GSIA Makes A Timid First Move

BMI View : The US$7.5bn Global Strategic Investment Alliance has made its first investment since reaching final close in April 2012 . The fund , which is formed of Japanese pension funds and Canada's OMERS pension fund, has been slow off the mark to invest, and indeed, this start is far from an adventurous move, with the asset currently belonging to OMERS. This does, however, mark the first infrastructure investment by a Japanese public pension fund - institutions which have focused on buying government bonds thus far. The deployment of sizable Japanese institutional capital into the sector could prove to be a windfall for infrastructure financing.

GSIA first investment into the Midland Cogeneration Venture (a combined cycle gas fired power plant) is in line with the fund ' s previously stated investment goals - a large asset with a value in excess of US$2bn, located in North America or Western Europe. Whilst this is the first investment by GSIA, it is really just dipping its toe in the market, with a relatively safe investment. The asset is currently owned by Borealis , which is the infrastructure operating arm of the cornerstone investor - OMERS . Borealis bought the asset in December 2012. GSIA has taken a roughly 33% stake in the power plant, with OMERS retaining ownership of the remaining two thirds. Borealis will continue to operate the asset.

Despite being launched in 2009 with a target of US$20bn, GSIA has remained at the US$7.5bn mark since reaching first close in April 2012. The fund reached this figure with pledges of US$1.25bn each from two Japanese institutions: Pension Fund Association and Japan Infrastructure Investment Partners , a consortium including Mitsubishi and Mizuho Corporate Bank . OMERS has committed US$5bn to the fund.

Despite a slow start, the fund represents a potential windfall for the infrastructure sector if other Japanese pension funds follow suit and invest in infrastructure. With the Bank of Japan expanding its purchasing programme of Japanese Government Bonds (JGBs), this could potentially drive the country's pension funds to diversify their portfolios. Restrictions on domestic infrastructure investment could push additional funds to consider foreign infrastructure assets.

Gas Increasing Importance
Michigan Average Monthly Electricity Generation, Coal And Natural Gas, MWh

The US energy sector is an attractive first market, and we have seen similar investors purchase midstream energy assets as well as electricity generating assets. The 1,600MW Midland Cogeneration Venture was converted into a combined-cycle natural gas- fired power plant from an unfinished nuclear plant by US construction company Fluor in 1991. The plant is one of the largest of its kind in the US, and supplies 10% of the electricity consumed in Michigan's Lower Peninsula. The plant has strong potential to be expanded, especially cons idering the phasing out of coal- fired power plants in Michigan. The state has been a particularly central focus of the coal debate, as it has a large number of older and dirtier coal power plants which are under pressure of being shut down. Indeed, the state is ranked 11 th for highest carbon emissions in the US. At the same time, a number of new coal power plants have been denied air permits. Consequently, gas fired electricity capacity is growing in importance in the state. Therefore we see a strong potential for this asset to generate stable returns, but also generate a stronger return on investment.

This article is tagged to:
Sector: Infrastructure
Geography: Canada, United States, Canada, Japan, United States, United States