Overvalued. Expensive. Competitive. This is how the alternative investment landscape looks to Leo de Bever, chief executive of pension manager Alberta Investment Management Corp.
The non-traditional asset class, which includes infrastructure, real estate, commodities and other unusual derivative investments, has become a focal point among fund managers in recent years as rock bottom interest rates and uneven markets push investors toward the potential for a bigger payoff.
"Alternatives are not the panacea, you have to know what you're doing and get increasingly more aggressive in managing the asset... That's hard to do for companies that have a lot of money to put to use," he said in an interview Wednesday.
Investing in alternatives worked for about 10 or 15 years, Mr. de Bever said. But with capital pouring in from all directions, "the number of projects you can find to earn those high returns sinks," Mr. de Bever said. He's currently writing a report on the asset class for his board of directors.
To get ahead of the yield-hungry pack of investors chasing the alternative space, AIMCo needs to break out of its traditional investment patterns.
Mr. de Bever recently said no to a deal for Sydney, Australia's ports. They were up for sale through the government of New South Wales and should have offered a return of about 8 per cent – that's plain vanilla for a port project. AIMCo bid on it, but it went to a buyer, who, in AIMCo's view, will only achieve a 6 per cent return. "Is that worth it? It's a good asset, but its an illiquid asset," Mr. de Bever said. "With infrastructure you almost lock yourself in and your first decision has to be your last one."
It used to be the norm that pension plans would invest in products and projects that were available in the market, but on better economic terms than competitors, such as banks. That was a big advantage.
Now, pension plans must leverage their reputations as longer-term, trustworthy investors to create new opportunities. In infrastructure, for example, that would mean investing in "greenfield," or investment sites that are just open land, with no need to remove, remodel or reconstruct anything, said Mr. de Bever. He's less interested in brownfield – land that has already been touched.
And he'd like to make some of that investment in North America.
"There's a potential for about $2-billion of infrastructure development in Fort McMurray, and I've been working with the government to try to make that into viable commercial projects," Mr. de Bever said.
The plan involves building roads and one bridge in a grassy bog land called "muskeg." It's a project that comes with many risks, but could make for a perfect toll road because it's a company town, and most of the traffic is trucks.
Building projects from the ground up takes more expertise, management and foresight, though. As de Bever said: "When you take development risk, you get a better return, but you better know what you're doing."
So the big question for AIMCo, and other institutional investors such as pension plans, is whether to try to buy other platforms that can do this kind of building and development. That's what the Ontario Teachers Pension Plan did when it purchased commercial property developer and manager Cadillac Fairview Corp. for $2.3-billion in 1999.
"It's probably not a bad time to do that [sort of thing], because a lot of private equity and venture capital firms would probably like to trade some of their 2-and-20 [management and performance fee] model for security of capital," Mr. de Bever said. Otherwise, the pension plans will have to use their non-capital resources – their reliability and long-term investment reputations – to attract partners.
But to stagnate is not an option. "We have to do the next thing, and it's going to be trickier, and its going to require more expertise and more aggressive use of our comparative advantages," he said.