Canada’s latecomer LP plots deployment of ‘very significant dry powder’

European infrastructure figures may well be familiar with Peter Martin Larsen. The Dane joined PensionDanmark in 2013, a year after it helped anchor the launch of the now renewables titan Copenhagen Infrastructure Partner. He remained at the group until 2021 as a senior investment director as it grew to one of Europe’s most significant LPs, both in terms of fund commitments and co-investments.

Now, having journeyed about 4,000 miles from Copenhagen, Larsen is replicating that work in Canada. He joined Ontario’s University Pension Plan in September 2021 as senior managing director and head of private markets for a pension system formed two months earlier through the merger of three university pension funds. Larsen’s remit is to build an inflation-protected portfolio for the now C$11.7 billion ($8.6 billion; €7.7 billion) scheme.

And indeed, Larsen is replicating the work. PensionDanmark was among the LPs to back the maiden effort of DigitalBridge in 2019 and in 2022, UPP made its first infrastructure commitment, investing in DigitalBridge’s first core-focused Strategic Assets Fund.

It doesn’t end there. Last October, UPP committed €150 million to CIP’s latest flagship fund CI V, while in May, it announced a co-investment with Arjun Infrastructure Partners in UK rolling stock lessor Angel Trains, a company Larsen previously was a board member of when PensionDanmark invested with AMP Capital.

There is, though, plenty more to come down the track, according to Larsen.

“We’re still looking to increase our exposure to infrastructure,” Larsen told Infrastructure Investor. “So far, across all private markets, we’ve invested or committed over C$1 billion across six fund partnerships and six co-investments, and most of that has been in infrastructure. I think we’ve really seen tremendous opportunities in the current market because we have very significant dry powder where most people didn’t have it and that has allowed us to be a great partner.”

An additional fund commitment and co-investment was announced last month that was not in Larsen’s sphere at PensionDanmark, with UPP’s commitment to the Quinbrook Infrastructure Partners’ recently closed Net Zero Power Fund being accompanied by a co-investment in Rowan Digital Infrastructure, a platform established by Quinbrook in 2020 to develop data centres powered by renewables.

Larsen declined to state how much has been invested by UPP in infrastructure to date or what its specific allocation target is, other than to state “we do have a very significant runway in terms of our targets”. Infrastructure comprised 3.5 percent of UPP’s asset mix at the end of 2023, according to its annual report, up from 2.5 percent in 2022.

What Larsen does envisage is an equal split of fund commitments and co-investments going forward, an uncommon approach for an LP at such a nascent stage, but Larsen stressed that co-investment will be an important pillar of the strategy.

“Co-investments are a strategic focus for us,” he maintained. “The clear benefits are enhanced returns through lower fees and greater control, governance, influence and information. It’s also a better opportunity to align with our targeted exposure, investment horizon and ESG focus. It’s the Canadian model but it’s also where we felt that we have enough size to do it, we have experience and it’s a way for us to build a value proposition to be attracted to new university members as well.”

This will include Larsen’s two other strategic pillars in focusing on the mid-market and partnering with market-leading expertise in sectors such as renewables, transition and digital infrastructure.

“The two ways we would generally try to seek influence is in co-investments, and in a situation like Angel Trains, we can negotiate pass-through information rights and governance rights, as part of a bigger consortium, and sometimes that would be more on a direct basis,” Larsen added. “The other way we see influence is around the mid-market and doing fund partnerships where our ticket size is meaningful and we would typically get an LPA seat, which gives us better transparency, oversight and strategic influence, which again strengthens the relationship with that particular partner.”

The ‘I’ word

Underlying all of this is Larsen’s earlier comment about building an inflation-protected portfolio. Indeed, UPP’s 2023 annual report noted that “the pricing pressure on real estate and infrastructure assets caused by high interest rates provided a good opportunity to build out our inflation-sensitive portfolio”.

That, above all, has driven the deployment. Larsen declined to disclose specific returns being targeted, but said the objective is “Canadian inflation protection and that’s really the role of the asset class”.

As such, he points to Angel Trains as “really critical infrastructure with great downside protection”. He also highlights the renewables and digital focus on Rowan, but stressed the “great downside protection and great inflation protection” of the platform, as well as a partner like Quinbrook. In respect of protecting against inflation, Larsen sees UPP’s latecomer status as an advantage.

“I think this will be a great vintage,” he declared. “I think investing as the interest rates rose was actually good timing for us. Your infrastructure assets should give you an inflation hedge and also an interest rate hedge, because there is a link there.”

Also underlying UPP’s investments is the group’s Climate Action Pledge, which envisages to achieve net-zero portfolio emissions by 2040 or sooner, an accelerated ambition of the 2050 target pledged by most of its Canadian pension peers.

This responsible investment philosophy is one of the things Larsen says he’s carried with him from PensionDanmark to UPP. Another is having a long-term mindset, while the third is portfolio diversification, with Larsen having sat on the boards of KKR’s Q-Park and Dutch gas distribution company Noordgastransport, a 2013 PensionDanmark investment, in addition to Angel Trains.

“One big learning for me during covid was how important diversification is,” he said. “I sat on the boards of three large infrastructure businesses in Europe on behalf of PensionDanmark and the impact of covid was very, very different across those businesses.”

For Ontario’s university pensioners, they’re now benefiting from the lessons of Larsen’s graduation.