Investment Performance
CIO Q&A
Overall, the diversified portfolio construction of exposure to public and private assets helped mitigate the negative impact of the challenging macroeconomic backdrop."
Last year will be remembered for the onset of a polycrisis, a situation in which overlapping global risks compound to challenge global growth. In 2022, investors experienced inflation rates not seen for decades, the Russian invasion of Ukraine followed by a commodity price shock, China’s zero-COVID lockdowns, the U.K. mini budget and pension crisis that disrupted long-term bond markets and the most aggressive monetary policy tightening cycle by major central banks on record. In addition, the cryptocurrency market, to which AIMCo has no direct exposure, was hit by crisis and scandal. The collection of these circumstances weighed on risk assets throughout the year, especially in public markets.
Despite the global headwinds, AIMCo delivered a -3.4% total fund net investment return, outperforming the benchmark by 1.9%*. Overall, the diversified portfolio construction of exposure to public and private assets helped mitigate the negative impact of the challenging macroeconomic backdrop. Inflation-sensitive portfolios, such as Infrastructure (16.8%), Renewable Resources (25.7%), Private Debt & Loan (6.2%) and Real Estate (4.6%) delivered the strongest returns. Our defensive and disciplined positioning, prudent underwriting process, active risk and liquidity management, and constant deployment of capital seeking the best risk-adjusted returns, contributed to resiliency, even during a market downturn.
Reflecting on portfolio and asset class performance of 2022, what stands out was the negative return in bonds and their unusually strong positive correlation to equity markets. For only the fourth time in 90 years, bonds and equities declined in value together. Overall, it was an extremely tumultuous year in public markets. The S&P 500 recorded its seventh worst year of return since 1920, while some bond indices were down by close to 15%, the worst returns for almost five decades.
In 2023, whispers of recession are lingering, which could transpire within the calendar year. Even though many central bank officials have paused interest rate increases, the impact of the fastest rate hiking cycle on record is starting to be felt across various industries, most notably in the regional banking sector in the U.S.
Bond markets and yield curves have an impressive track record of forecasting recessions. An inverted yield curve — which has historically been the most accurate predictor of recessions — continues to send warnings, in many cases inverting to a degree not seen since the early 1980s.
With these conditions in mind, we are being surgical in terms of where we are putting new capital, and taking measures to make sure clients’ portfolios are positioned appropriately for the circumstances and their risk profiles.
From an investment perspective, our most important initiative is the implementation of a new Investment Strategy to meet client needs for net total returns and adaptive solutions. The changes focus on more targeted active management where we have an identifiable edge, geographic expansion and diversification, and a coordinated approach to total portfolio management and strategic partnerships. We will focus more on total return while continuing to add value through active management. The work underway supports a critical objective for our organization — to deliver persistent, superior risk-adjusted net total returns for our clients, as defined by their needs.
*Small differences in the 2022 excess return maybe observed in this report, due to rounding.
