OTPP Building New Careers?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Rishika Sadam of Reuters reports, Apollo Global-led investor group to buy CareerBuilder:

A group of investors led by U.S. private equity firm Apollo Global Management LLC (APO) and Ontario Teachers’ Pension Plan Board will buy a majority stake in job portal CareerBuilder, the companies said on Monday.

CareerBuilder LLC is owned by Tribune Media Co (TRCO), TV station operator Tegna Inc (TGNA) and newspaper group McClatchy Co (MNI). These current owners will all retain a minority stake, Apollo said.

Apollo did not disclose financial details of the deal.

Reuters reported last month that Apollo was negotiating a deal that would value CareerBuilder at more than $500 million, including debt.

OTPP put out a press release, Apollo Global Management-affiliated Funds and Ontario Teachers’ Agree to Acquire a Controlling Interest in CareerBuilder:

Certain affiliates of investment funds managed by affiliates of Apollo Global Management, LLC (together with its consolidated subsidiaries, “Apollo”) (NYSE: APO), the Ontario Teachers’ Pension Plan Board (“Ontario Teachers'”) and CareerBuilder, LLC (“CareerBuilder”) announced today that they have entered into a definitive agreement, pursuant to which an investor group led by Apollo along with Ontario Teachers’ will acquire a majority of the outstanding equity interests in CareerBuilder. CareerBuilder’s current owners, TEGNA Inc. (“Tegna”), Tribune National Marketing Company, LLC (“Tribune”) and McClatchy Interactive West (“McClatchy”) will retain a minority interest.

“CareerBuilder is a global leader in human capital solutions, and we are excited to work with the Company in the next phase of its growth and development,” said David Sambur, Senior Partner at Apollo. “Matt Ferguson and his team have done an exceptional job capitalizing on CareerBuilder’s iconic brand to create an integrated solutions software-as-a-service (SaaS) platform, and we look forward to working with the team to support the Company’s continued growth and innovation.”

Matt Ferguson, CEO of CareerBuilder, added, “This is an exciting next chapter for CareerBuilder. We are very proud of the work we did during our partnership with Tegna, Tribune and McClatchy, and we look forward to collaborating with Apollo and Ontario Teachers’ to continue the successful transformation of our business.”

The transaction includes committed financing from Credit Suisse, Barclays, Deutsche Bank, Citigroup Global Markets and Goldman Sachs & Co. LLC; all are also acting as financial advisors to Apollo, along with LionTree Advisors and PJT Partners. Morgan Stanley & Co. is acting as financial advisor to CareerBuilder. Akin Gump Strauss Hauer & Feld LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP are acting as legal advisors to Apollo. Wachtell, Lipton, Rosen & Katz LLP is acting as legal advisor to the sellers.

The proposed transaction is expected to close in the third quarter of 2017, subject to regulatory approvals and customary closing conditions. Apollo’s investment is being made by the Apollo-managed Special Situations I fund.

About CareerBuilder

CareerBuilder is a global, end-to-end human capital solutions company focused on helping employers find, hire and manage great talent. Combining advertising, software and services, CareerBuilder leads the industry in recruiting solutions, employment screening and human capital management. It also operates top job sites around the world. CareerBuilder and its subsidiaries operate in the United States, Europe, South America, Canada and Asia. For more information, visit www.careerbuilder.com.

About Apollo

Apollo is a leading global alternative investment manager with offices in New York, Los Angeles, Houston, Chicago, St. Louis, Bethesda, Toronto, London, Frankfurt, Madrid, Luxembourg, Mumbai, Delhi, Singapore, Hong Kong and Shanghai. Apollo had assets under management of approximately $197 billion as of March 31, 2017 in private equity, credit and real estate funds invested across a core group of nine industries where Apollo has considerable knowledge and resources. For more information about Apollo, please visit www.agm.com.

About Ontario Teachers’

The Ontario Teachers’ Pension Plan (Ontario Teachers’) is Canada’s largest single-profession pension plan, with C$175.6 billion in net assets at December 31, 2016.  It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an average annualized rate of return of 10.1% since the plan’s founding in 1990. Ontario Teachers’ is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario’s 318,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

In other related news, Cision PR Newswire reports, CareerBuilder Teams Up with Google to Help Connect More Americans with Jobs:

CareerBuilder’s evolution into an end-to-end human capital solutions company began with operating leading job boards around the world – something it has done for more than two decades. Today, CareerBuilder is excited to announce a powerful collaboration that will bring even more visibility to its clients’ job listings and help job seekers find those opportunities faster.

