Alberta Investment Management Corporation, AIMCo, the $160 billion asset manager for pensions, endowments and insurance groups in Canada’s western province, is developing a total portfolio approach in private assets.
Unlike other Maple Eight investors, AIMCo’s client funds decide their own asset allocation and most of them have reached their target in private markets. Rather than continuing to plough in capital, the investment team are now thinking more about comparing opportunities across assets and anticipating future trends.
“The investment horizon for these assets is long and the ability to rebalance in the future is hampered,” warns Marlene Puffer, who joined AIMCo as CIO in 2023 from Canada’s railway pension fund CN Investment Division.
This approach ensures AIMCo taps sufficient risk but also protects against embedding too much connected risk. Puffer says cross-functional conversations and analysis from the risk team supports intelligent decision-making and avoids unintended consequences.
The team is exploring how different themes cut across different asset classes, she says. The best example is AI which manifests in every corner of the portfolio, but in private markets is encapsulated in red-hot investor demand for data centres. These buildings touch infrastructure and real estate; they hold private equity elements in the construction and development phase; and that are also a renewable energy play.
“We are having more sophisticated conversations around where we want to play in this [AI] value chain and why,” Puffer says.
“It is about making sure we don’t miss part of the value chain because of our definition of what constitutes a real estate or infrastructure investment, or the geographical focus of the portfolio.”
AI is just one example. The total fund approach will touch every point of AIMCO’s strategic direction defined by global diversification, a focus on Asia, integrating climate and new energy opportunities, and garnering more strategic input from partners so that fund investments lead to co investments and direct investment.
“Global diversification, energy and climate opportunities and strategic partnerships all sit in total portfolio management,” Puffer says.
“It is about collaboration and breaking down silos.”
A new approach to risk
The new approach is supported by AIMCO’s rebooted risk culture following losses during COVID-induced market volatility when the investor shed $2.1 billion on a strategy meant to profit from low volatility in equity markets, known as VOLTS. A review found that escalation of the risk of the strategy to senior management and the board was “incomplete” and did not come soon enough.
Now the breadth and depth of risk governance and collaboration has been overhauled, fanning a new risk culture. The investment process involves a two-step approach to analysis whereby anything new coming into the portfolio (a manager or strategy, for example) is discussed first at the investment committee level, before further scrutiny by the investment, risk, legal and sustainable investing teams.
Governance has been reviewed and refreshed. The board has oversight of the risk parameters of every underlying product, and review and set the appetite for risk tolerance and the total fund risk budget. Escalation policies are also now embedded.
New high profile hires include Kevin Bong, senior managing director, chief investment strategist and head of Singapore; and chief risk officer Suzanne Akers who joined in 2022. Puffer says the pair represents a new level of talent and leadership that is now embedded into investment teams, weighing in on due diligence.
“Deals have not been done, or we’ve added more due diligence, as a result of these people,” she says.
There is an independent risk assessment for every transaction and Akers is a voting member of the investment committee.
New C-suite hires have helped build a new culture that encourages psychological safety in all interactions, and open and challenging conversations. Team building and in-person, regular offsites despite the teams being spread around the globe is fostering strong relationships and ensuring everyone pulls towards the same strategic goals. Puffer says gatherings may thrash out strategies, or just focus on building trust and understanding of each member of the team, she says.
“We all know where we are going,” she says.
Private credit is the star of the show
AIMCo’s $7 billion private credit portfolio is another a key area of Puffer’s focus. The investor is expanding its already significant private credit talent base in London and Toronto, with new hires in New York. Maintaining the portfolio’s size, and growing it further, requires stepping up from the small-cap investments made at the beginning and developing large-cap partnerships and deal flow out of New York.
It’s difficult to scale in small cap, she explains. The typical four- to five-year tenor of a private debt deal means around 20 per cent of the portfolio is in perpetual motion.
“You have to feed the portfolio,” Puffer says.
“We are a small team, and feeding it with large-cap deals is more effective. Although it’s possible to scale through small deals, they take up as much time as a big deal and require the same level of talent and staffing.”
AIMCo is one of many investors piling into the asset class which now accounts for some $2 trillion of assets under management. The IMF recently sounded the alarm at so much debt being traded out of the public eye in its latest Global Financial Stability report.
Puffer acknowledges the risk of scaling the allocation in an environment where interest rates are more likely to fall than rise, but she is reassured by an enduring return profile that adds value and provides an alternative exposure to liability matching fixed income.
“Private credit is the star of the show,” she says.
“The sensitivity to interest rates and duration is not the only reason we are in private credit. We are also in it for the credit spread, and for a little extra because of today’s base rate. Even as rates come down, it still has value because it will be down less than our other investments in fixed income.”
Moreover, she says AIMCo has an edge because of the team’s ability to execute. Private credit is shaped around fund investments, yet with each partner the team expects significant co-investment deal flow opportunities. Cue a sophisticated internal team not only with the ability to turn deals around quickly but also a familiarity with its partners and the way they work, and knowledge of the underlying companies.
Puffer will also spend the coming months sizing opportunities in Asia via AIMCo’s new Singapore office, opened late last year. She says fund mangers are increasingly setting up shop in Singapore, enabling new partnerships out of the city state that will lead onto co-investment opportunities, particularly in renewables and diversified infrastructure.