2022 Results
Asset Class Performance
Total AIMCo Fund Aggregate (1)
$135,030
(3.4)
5.2
4.3
5.9
5.1
(3.4)
14.7
2.5
10.6
2.3
Benchmark
(5.3)
1.1
3.4
5.2
4.4
(5.3)
8.0
8.0
11.1
1.3
Balanced Funds Aggregate
$111,242
(4.6)
5.3
4.4
6.2
5.4
(4.6)
16.2
2.6
11.8
2.5
Benchmark
(6.1)
1.1
3.6
5.8
4.9
(6.1)
8.9
8.9
12.5
1.4
Government Funds Aggregate
$23,789
1.4
3.2
2.8
3.3
2.9
1.4
5.0
2.2
4.8
1.3
Benchmark
(1.7)
0.2
1.2
2.1
1.9
(1.7)
2.1
3.4
4.7
1.2
Public Markets
Aggregate Public Investments
$79,454
(8.9)
0.7
2.5
4.9
3.6
(8.9)
11.2
6.4
12.4
(1.3)
Benchmark
(9.6)
(1.2)
2.5
5.0
3.8
(9.6)
8.0
10.3
13.0
(0.8)
Money Market and Fixed Income (2)
$36,976
(8.1)
(4.7)
(0.7)
1.0
1.1
(8.1)
(1.1)
7.8
6.2
1.7
Benchmark
(9.2)
(5.8)
(1.6)
0.2
0.4
(9.2)
(2.2)
7.3
5.9
1.2
Money Market (3)
$703
1.7
1.0
1.1
1.3
1.3
1.7
0.2
1.2
1.9
1.6
Benchmark
1.7
0.9
0.9
1.1
1.2
1.7
0.2
0.9
1.6
1.4
Universe Bonds
$13,720
(11.8)
(7.2)
(1.8)
0.5
0.8
(11.8)
(2.3)
9.9
7.8
1.9
Benchmark
(11.7)
(7.2)
(2.2)
(0.0)
0.3
(11.7)
(2.5)
8.7
6.9
1.4
Mortgages
$4,616
(5.0)
(2.0)
1.7
2.8
3.1
(5.0)
1.2
9.4
6.0
4.7
Benchmark
(6.1)
(3.6)
0.3
1.9
1.8
(6.1)
(1.1)
8.7
6.9
1.4
Fixed Income Long-Term
$5,864
(23.0)
(14.4)
(6.1)
(1.7)
(1.2)
(23.0)
(4.8)
13.0
12.8
0.9
Benchmark
(22.6)
(14.3)
(6.3)
(2.0)
(1.5)
(22.6)
(5.1)
12.1
12.2
0.5
Private Debt and Loan
$6,138
6.2
7.4
6.9
6.3
5.8
6.2
8.5
5.9
4.4
4.0
Benchmark
(0.1)
(0.5)
1.4
1.8
1.8
(0.1)
(0.9)
5.3
3.1
1.9
Real Return Bonds
$1,296
(14.2)
(6.6)
(0.3)
1.8
1.5
(14.2)
1.7
13.7
8.3
0.1
Benchmark
(14.3)
(6.6)
(0.5)
1.6
1.3
(14.3)
1.8
13.0
8.0
(0.0)
Segregated Assets - Short Term (4)
$4,018
1.7
0.9
0.8
1.0
1.1
1.7
0.1
0.6
1.7
1.4
Benchmark
1.6
0.9
0.8
1.0
1.1
1.6
0.1
0.7
1.7
1.3
Segregated Assets - Long Term
$621
(5.1)
(3.2)
(0.3)
0.5
0.8
(5.1)
(1.2)
5.6
3.2
1.9
Benchmark
(4.8)
(3.0)
(0.4)
0.3
0.6
(4.8)
(1.2)
5.1
2.5
2.0
Public Equity (2)
$42,246
(10.0)
5.4
4.8
8.1
5.4
(10.0)
23.4
3.7
18.5
(4.6)
Benchmark
(10.6)
2.7
5.8
9.3
6.7
(10.6)
18.1
12.2
20.3
(3.1)
Canadian Equity
$7,890
(5.1)
11.3
6.2
9.7
5.4
(5.1)
30.5
(3.4)
20.8
(10.1)
Benchmark
(5.8)
8.5
7.5
11.2
6.8
(5.8)
25.1
5.6
22.9
(8.9)
Global Equity
$23,733
(11.4)
5.8
5.7
9.2
6.9
(11.4)
26.2
5.6
20.2
(1.8)
Benchmark
(12.2)
3.0
6.5
10.0
7.8
(12.2)
20.8
13.9
21.2
(0.5)
Global Minimum Variance
$2,015
(2.4)
6.0
4.5
5.7
4.6
(2.4)
15.1
1.5
9.4
0.6
Benchmark
(2.7)
5.1
3.4
6.5
6.1
(2.7)
13.5
0.1
16.6
4.2
Emerging Market Equity
$5,611
(14.7)
(7.2)
(2.7)
0.5
(1.3)
(14.7)
1.0
7.0
10.6
(8.2)
Benchmark
(14.3)
(9.0)
(1.3)
(2.0)
(0.2)
(14.3)
(3.4)
16.2
12.4
(6.9)
Global Small Cap Equity
$2,997
(7.8)
6.4
5.9
8.6
5.2
(7.8)
22.8
4.8
17.2
(7.2)
Benchmark
(12.9)
0.0
4.4
8.1
5.1
(12.9)
14.8
13.9
19.8
(6.1)
Private Markets
$55,577
7.8
15.7
7.5
7.1
8.2
7.8
24.1
(7.2)
6.0
12.8
Benchmark
4.2
6.0
4.7
5.0
5.6
4.2
7.8
2.3
6.0
8.0
Private Equities (5)
$11,916
0.5
30.1
22.0
17.2
16.7
0.5
68.5
7.2
3.8
14.7
Benchmark
4.2
6.5
7.0
7.3
7.5
4.2
8.8
8.1
8.2
8.2
Real Estate
$22,973
4.6
9.5
1.1
1.8
3.8
4.6
14.5
(13.6)
4.0
12.2
Benchmark
1.8
4.7
2.2
2.8
4.1
1.8
7.8
(2.6)
4.7
9.5