CareerBuilder is joining forces with Google to help power a new feature in Search that aggregates millions of jobs from job boards, career sites, social networks and other sources. CareerBuilder is fully integrated with Google to feed content to them, and will include all of its jobs from its job sites and talent networks in this new feature.

“CareerBuilder has been working closely with Google on this from the very beginning when Google was first reaching out to content providers,” said Matt Ferguson, CEO of CareerBuilder. “We saw a big opportunity to increase exposure for our clients’ jobs and today we stand as one of Google’s biggest suppliers of jobs content. Google has enormous reach and excellent search capabilities, so why not leverage these strengths for the benefit of our clients?”

Over the last 20-plus years, CareerBuilder’s model has always been to serve up jobs wherever job seekers are on the Internet, and today CareerBuilder’s job search engine is on more than 1,000 sites. CareerBuilder is embracing this new feature as another distribution channel for its clients that will capture even more potential candidates.

CareerBuilder has been working with Google on different initiatives and is exploring ways in which the two companies can further collaborate.

“CareerBuilder has always had an open ecosystem because it speeds innovation and produces better outcomes,” Ferguson said. “Our product portfolio has expanded so significantly – now covering everything from recruiting and employment screening to managing current employees. We think there is a great opportunity to work with Google as we grow our business.”

Google has been a traffic source for CareerBuilder for several years. Six months ago, CareerBuilder announced plans to use the Google Cloud Jobs API to power searches on its job site. CareerBuilder is pairing its deep knowledge in recruitment with Google’s expertise in machine learning to provide faster, more relevant results for workers looking for jobs on CareerBuilder.com. See the announcement here.

I don’t have much to add on this deal. I’m pretty sure the folks at Apollo know how to unlock the value in CareerBuilder. Moreover, if the company is working with Google to improve its products and services, that is a huge vote of confidence in my book.

Of course, if you ask me, Microsoft’s acquisition of LinkedIn will change the job search industry in ways we don’t even know yet, and this represents a major threat to traditional job search companies.

How traditional job search companies respond to this emerging threat remains to be seen. Will Google try to compete head on with Microsoft and potentially acquire CareerBuilder in the future? It certainly wouldn’t surprise me given the two companies are working closely together.

CPPIB Gains 11.8% in Fiscal 2017

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Jacqueline Nelson of the Globe and Mail reports, CPPIB posts strong gains as push to increase investment diversity continues:

Canada Pension Plan Investment Board posted strong investment gains in its fiscal 2017 year as the fund continues to retool its approach to risk and increase the diversity of its investments.

CPPIB, the largest pension fund in the country and manager of the Canada Pension Plan’s portfolio, said that buoyant equity markets provided a boost last year that helped the fund reach net investment gains of 11.8 per cent in its fiscal 2017 year, which ended March 31. During that period, total assets climbed to $316.7-billion compared with $278.9-billion at the same time last year.

The increase in CPPIB’s assets through the year came from $33.5-billion in net income after all costs and $4.3-billion in net Canada Pension Plan contributions.

Mark Machin, chief executive officer of CPPIB, said the fund is still finding plenty of pockets of investment opportunities, even as valuations have climbed in many asset classes outside the public markets.

“While infrastructure may be really highly priced, and private equity in the U.S. might be really highly priced, and core real estate might be really highly priced – we have teams and capabilities to find the other opportunities,” he said in a press event to discuss the fund’s results.

It has been one year since CPPIB announced the leadership change that Mr. Machin would replace outgoing CEO Mark Wiseman.

Since then, the fund has moved to further extend the range of investments the fund makes, both by asset class and geography. CPPIB did 182 global transactions in 2017, a figure that has been climbing in the last few years. Of those transactions, 19 were worth more than $500-million.

Mr. Machin said this has been one of the most active years for the fund because investment teams are getting more developed and the investment fund is growing.

CPPIB’s thematic investing team, for example, bought a stake in the parent company of river and ocean cruise operator Viking Cruises, while the fund’s private investment team acquired specialty insurance company Ascot Underwriting Holdings Ltd.

The portion of the fund’s investment activities now taking place outside of the country also continued to tick up in the past year, and 83.5 per cent of the fund’s total assets are now located beyond Canada.

Ed Cass, CPPIB’s chief investment strategist, said that diversification in geography and asset class is the “one free lunch in financial markets” that the fund gets. This year, the return profile of private assets lagged public equities, but the fund believes that infrastructure, real estate, private credit and other alternative investment classes will help improve investment results over the long term.

Still, CPPIB is highly exposed to Canada, given the country’s overall contributions to the global economy, says Mr. Machin. “But we’re comfortable being massively overweight Canada because it is our home turf and we really understand it,” he said.

