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The Ontario Municipal Employees Retirement System pension fund sold a long-held stake in the U.K.’s second-largest natural gas distribution network on Wednesday for $1.6-billion, more than tripling its original investment and raising capital for new infrastructure projects.

Toronto-based OMERS acquired a 25-per-cent stake in utility Scotia Gas in 2005 for $555-million, and announced it is selling the holding to Global Infrastructure Partners, a US$77-billion private equity fund based in New York.

OMERS did not disclose financial terms of the sale, however, a source involved in the transaction said the sale price was $1.6-billion. The Globe and Mail is not naming the source because they are not authorized to speak for Scotia Gas and the two fund managers. The deal is expected to close in the first quarter of the new year.

“Scotia Gas was our first infrastructure investment in Europe, and we are very pleased with the company’s 17-year track record of successful value creation,” said Alastair Hall, head of European investments for OMERS’s infrastructure division, in a news release. “We will redeploy the capital back into growing our $30-billion direct global infrastructure portfolio.”

The other shareholders in Scotia Gas are the Ontario Teachers’ Pension Plan, which also initially invested in 2005, and a fund controlled by Brookfield Asset Management Inc., which acquired its interest in August. Each of those two partners holds a 37.5-per-cent stake.

Scotia Gas serves six million customers in England, Scotland and Northern Ireland through a 76,000-kilometre pipeline network. In recent years, the 3,800-employee company has invested in hydrogen and carbon capture technology to reduce emissions, including a partnership with Exxon Mobil Corporation announced earlier this month.

Two decades back, Canadian fund managers such as OMERS, Teachers and the Canada Pension Plan Investment Board were among the first institutional investors in the world to begin making direct investments in relatively low-risk infrastructure businesses such as Scotia Gas. The gas distribution business generates dependable, long-term cash that suits many of a pension plan’s investment targets.

Today, most pension fund managers commit a significant portion of their portfolio to infrastructure, along with other alternative assets such as real estate and private equity. A recent survey by the London-based data service Prequin shows institutions have doubled the capital they dedicate to the sector over the past five years, to more than US$800-billion. This flood of money has increased demand for assets, boosted valuations and is triggering deals.

“The infrastructure deals market has emerged resiliently from 2020, with larger assets starting to trade after a wait for an improved exit environment,” said Alex Murray, a Prequin vice-president, in a report. “Rising inflation concerns mean infrastructure is likely to gain more traction as investors look to utilize its hedge inflation mechanisms.”

OMERS’s infrastructure portfolio posted an 8.6-per-cent return in 2020, and was the $114-billion fund’s best performing asset class. OMERS manages retirement savings for more than 500,000 Ontario civil servants, including firefighters, police officers and paramedics.

Infrastructure consistently ranks among the best performing alternative asset classes, returning 13.9 per cent over the past 12 months, according to a survey released in October by Prequin. The consulting firm’s study showed infrastructure outperformed all other alternative asset classes, except private equity, over the previous three and five years, and only real estate did better over 10 years.

BofA Securities advised OMERS on the Scotia Gas sale, and the fund manager used law firm Latham & Watkins LLP. The transaction marked the second shakeup in Scotia Gas’s ownership this year, after U.K. renewable energy producer SSE sold its 33.3-per-cent holding during the summer for £1.2-billion, or $2.1-billion, to Teachers and Brookfield.

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