Infrastructure
$17,422
16.8
17.9
10.2
9.5
10.4
16.8
19.0
(3.5)
7.4
13.7
Benchmark
8.2
7.5
7.0
6.8
6.7
8.2
6.8
6.1
6.2
6.2
Renewable Resources
$3,045
25.7
20.2
10.7
12.1
12.6
25.7
15.0
(6.0)
16.1
15.0
Benchmark
7.7
7.3
6.9
6.7
6.6
7.7
6.8
6.1
6.2
6.2
AIMCo Strategic Opportunities Pool
$221
(21.3)
(12.6)
(9.2)
(2.6)
(2.5)
(21.3)
(2.9)
(2.0)
20.3
(2.2)
Benchmark
(12.2)
3.0
6.5
10.0
7.8
(12.2)
(20.8)
13.9
21.2
(0.5)
- Total AIMCo Fund calculations do not include $22,948 million of assets that do not meet the required conditions for inclusion in AIMCo’s excess returns as of December 31, 2022.
- Money Market & Fixed Income, Public Equity Total Market Value does not include Tactical & Overlay Program notional exposures in this asset class.
- Money Market Total Market Value does not include cash held by AIMCo investment pools.
- Segregated Assets - Short Term includes Cash Reserve Account in both portfolio and benchmark returns.
- Private Equities include Core Private Equities, Alberta Teachers’ Retirement Fund Private Equity, Relationship Investing and Venture Capital.
performance Benchmarks
Money Market (1)
Money Market and Fixed Income
Fixed Income Mid-Term
Mortgages
Real Return Bonds
Private Debt and Loan (2)
Segregated Assets - Short Term (3)
Segregated Assets - Long Term
Public Equities
Canadian Equities
Global Equities
Global Minimum Variance
Emerging Markets Equities
Global Small Cap Equities
Private Markets
Private Equity
Private Equity, ATRF (4)
Real Estate, Canadian
Real Estate, Foreign
Real Estate, ATRF (5)(6)
Infrastructure
Infrastructure, ATRF (4)
Renewable Resources
AIMCo Strategic Operations
Innovative Investing
Tactical Asset Allocation Overlays
- Effective October 3, 2022. Prior to this date, the product benchmark was the FTSE Canada 91-Day T-bill Index.
- Effective January 1, 2022. Prior to this date, the product benchmark was the FTSE Canada Short-Term Overall Index.
- Segregated Assets - Short Term benchmark includes Cash Reserve Account proxy benchmark.
- ATRF (Alberta Teachers’ Retirement Fund) benchmarks were added as of January 1, 2022.
- ATRF Real Estate benchmark was added as of March 1, 2022.
- Effective September 1, 2022. Prior to this date, the ATRF Real Estate benchmark was the MSCI Global Property Fund Index (hedged to CAD).
Asset Class Overviews
Public Equities
Purpose
The Public Equities team manages $42.2 billion in public equities assets across a suite of products covering domestic, global, and emerging market portfolios. The underlying strategies that make up the Public Equities portfolio are optimized allocations across several dimensions, including factor, sector, and regional exposures as required by the products that clients allocate capital to. Internally managed investments include Systematic, Absolute Return, and Fundamental Active strategies. Externally managed investments include Long-only Equity and Absolute Return strategies that are employed in areas where internal management does not offer both a competitive and cost advantage.
