Latin America offers good opportunities for long-term infrastructure investors such as retirement funds, says Andrew Claerhout, who leads the infrastructure group at the Ontario Teachers’ Pension Plan. But it is important to keep an open mind on the shape of those investments — and where to make them, he says. 

Ontario Teachers’ made its first investment in Mexican infrastructure in June when it teamed up with the Canada Pension Plan Investment Board (CPPIB) and Mexican infrastructure company IDEAL to create a toll road partnership. Ontario Teachers’ took a 20% stake in an infrastructure company controlled by Mexican magnate Carlos Slim to operate Autopista Arco Norte, one of the largest federal toll road concessions in Mexico. CPPIB holds a 29% stake, with IDEAL holding the remaining 51%. Together the two pension firms contributed more than $1 billion.

Ontario Teachers’ took a step further into the Latin American market in July. Alongside another Canadian pension plan, PSP Investments, Ontario Teachers’ bought Santander’s stake in Cubico Sustainable Investments, a London-based energy and water infrastructure

company with wind, solar and water infrastructure assets across eight countries in Europe and Latin America, including Brazil, Mexico and Uruguay. The two pension funds and Santander launched Cubico in May 2015.

Claerhout discussed his views on the region, including why Colombia is not the sweet spot and how to play Brazil, to LatinFinance in August. The following is an edited transcript of the interview.

LF: What was attractive about the Mexico deal? 

AC: We think there is a lot of opportunity as the economies continue to grow and as the existing free roads continue to get more congested, so Latin American transport or roads is a broader theme we’ve been exploring. Arco Norte was also very attractive because it is a bypass of the city of Mexico City used predominately by trucks that are moving goods either from the south to the north or vice versa. The location and purpose of the road made sense to us. 

LF: How does the partnership work? Are co-investments likely to be a model in the future? 

AC: We became investors with [CPPIB] in Chicago Skyway earlier this year, which is another toll road asset in Illinois. This was another opportunity to partner with CPPIB. Is this a sign of things to come? No. This is really a sign of us continuing to execute a strategy that looks to form partnerships where those partnerships make sense. 

We evaluate them in terms of aligned interests, views of what can be done with the business, in terms of how long we want to hold the business and how we want to work from a governance standpoint. 

CPPIB checks all of those boxes. Partnering is an option; it’s not an obligation. We don’t need to be a controlling shareholder. We’re happy to share if it makes sense. 

In terms of the Arco Norte toll road, what first attracted us to this was the potential to partner with IDEAL and Grupo Slim. When we look to do investments in emerging markets, and in any new market we don’t have experience in, we tend to try to pick a partner first, then look at the deal attributes. In terms of being able to work with the Slim organization, that was something we thought would be very attractive. 

LF: Are there any other projects in Mexico that have caught your interest?

AC: Part of the reason that Mexico is one of our core markets is because it is a positive business environment, it has strong macroeconomic fundamentals and it’s a relatively mature market for infrastructure. There are a number of infrastructure assets there that pique our interest. There are many reforms that are happening in Mexico. There is a large-scale privatization program around the energy sector to bring more foreign capital and more foreign know-how into Pemex. It’s an interesting market for us. We like transportation assets, so I think you’ll continue to see us look at transportation assets as well as things like power generation and the oil and gas sector. 

LF: Looking across the region, what other markets are drawing your attention and why?

AC: We’re quite focused on the Andean region in South America. We’re very West Coast focused as opposed to East Coast focused. If you go down the West Coast — Mexico, Colombia, Peru, Chile — that is where we’ve been spending most of our time. We’ve historically had very large positions in Chile. We’ve been an investor in Chile for close to a decade. So there are other markets that we’d like to demonstrate putting money to work in, including Colombia and Peru. Those are the primary markets. Brazil is a country that is on our radar screen. But Brazil is more complicated. It’s a country that in our mind requires a more opportunistic approach than the others.  

LF: What do you mean by more opportunistic approach?  

AC: One of the issues that I’ve seen in Brazil over the years is that there is a number of uncompensated risks in the country. One of the things we always think about whenever we’re looking at investing in infrastructure is how an infrastructure investment compares to other potential investments we could make in the country. How do infrastructure returns in Brazil compare to bonds that we could buy in Brazil or equities or real estate or any other asset class? This an area where frankly it’s been hard to justify some of the returns we’ve seen in infrastructure in Brazil, particularly if you look at it versus the sovereign long bonds. 

So you have to ask yourself, if I can buy something that has a sovereign guarantee at 12.5%, what do I need to get compensated for illiquid, leveraged equity? It would be materially more than that. So a lot of times there seems to be disconnects in terms of how different assets are priced versus the sovereign long bond. We felt that the equity risk premiums have not been near adequate to motivate us to invest. If we’re going to do something in Brazil, it’s certainly going to be with a local partner. And we’ve seen with the “Car Wash” scandal, choosing one is a challenge. We are taking some time with Brazil. 

LF: Could you participate in the 4G toll road concessions program in Colombia?

AC: The 4G projects are more complicated. The way the procurement process has been set up, it’s better catered to debt providers or construction companies. It just seemed if you were a pure equity provider, that may not be the sweet spot in those roads. I would say, though, that Colombia and Peru have a lot of greenfield opportunities. 

LF: Turning to Cubico, do you see other opportunities in renewables in Brazil, Mexico and Uruguay? 

AC: We do see continued opportunity there. There’s also opportunity for us to grow Cubico away from some of those markets. You can expect us to invest more broadly in the region, but also don’t be surprised if you see us invest in places where Cubico has not invested historically. 

LF: Argentina is getting a lot of attention right now on renewables. Argentine President Mauricio Macri is making a push to attract more investment. Do you think there’s an opening for buy-and-hold investors like Ontario Teachers’?

AC: It’s complicated. Argentina has had a long history of not being very favorable to foreign capital. Certainly with the change of government, they are saying all the right things and trying to do all the right things in order to attract foreign capital. However, I’ll come back to my point that we need to get compensated for the risks we take. We look to develop assets and hold them for the long term. Although Argentina is saying all the right things and Macri is doing all the right things, it’s a place where we’re going to take a wait-and-see approach. 

LF: Chile is making a push to revamp its infrastructure. How do you see the Chilean market? 

AC: There are certainly some opportunities in Chile. What we have found is that given the maturity of the market and how positive the investment environment has been, returns have compressed during the time we’ve been in Chile. Now they’re largely on par with developed markets. We certainly think that as the most developed market of Latin America and given the competition, the returns reflect that. We are glad we invested in Chile when it was not fully appreciated as a mature market by the broader investment community. We invested at a time when it was much less competitive and returns were much more attractive. Now the challenge becomes, given the amount of capital that is there and the returns, is it suitably attractive for us versus some of the other markets we’re seeing in Latin America?

LF: So what’s the next Chile?

AC: That is the question. If I knew I certainly wouldn’t tell you (laughs). LF