It was a rare and revealing opportunity: two Canadian CEOs who are dominant global M&A players and a third who also features prominently on this year’s top 10 Canadian-led M&A deals list, speaking candidly about market trends and their own unique acquisition and business strategies.
Bruce Flatt, CEO of Brookfield Asset Management (TSX:BAM.A), Mark Wiseman, CEO of the Canada Pension Plan Investment Board (CPPIB) and David McKay, CEO of Royal Bank (TSX:RY), recently came together on a panel hosted by the Ontario Securities Commission in Toronto. And afterwards, the audience went back to the office better equipped to make sense of each day’s investing and deal-making headlines.
The three CEOs shed light on vital topics: investing in infrastructure, real estate and other alternative assets; why companies and capital are leaving public for private markets, and making wise long-term decisions in a time of rapidly accelerating change. But they also took a few unexpected turns. For example, who knew self-driving cars might impact the future of Canadians’ pensions? Or that fear of activist investors is bringing a stream of sellers to Brookfield’s door?
RBC’s McKay won the most sympathy for leading a business that is being buffeted on all sides by technological change. “It creates opportunities and it creates challenges for us to adjust to changing customer needs,” says McKay, citing mobile processing and machine learning as two areas where RBC works hard to keep up.
More surprising, perhaps, was Flatt’s admission that Brookfield deliberately avoids investing in companies and sectors where there is a high rate of technological change. “Opposed to a bank which is right in the path of all the advancements, we’ve tried to do the opposite, which is to get out of their way,” says Flatt. “And so we own office buildings, we rent them to people, and whatever people do in them, as long as urban centres keep getting more and more people, as long as people want to be in urban centres, we’re going to be fine.”
Wiseman brought up self-driving cars to illustrate how when it comes to technological change, “we have to think about how it’s going to affect our individual investments.” Indeed, when one of your holdings is the money-spinning 407 toll highway in Southern Ontario and you’ve got 87 years left on the concession, self-driving cars are a factor. “We bought that investment because we see it as a long-term stable asset that will pay for pensions for decades to come,” he says. “But is it really that long-term and stable with the advent of self-driving cars?”
For the record, CPPIB’s research indicates they’ll be fine. “Self- driving are probably good business because you can fit more of them closer together and charge them the same toll,” says Wiseman—drawing the biggest laugh of the afternoon.
In its last fiscal year, CPPIB did 45 transactions worth $200 million or more in 15 jurisdictions. But Brookfield is no slouch either. In 2015, the company has been in on a half-dozen deals valued at $1 billion or more. And all reflect a philosophy that Flatt laid out for the group. “For the past 20 years, what we’ve tried to do is buy backbone infrastructure globally and to do things that have very dependable cash flows that deliver over long periods of time,” he says.
Targeting infrastructure and other alternative assets is really a no-brainer, says Flatt. Compared to bonds, which have a very low return, or equity markets, which are unpredictable and volatile, “real estate and infrastructure can earn 8% to 15%,” he says. “It’s a relatively low-risk investment and a very dependable capital stream. And it’s as simple as that.”
Globally, Flatt believes the share of fund and institutional monies investing in alternatives will grow from its current 5% to as much as 20% or more by 2030. Here, as well, CPPIB is ahead of the curve. According to Wiseman, it has about half its portfolio in these assets. “We are in the very enviable position of knowing we are not going to require liquidity,” he explains. “That gives us a massive advantage and that’s why we’ve shifted and diversified so much of the portfolio into alternatives.”
Panelists were frank about the growing appeal of taking companies private. In Brookfield’s case, the trend is creating opportunities. “Increasingly a lot of our transactions are because management teams are fed up with capital markets,” Flatt says. “It’s not that they’re fed up with the reporting or the cost. [It’s that] they can’t plan the future because something is going to happen to them tomorrow morning. They think they’re going to get their business taken out [by activists].
“We’re sort of a white knight, a safe place,” he explains. “That’s not to say we’re going to keep it forever. But there’s a big difference between a management team saying we have to plan for every day we’re going to get taken over, or, we and them together will decide when we sell the business someday. That’s a huge difference to an entrepreneur.”
Adds Wiseman: “It’s really, really difficult in the public company con- text to align the interests really well between the owners of the company, the shareholders and the management. In the private context, essentially what you get in my view is governance arbitrage. There’s just much better alignment of interest between the owners and management. You’re much more nimble.”
Photography: Ontario Securities Commission.