Results
Global equity markets were challenged on many fronts in 2022. Inflation moved steadily higher in 2022, reaching a multi-decade high. Central banks responded around the world to control prices and as a result have embarked on one of the swiftest tightening cycles many investors have ever witnessed. Also contributing to equity market volatility were rising geopolitical risks, most notably the tragic invasion of Ukraine by Russia and increasing tension between the Unites States and China.
Most developed market indices declined over the first three quarters of the year, significantly impacting annual returns. The Canadian Equities Master Pool returned -5.1% while the Global Equity Master Pool returned -11.4%. The Emerging Markets Master Pool generated a return of -14.7%, weighed down by largely negative performance from China. The Global Minimum Variance Pool and the Global Equity Small Cap Pool returned -2.4% and -7.8%, respectively. The public equities products collectively outperformed their respective benchmarks by 0.6%. The excess return generated in 2022 is largely attributable to Global, Canadian, and Small Cap equity products while emerging market equities products slightly underperformed.
For the second consecutive calendar year, value outperformed growth during 2022, as higher interest rates and cost inflation hurt many long duration, growth-led sectors such as Information Technology, which was down significantly. Historically, when policy interest rates rise in a central bank tightening cycle, earnings multiples tend to drop. The tailwind to value benefited the stock selection within many fundamental active strategies. A relatively wide dispersion of returns across global indices also created the conditions for discretionary investors to add value. Across the systematic strategies, most multi-factor strategies outperformed their benchmarks, but had negative returns on an absolute basis. Global Small Cap and North American Systematic Equity Strategies contributed the most to relative performance. The broader equity portfolio also benefited from conservative overall market exposure throughout the year.
Looking Ahead
Caution on global public equities remains warranted into 2023 due to historically high and persistent inflation, tight labour markets, and geopolitical concerns in multiple spheres. Equity markets have been hesitant to price in the potential for corporate margin compression, the expected decline in earnings, and the potential for various economic “landing” scenarios. The portfolios remain cautiously positioned from an active risk perspective, and despite the uncertainty in markets, we continue to believe this environment will provide robust opportunities for positive risk-adjusted returns.
Long term, the team expects the 2022 redesign of the product platform, completed in consultation with clients, to better meet client needs from a market exposure, total portfolio liquidity and active risk perspective.
Money Market & Fixed Income
Purpose
The objective of the Fixed Income portfolios is to provide our clients with capital preservation, liquidity, diversification, liability hedging, and superior, risk-controlled returns relative to a benchmark.
We actively manage and add value to the portfolios in four principal ways:
- Anticipating interest rates and positioning duration accordingly
- Anticipating the term structure of interest rates
- Active investment in various credit sectors, both public and private markets
- Active individual security selection
The team manages portfolios with global investments seeking diversified return and manages risk through prudent duration, curve, sector, geographic, issuer, and structural selection.
Results
Money Market
In supporting the Government of Alberta Treasury Board & Finance transition to a new liquidity management platform, AIMCo and the Government collaborated in the winding down of the Consolidated Cash Investment Trust Fund (CCITF) during 2022. The CCITF was replaced with a new pooled portfolio, Money Market Pool (MMP). MMP is managed to provide daily liquidity while aiming to add value over the benchmark. The fund holds primarily short-term securities issued by the Government of Canada, provincial governments, large Canadian banks, pension funds and investment grade corporations. Money market rates increased over the year with the Bank of Canada’s target for the overnight target rate ending the year at 4.25%. The increase in interest rates and wider credit spreads enabled some excess returns to be generated for the year. MMP outperformed its benchmark by 0.1% and returned 1.0% between its October launch date and calendar year end. CCITF had a return of 1.0% and excess return of 0.1% between January 1, 2022, and its October closing date.
