Earlier this year, a car park on Toronto’s Front Street West started to turn into a building site, as preparations began for the construction of an 840,000sqft, 46-storey office tower. In April, Canada’s TD Bank signed a long-term lease to occupy 33 floors of the building that is scheduled to open in a little over three years’ time.This is a great interview with IMCO's CIO who I met at the end of March before covering the Toronto CFA Society's annual spring pension conference.
About 300 metres away, at 200 King Street West, preparations of a different kind have been taking place – although the ambitions at the recently established Investment Management Corporation of Ontario (IMCO) are similarly lofty.
IMCO is one of the two major investors in 160 Front Street West, alongside developer Cadillac Fairview. It has also recently emerged as a new major investor on the block, with C$60bn (€40bn) in assets under management and plans to grow significantly bigger.
The private-markets capabilities of IMCO will be an important element in its business model, since greater scale and resources can add advantage in asset classes like real estate and infrastructure.
Jean Michel, who joined IMCO as CIO last year, anticipates that private markets will come to make up, on average, about 40% of clients’ portfolios in the future, up from about 30% today.
“We need to be relevant for our clients,” he says. “And so that means that we need to do things that [both of] our potential and current clients could not have done by themselves.”
OPB and WSIB are expected to be the two largest investors to join IMCO, averaging C$30bn of assets between them. The third and fourth entrants are more likely to be around the C$1bn mark, which is where IMCO’s potential to aggregate and create benefits of scale will be very attractive.
The plan is to officially open to new clients by the end of the year. “We’re still on track,” says Michel. “There are already clients knocking on the door. So the first two or three clients, they should happen relatively quickly.”
IMCO’s potential client base is limited to the province of Ontario, but there are about 90 institutions with some C$90bn of assets in total. “That’s the market we’re after,” Michel says. “We believe that over the next three, four, five years, we can get maybe 20% of that. And over time, if we get to one third of those becoming our clients, that’s going to be a very real success.”
Taking on board a third of the targeted market would theoretically increase IMCO’s assets under management by 50%.
“Nobody will be forced to join us. So we need to sell our product as [would] anybody else. We need to be relevant enough so that they’re going to join us.”
The ability to provide private markets, particularly real estate and infrastructure, will be key. IMCO’s strategy is to build its in-house capabilities to become more of a direct investor in both asset classes.
OPB is already an established direct investor in the Canadian real estate market, and IMCO is looking to use this position as a launch pad to become a more international direct investor.
“And when we say direct, it is like true direct – not co-investments, where you originate and do your own transactions,” Michel says.
Meanwhile, IMCO’s plans for infrastructure are less about global diversification – its existing portfolio is already well diversified – but about becoming more direct and moving away from a reliance on funds.
“This portfolio will also will evolve over time, but not necessarily in terms of sector,” he says. “It’s already a well-diversified portfolio, but for now relies a bit more on funds.”
Although IMCO has ambitions to follow the so-called Canadian model (as characterised by large investors like Canada Pension Plan Investment Board and Ontario Teachers Pension Plan), Michel stresses that becoming a more direct investor does not mean it plans to invest on its own.
“It doesn’t mean you do that without partners,” he says. “A partnership for us is very important.”
For example, IMCO is close to finalising its first partnership to invest in the US office market, partnering with a company that is capable of developing assets there.
“It’s not a fund; it’s a true partnership,” Michel says. “On each transaction, we’re going to be involved very early stage in everything they’re going to be doing with us. And we have a governance right to say no on everything they are going to propose.”
This is likely to be followed by a similar arrangement targeting the multifamily market in the US.
Michel says the US office partnership epitomises IMCO’s strategy and approach. “We’re going to be a hybrid [of] having direct-investment capabilities but still using partnerships,” he says. “And for that to work, we need to have partners that are willing to be slightly different, to work with us slightly differently.”
He adds: “So for me it’s very important: if you have a better team, you can be a better partner. If you can be a better partner, you will have better partners. It’s as simple as that. So it’s really part of the strategy to create a lot of partnerships within each asset class and treat them well.” Michel looks at partners as “an extension of my team”.
IMCO is likely to make announcements this year, including a new head of infrastructure and the new real estate partnerships in the US. European real estate “is clearly in the pipeline also”, Michel says.
But it is worth considering that IMCO’s ambitions to drive further into private markets and real assets comes at a time when asset prices and market competition are at record highs. It is a common observation that has not escaped the attention of IMCO.
Michel says the direct partnership model has been devised with an understanding that over the next five to 10 years “it’s going to be more difficult to create value and create good investments” in real estate and infrastructure. “The current pricing is already really high, so there’s no obvious liquidity premium out there,” he says. “So you really need to go there and create your own value. With the amount of competition that we have there, just to go and be in the asset class won’t be enough.”
He adds: “In real estate, something that does work well – and we continue to do – is the build-to-core type of strategy where you enter more in the development phase… you still have a significant amount of core in your portfolio, but you never buy core – you always buy in the development phase, and you keep those assets for the long run after that. So at least you participate in the value creation in the development basis.
“It’s something we want to bring in the infrastructure portfolio also,” he says. Here IMCO will look to obtain “more value” from transactions rather than “just buying core assets when they are already fully valued”.
For real estate, the challenge will also be to reweight the portfolio away from Canada, where some 80% of the portfolio currently resides.
“The ability to do direct transaction is there, but most of that has happened in Canada, and so we need to export that and be more international,” Michel says.
