World’s largest asset manager behind Duluth energy company Allete’s $6.2B sale

Some consumer advocates are raising eyebrows about one of Duluth energy company Allete’s soon-to-be owners: a large investment firm itself in the midst of selling to the world’s largest asset manager.

Allete and its electric utility Minnesota Power sold, pending state and federal regulator approval, to Global Infrastructure Partners (GIP) and Canada Pension Plan (CPP) investment board for $6.2 billion earlier this month. The pension board looks after retirement funds for 21 million Canadian residents and will be the minority owner. GIP — which BlackRock will acquire for about $12.5 billion in cash and stock in the third quarter of this year — will be the controlling power.

While both CPP and GIP have experience in the energy sector that can boost Allete, concern that BlackRock’s growing power could thwart competition might be a factor for the Minnesota Public Utilities Commission (PUC), which can greenlight or block what would be a historic sale to take Allete private.

There is no modern precedent for this in Minnesota, as Xcel Energy formed from a merger of two public companies in 2000.

BlackRock’s January deal to buy GIP was a bet on infrastructure as a growing sector in coming years. While the sale isn’t quite final, it represents a turn for the mega company with roughly $10 trillion in assets. BlackRock, which declined to comment because the sale is still pending, is primarily known for passive investments where retirees entrust them to hold stocks on their behalf, said Tyson Slocum, energy program director with the liberal consumer advocacy group Public Citizen.

One of Allete’s main arguments for the sale is ready access to capital outside of the more volatile public markets, crucial for a planned spending spree on infrastructure like wind farms and transmission lines necessary to cut out fossil fuels. GIP and BlackRock have deep pockets.

Existing GIP management would lead the new division within BlackRock, which would be one of the largest infrastructure investment groups in the world. BlackRock CEO Laurence Fink said in January the expansion of physical and digital infrastructure “will continue to accelerate” with the help of government financial incentives.

There are special rules for investing in public utilities since they have captive customers and regulated power rates. Slocum said BlackRock has permission from the Federal Energy Regulatory Commission (FERC) to control up to 20% of voting shares of public utilities because of its role as a passive investor.

However, Slocum said that authority should take a fresh look if BlackRock is playing a more active role in running utilities. He contends BlackRock acquiring Allete would be a conflict of interest that deserves further scrutiny from FERC, which is already looking at the GIP purchase.

On Monday, Slocum and the Private Equity Stakeholder Project filed a letter with FERC saying the GIP purchase and Allete deal “fundamentally transforms BlackRock from the world’s largest passive investor into an entity with active control over significant power market assets, threatening competition, rates and regulation.”

BlackRock also already has significant ties to Minnesota’s energy sector. That’s not necessarily surprising, since the firm and similar ones like Vanguard are among the largest investors in nearly all of the state’s biggest public companies. But BlackRock controls more than 15% of Fergus Falls-based Otter Tail Corp. shares, nearly 9% of Xcel Energy, roughly 8% of Minnesota’s largest natural gas provider, Houston-based CenterPoint Energy, and more than 13% of Allete. That makes it the largest institutional investor in Otter Tail and Allete, and the second largest in Xcel.

BlackRock also owns the most shares of any institutional investor in U.S. Steel and the second most Cleveland-Cliffs shares. Those two companies are Minnesota Power’s largest customers, since they own the state’s six taconite mines.

“People don’t really understand what a gargantuan enterprise [BlackRock] is, and the significant role it plays in the markets every day,” Slocum said. “This is a big deal for Minnesota Power.”

GIP would own about 60% of Allete should the deal close next year. The New York-based investment firm manages roughly $112 billion.

Founded in 2006, GIP is a major investor in energy development companies that build wind, solar and battery storage as part of a larger portfolio that includes airports, liquid natural gas terminals, pipelines, water utilities and more.

The firm owns 21% of Naturgy, the third-largest electric utility in Spain and one of the largest utilities and infrastructure companies in Europe. Closer to home, GIP owns 40% of TC Energy’s Columbia Pipeline gas distribution network in North America. But Allete would be GIP’s first regulated U.S. power utility.

“Our investors are focused on long-term essential assets that provide stability, cash flows, inflation protection — all of the things that you would associate with an electric utility,” said Jonathan Bram, a founding partner at GIP, during a PUC hearing last week.

CPP might draw less scrutiny than GIP and BlackRock, since it would be a minority owner with about 40% of Allete, but CPP is no small investor.

The board has a portfolio of more than $590 billion of assets in Canadian dollars. That makes it one of the Top 10 retirement funds in the world. CPP said it operates independently of the Canadian government.

Palak Trivedi, principal at CPP, told Minnesota regulators CPP has a portfolio in infrastructure assets worth $51 billion in Canadian dollars. For 13 years, it was the largest investor in Puget Sound Energy, the biggest energy utility in Washington state. CPP is also the controlling owner of Pattern Energy, a U.S. developer building a gargantuan 3,515 megawatt wind project in New Mexico.

Generally, power companies make money off building infrastructure through returns state officials regulate. Trivedi told the PUC it looks for “large-scale infrastructure investments that provide long-term stable returns.”

“Which is why we’re interested in Allete,” he said.