Public Fixed Income
In 2022, fixed income markets experienced overall weak returns primarily attributed to the sustained rise in interest rates implemented by central banks in their efforts to stabilize inflation throughout the year. This resulted in a significant increase in bond yields, reaching levels not seen in over ten years. Consequently, the yield curve inverted, with short-term yields surpassing long-term yields, historically indicating an impending recession. Furthermore, credit markets performed poorly, experiencing widening spreads for much of the year. These circumstances arose from concerns about an economic downturn, coupled with worries about underperformance in the credit market and the potential for corporate defaults.
Towards the year's end, however, credit spreads began to narrow as the prospect of inflation and the conclusion of central bank tightening became more foreseeable. Nonetheless, public fixed income portfolios suffered substantial negative returns for the year, slightly underperforming benchmarks. The Universe Bond portfolio experienced an 11.8% decline, below the benchmark by 0.1%, while the Long Bond portfolio dropped by 23.0% with a negative excess return of 0.4%. The negative returns of 2022 caused longer-term absolute returns to reverse, approaching zero or becoming negative. Despite the negative excess returns in 2022, relative returns over the long term remained markedly positive.
The portfolios were conservatively positioned in 2022, with an overweight in credit markets primarily contributing to negative excess returns. Investments in collateralized loan obligations and fixed income relative value strategies provided a headwind to relative returns.
Real Return Bonds
Real Return bonds also had negative returns in 2022 of -14.2%. The portfolio outperformed, adding 0.1% of excess return over the year.
Realized inflation in Canada peaked at an annualized rate of 8.1% for the Consumer Price Index (CPI) in 2022 which was the highest level since the early 1980s. This inflation dynamic increased break-even inflation yields that ended the year towards the upper end of their historical ranges.
Private Debt & Loan
Private Debt & Loan invests in private credit as a higher yielding alternative to public fixed income. The products are typically privately sourced and structured, primarily floating rate debt with lower return volatility.
The portfolio generated a 6.2% net return for the year 2022, outperforming the benchmark by 6.3%. The return was driven by a diversified, resilient portfolio consisting of primarily senior secured, floating rate loans that sit at the top of the capital structure and benefit from a rising or high interest rate environment.
Private Mortgages
This portfolio provides a steady cash flow and premium return over government bonds, aligned with the long-term objectives of our clients. The Mortgages portfolio returned -5.0% during 2022, outperforming its benchmark by 1.1%.
The absolute return of the portfolio was driven by increasing government bond yields and credit spread volatility, led by the central bank tightening cycle which began in April 2022. The portfolio outperformed mainly due to short duration positioning compared to the benchmark. The real estate sector continues to be impacted by the COVID-19 pandemic, particularly the office segment as work-from-home continues in most major markets.
Looking Ahead
With many uncertainties entering 2023, the public fixed income portfolios were positioned cautiously entering the year with lower-than-average active risk levels. Duration positioning remains slightly longer than the benchmark with higher yields and uncertainty around macroeconomic, financial system, and geopolitical risks being elevated. This conservative positioning enables the portfolios to be more tactical and pivot active risk deployment as the broader economy and market dynamics evolve and become clearer throughout the year.
The Private Debt & Loan team remains focused on credit selection, portfolio diversification and a partnership approach to deliver stable, attractive risk-adjusted returns throughout a cycle.
In the wake of the significant increase in interest rates, the Mortgages group is proactively monitoring near-term loan maturities while stress-testing durability of property-level cash flows. The underlying loans are supported by strong underwriting discipline resulting in conservative loan economics that reflect the resiliency of the well-diversified portfolio.
Real Estate
Purpose
Real estate investments provide clients with exposure to domestic and international opportunities through direct holdings diversified across property types and geography.
The domestic portfolio consists primarily of direct investments with joint venture partners in high-quality industrial, multi-family, office, and retail properties in Canada’s major cities with greater focus on income generation. The international program, with investments in the U.K., Europe, U.S., Mexico and Asia, is opportunity-focused, investing directly and through co-investments with local operating and investment partners. AIMCo also participates in niche market sectors such as data centres, life-science properties and through externally managed opportunity funds.