“The US and Europe are the two markets that we’re going to look at first to greater diversify the portfolio. And there’s a sector transformation also that we need to happen. We’re too heavily invested in the retail market. We want to significantly decrease that.”
Multifamily and industrial property in the US will be top targets for redeploying sale proceeds. “We want to reduce our Canadian exposure and reduce our retail exposure,” Michel says. “But it’s a challenge, obviously, for us. When you want to sell assets, it’s always a challenge. It’s easier to buy than sell.”
Jean is a really nice guy and very smart. He has tremendous experience and isn't afraid to forge his own path when it comes to investing in public and private markets.
IMCO is growing and will take on new mandates which it will compete for but before IMCO's CEO Bert Clark and Jean Michel sit in front of prospective clients to entice them to join the fund, they need to make sure everything is in order.
This is what has been going on at IMCO over the last year. They have hired key people in key positions, are bolstering up all their systems, and are now prepared to go solicit funds from new clients.
Basically, the only captive clients IMCO has are the two founding members, OPB and WSIB. Every other client/ member will need to be earned through hard work and results.
The article above states IMCO will be targeting 90 institutions with some C$90bn of assets in total, and if they manage to garner 30% over time, that will be a 50% increase in assets.
The whole reason behind aggregating OPB and WSIB was to enjoy the benefits of scale. If more institutions join, which they will, IMCO will fast become one of the major large pension funds in the country, which it already is.
And with ramp-up almost complete, Jean Michel and his team are getting ready to execute on their investment strategy across public and private markets.
I say this because after my last comment on IMCO's building blocks, I received a critical email from someone stating this:
Nice summary of the goings on, but I must say I see no signs of any type of differentiation, or identification of where this organizations strengths are, or where they would like them to be. I also see a very centralized approach, and probably too many cooks in the kitchen. I wish them well, but as yet don't see much learnings coming from what they are doing. It is all still aspirational. The team has good resumes, but very conventional ones, and does not show any sign of risk taking.I didn't think this was a particularly fair or accurate comment and let this person know that IMCO has been hiring key people with exceptional resumes and moving as fast as possible to get to the point where they can now begin to execute on their strategy.
Obviously, private markets are going to be critical to the fund's long-term success. Nicole Musicco is the head of that team and Jean Michel gave us some insights into the differentiating strategies IMCO is going to adopt in privates.
In particular, IMCO is building its in-house capabilities to become more of a direct investor in real estate and infrastructure. “And when we say direct, it is like true direct – not co-investments, where you originate and do your own transactions,” Michel says.
But Jean also states that "partnerships are very important" to them and on each transaction, they’re going to be involved very early stage in everything partners are going to be doing with them, making sure they have the right governance.
What does this mean in practice? Jean states they are finalizing a partnership to invest in the US office market, partnering with a company that is capable of developing assets there.
I'll tell you what went through my mind, they might get into a partnership with developers who do logistic warehouses in the US, Europe or Asia, taking on some construction risk, and then own a big chunk of these logistic warehouses.
Remember, 80% of the real estate assets are in Canada, so the fund needs to diversify outside Canada. That brings me to another thought, the record $7 billion partnership deal BCI's QuadReal did with RBC GAM to diversify its real estate holdings outside Canada.
Is IMCO going to do a similar partnership? I don't know but that was a great deal to diversify BCI's real estate holdings outside Canada.
In infrastructure, IMCO has a well-diversified portfolio but it's mainly through funds but they are soon going to announce a head of infrastructure who is going to be doing more direct deals.
There too partnerships are the key. IMCO has the differentiated capital to do things others cannot do. For example, they can literally be a big seed/ anchor investor for an infrastructure fund, enjoy lower fees and no carry, and gain very valuable knowledge transfer as they initially co-invest alongside this fund and eventually move to 100% purely direct investments.
In other words, before you can run, you need to crawl and walk and that goes for IMCO. It's in a great spot to take a unique approach which will allow it to leverage off its key relationships with partnerships/ platforms but in order to gain the most out of these relationships, it has to be able to dictate the terms of the partnership (you can't do that when investing in a large commingled fund).
This is what Ontario Teachers' did in private equity. Initially, it was investing mostly through funds and now funds are a small percentage of total assets as it has developed an extensive co-investment program and even does some purely direct deals.
Jean Michel understands all this. As he states above: “[..] for me it’s very important: if you have a better team, you can be a better partner. If you can be a better partner, you will have better partners. It’s as simple as that. So it’s really part of the strategy to create a lot of partnerships within each asset class and treat them well.”
Importantly, he looks at partners as an extension of his team and that is the key to develop direct investing capabilities at IMCO (across public and private markets).
Lastly, this week, IMCO appointed Kathy Jenkins as its new CFO:
Ms. Jenkins was formerly Managing Director of Corporate Finance at Canada Pension Plan Investment Board (CPPIB). Previously, she was Senior Vice President and Chief Financial Officer of Global Wealth Management and Insurance at Scotiabank; Senior Vice President of Finance at Fairmont Raffles Hotels International, and Vice President of Retail, Wealth and Infrastructure Finance at CIBC.What a great hire, one of many, and I'm sure she will be a great asset to the organization.
Below, some clips from the Milken Institute Global Conference which took place earlier this week. The first is on the hedge fund shakeout and the second is a discussion on global economic conditions featuring Christine Lagarde and others. Great insights, well worth watching.