credit in the process. As often happens with these things, the prices paid were too high, too much debt was piled on and when 2008 presented itself, the result was bankruptcy.
What makes this opportunity different than, say, something similar in Canada? First, not possible. The ability to buy that amount of land simply doesn’t exist. Second, AIMCo got it for about 60 cents on the dollar. Third, as it stands today, Australia remains a net importer of fibre. In addition to being used for paper and other products, the wood grown in these forests are used to make pellets for use as fuel; the use of biomass for fuel is rapidly growing in Europe. Fourth, the land itself, once the existing timber is harvested, can be used for growing other agricultural products. Given Australia’s proximity to Asia, it’s not hard to figure out where the potential lies.
Also making the deal attractive is the potential for further consolidation of the forest products industry in Australia, in which AIMCo could also play a role.
Roll it all together and in the world of investments-peak, the assets purchased have long-term ‘optionality’ because it will take time for the timber to grow and be harvested.
While it remains curious that AIMCo is going offshore for commodity-type investments, when there is arguably plenty to choose from closer to home, diversifying risk by investing beyond one’s own borders is an important part of any investment strategy.
In the current context, there is much being written these days about Australia and how it has managed to shift its trade in a timely manner to the growing markets; with its focus now on Asia, AIMCo stands to benefit from Australia’s trajectory.
AIMCo, in fact, is doing what needs to be done on a broader scale by Canadian companies in terms of positioning themselves to take greater advantage of the growing markets overseas, not to mention diversify sovereign and sector risk.
In addition to Tuesday’s deal, the fund bought a 50 per cent interest in a Chilean toll road running through Santiago in December and holds interests in ventures south of the border and in Europe.
For de Bever and his team, being successful is about staying one step ahead of what is taking place today and investing in companies that will feed into longer-term trends in five, 10 or 15 years.
As de Bever put it, it’s not unlike what Wayne Gretzky was so good at.
“He was good at anticipating where the puck was go- ing to be, not where it was.”
Everyone knows how well that worked out for the legendary ‘99’; one hopes that de Bever’s focus on where the global economy is going — not just where it is — and investing accordingly will yield similar benefits for Albertans.
DEBORAH YEDLIN IS A CALGARY HERALD COLUMNIST DYEDLIN@CALGARYHERALD.COM