Results
AIMCo’s Real Estate portfolio earned a return of 4.6% and generated 2.8% in excess return for the year. The domestic portfolio generated a return of 7.3% and ended the year with a net asset value of $13.2 billion. For context, the domestic portfolio primarily employs a core strategy of assets that are held long term and comprise direct investments in quality industrial, multi-family, retail and office properties located in Canada’s major cities. To a lesser extent, it includes an opportunistic strategy of “Build Core to Hold” that includes new construction and project development land, which carries higher levels of risk and return. The domestic portfolio return was driven by strong industrial and residential performance and offset by negative performance in the office portfolio. Higher interest rates and recession concerns are putting greater focus on liquidity and pressure on capitalization rates to rise.
The foreign portfolio generated a return of 0.2% and ended the year with a net asset value of $7.3 billion. The foreign program employs an opportunistic strategy of “Manufacturing Core to Sell” through the execution of a project business plan that includes major renovations and leasing to enhance value and new construction until completed. The foreign portfolio return was driven primarily by strong residential and industrial performance offset by underperformance of office in the United States. Similar to the Canadian market, liquidity and leverage will be greater areas of focus for the team while they also look for potential distressed or special situation opportunities.
For the past several years Real Estate has employed a strategy of repositioning the domestic and foreign portfolios towards industrial, multi-family and growing niche sectors like data centres to lean into the secular tailwinds. This repositioning has enabled AIMCo Real Estate to prepare for long-term performance in an evolving new economy and weather the impacts of COVID-19. Over 10 years, Canadian Real Estate achieved a rate of return of 6.0%, compared to a benchmark return of 5.5% and Foreign Real Estate achieved a rate of return of 8.0% compared to a benchmark return of 6.9%.
Looking Ahead
After an up and then down year in 2022 where equity drawdowns, high inflation and interest rate hikes began to have an impact on Real Estate pricing, volumes, and debt availability, 2023 has brought in a new risk related to a potential banking crisis. Refinancing risk is now heightened, particularly in the office sector.
In addition, Environmental, Social and Governance (ESG) considerations continue to be a big factor in investor and tenant choices. Lower quality or not-rated assets are likely to trade at lower values and may require major capital investment to remain viable versus top-quality assets.
The Real Estate team expects its thematic investments in industrial, multi-family and niche sectors to continue to be a sound investment thesis against inflationary and recessionary pressures. Staying focused on long-term secular trends such as demand for housing, e-commerce, and increased health care spending will be a focus going forward.
Infrastructure
Purpose
AIMCo Infrastructure investments are made in real assets that typically provide an essential service which, over the long term, generate stable, inflation-linked cashflows for our clients. The portfolio consists primarily of diversified long-term, equity-oriented positions in assets with high barriers to entry, regulated returns or long-term contracted revenues such as utilities, energy infrastructure and transportation.
Results
For 2022, the portfolio return was 16.8%, outperforming its benchmark by 8.5%. The portfolio performance was largely driven by the robust valuations of several investments within the portfolio. In particular, investments in the midstream and pipeline sector experienced strong macroeconomic tailwinds that resulted in valuation increases. Strong market demand for renewable energy assets increased valuations in this sector. Overall, the portfolio continues to benefit from the general resiliency of infrastructure assets through different economic challenges.
Looking Ahead
We are focused on the impacts of inflation, higher short-term interest rates and the possibility of slower growth as we underwrite new investments and manage portfolio companies. While volatility across public markets has impacted capital availability across financial markets, we continue to expect the demand for inflation-sensitive assets such as infrastructure and renewable resources to remain relatively robust through 2023 and beyond.
Renewable energy and other climate transition opportunities are increasingly important to AIMCo and other infrastructure investors given the significant capital requirements needed to lower carbon emissions globally in the coming decades. Additionally, a higher interest rate environment may provide attractive opportunities to provide debt financing to infrastructure investments.
Private Equity
Purpose
AIMCo’s Private Equity portfolio is comprised of two primary strategies — Private Equity Fund Investments and Directs & Co-Investments.
The team selectively invests with the world’s leading private equity firms and builds deep, lasting relationships with partners. Investments are made across a broad range of sectors including Consumer, Industrials, Business Services, Financial Services, Technology and Healthcare.
Results
The $11.6 billion Core Private Equity* portfolio generated a return of 1.6% in 2022, underperforming the benchmark by 2.6%. Given a year of unprecedented volatility and macroeconomic turmoil, the relative stability of the Private Equity program reflects our commitment to investing alongside proven fund partners, as well as our co-investment selection process.
On a longer-term basis, the asset class continues to generate consistent excess return, delivering a 17.3% 4-year annualized net return, 10.0% above benchmark.
The Funds program represents about 64% of the portfolio and invests selectively with some of the world’s leading private equity firms. We primarily invest with well-established large and middle-market buyout funds in North America, Europe and selectively in Asia; as well as developing an expanding growth equity and secondaries program.
The Directs & Co-Investments strategy, representing 36% of the program, focuses on co-control and minority investment positions in private companies, alongside private equity fund partners and other like-minded institutional investors.
The Private Equity team continues to actively manage both direct and fund investments within the Venture Capital and Relationship Investing strategies. We are not currently making new investments from these platforms and continue to seek opportunistic exits to wind down the portfolios in the most value accretive way possible.
Looking Ahead
The global private equity investment landscape in 2022 was interesting, wherein the first half of the year saw a deal environment that carried over much of the momentum from 2021’s record levels of activity. Transaction levels declined significantly in the second half of the year as macro-economic impediments impacted both deal volume and valuations.
Moving into 2023, persistent concerns of a potential economic downturn could impact growth prospects and transaction activity, as well as continue to depress valuations within the portfolio. However, as the year continues to unfold, these headwinds may begin to lessen and several factors, including more muted valuations and longer fundraising timelines for Funds could lead to potentially attractive investment opportunities. Historical trends indicate that Private Equity vintages following market dislocations can stand to deliver outsized performance returns, thereby reinforcing the need for the Private Equity team to remain patient and selective to try to capitalize on changing market dynamics.
*All return information is exclusive of Venture Capital and Relationship Investing as they are deemed non-core. Additional information is available in the Asset Class Performance Table.
Renewable Resources
Purpose
AIMCo’s Renewable Resources program encompasses a global portfolio of land-centric, high-quality timberland and agricultural assets which are characterized by their low correlation to traditional asset classes, inflation hedging qualities, and a long-term duration match with client obligations. Renewable resources assets provide capital preservation, current yield, and real asset appreciation. The Renewable Resources program is concentrated in developed market OECD member countries with an opportunistic view on emerging market exposure. Flexibility is engrained into the Renewable Resources mandate which allows the team to maximize long-term value by optimizing portfolio assets between timberland, agriculture, and strategic investments along the value chain.
Results
The AIMCo Renewable Resources team manages $3.0 billion in timberland and agricultural investments situated primarily in Australia and North America. During 2022, the Renewable Resources team deployed capital in two investments: Lawson Grains, one of Australia’s largest corporate grains businesses; and Caddo Sustainable Timberlands, a large-scale, high-quality timberland plantation located in Texas and Louisiana.
For 2022, the portfolio return was 25.7% which exceeded the benchmark. This strong performance was driven by significant rural land price appreciation globally, strong commodity prices, and positive operating results across much of the portfolio. High input costs, constrained labour markets, and adverse weather and fire events were challenges experienced by portfolio companies during the past year.
The Renewable Resources portfolio continues to perform well over the long term as investor interest in the positive attributes of the asset class remains high. Supporting continued strong performance is the robust global demand for agricultural and timber products which is expected to increase, and alternative revenue streams such as carbon, conservation, biodiversity, and partnership opportunities with renewable energy producers. While their impact has been relatively limited to date, global macroeconomic uncertainty and rising interest rates could serve to moderate forward-looking returns in the short to medium term.
Looking Ahead
The Renewable Resources team is focused on continuing to diversify the portfolio through the introduction of additional tree species, livestock, and crop types, as well as the expansion of the program to new geographies. The team will also continue to optimize the existing portfolio through the conversion of land assets to their highest and best use and through the pursuit of alternative revenue streams. Renewable resources assets are well placed to play a role in the ongoing energy transition, and the team will take a proactive, climate-forward approach to target investment opportunities with strong tailwinds and limited climate-related risk.