CPPIB reported a 10-year annualized return of 5.1 per cent after factoring in inflation, which exceeds the standard set by Canada’s Chief Actuary.

Barbara Shecter of the Financial Post also reports, CPPIB reaps almost 12% investment return as opportunities beckon in the U.S.:

The CPP Fund, which houses investments for the Canada Pension Plan, rose to $316.7 billion at the end of March on the back of an 11.8-per-cent net annual investment return.

The $37.8-billion increase in assets consisted of $33.5 billion in net income after all CPPIB-related costs, and $4.3 billion in net Canada Pension Plan contributions.

Despite the double-digit results for fiscal 2017 — which far outstripped a 3.4-per-cent return a year earlier — soaring stock markets caused the investment fund to underperform the 14.9-per-cent return of its benchmark reference portfolio, a passive portfolio of public market indexes.

“Given our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds, we expect to see swings in performance relative to this benchmark, either positive or negative, in any single year,” said Mark Machin, chief executive of the Canada Pension Plan Investment Board, which invests funds not needed to pay current benefits of the Canada Pension Plan.

“Over the longer term, the investment portfolio has outperformed the Reference Portfolio over both the past five- and 10-year periods,” Machin said, noting that the investment portfolio is being built to be “resilient during periods of economic stress” and to add value over the long term.

Four investment departments completed 182 global transactions in fiscal 2017, which Machin said was among the fund’s busiest years. Nineteen of those investments were more than $500 million.

Current stock market volatility and political uncertainty could create opportunities for the fund in the coming year, Machin said, adding that CPPIB continues to hunt for alternative investments such as infrastructure and real estate, despite high prices caused by stiff competition.

While being outbid by other investors in many instances, CPPIB has found success in emerging markets and complex situations that draw fewer bidders, he said. But he added that there would be more opportunities in the United States if U.S. policymakers are able to advance their agenda to increase investment in infrastructure.

“If the U.S. comes on stream, that would be really interesting, because it’s such a massive market and there are pools of capital that are getting ready to invest in it,” Machin said. “If policy (makers) in the U.S. got their act together … that would produce a good home for a lot of capital.”

He declined to weigh in on what current controversies surrounding President Donald Trump will mean in terms of the likelihood of investment-friendly policies on taxes and infrastructure being adopted. But he told the Financial Post he is optimistic there will be “interesting, sizable” investment opportunities in the “not-too-distant” future.”

“It’s a bipartisan view that the U.S. needs … more investment in infrastructure,” Machin said, adding that Canada’s largest pension would be interested in everything from roads, to airports, to energy transmission.

“We would find it interesting and I think other people would as well. At the moment there is much more demand than supply.”

Machin and CPPIB’s chief investment strategist Ed Cass said they would like to find a way to make more infrastructure investments in Canada, even if it means divesting Canadian stocks or other investments here in order to rebalance the fund’s portfolio.

However, details of how such investments would work under the federal government’s new Infrastructure Bank still need to be worked out, they said. Among the challenges is that many of the projects rolled out are expected to be new “greenfield” infrastructure, which carries more risk than the operating assets CPPIB prefers.

“All other things being equal, we prefer to invest in Canada. We understand it better than anywhere else,” Machin said. “It is our home turf.”

On infrastructure, David Paddon of The Canadian Press reports, Canadian infrastructure deals scarce but would be welcome: CPPIB chief executive:

Officials from the country’s largest pension fund said Thursday they’d welcome the opportunity to invest in Canadian infrastructure but there’s been a limited supply of suitable assets available to purchase.

“If the opportunities were there, we’d love to look at them. We’d love to invest in them. It’s just a scarcity of opportunities,” said Mark Machin, CEO of the Canada Pension Plan Investment Board.

He said the CPPIB is constantly on the hunt for purchases around the world but finds itself frequently outbid by rivals when infrastructure comes on the market.

“That’s terrific for governments. It’s terrific for sellers. But when you’re competing to buy, it’s really razor-sharp pricing,” Machin said.

“So we’ve been quite cautious on where we’ve added assets.”

Machin and CPPIB chief investment strategist Ed Cass said they’d prefer to invest in late-stage infrastructure projects or completed projects rather than “green field” developments that need to be approved and built before they generate cash flow.

Cass said that the new federal infrastructure bank, which is being created by the Trudeau government, will be able to “package” opportunities for late-stage investors after going through the early stages.

But Machin said that CPPIB faces no political pressure to invest in Canada, or the infrastructure bank, because the fund has a clear mandate to maximize investment returns and operates at an arms length from all levels of government.

“We’re shielded from anything along those lines,” Machin said.

His comments were made as CPPIB, created in 1999, announced that 2016-17 marked one of its best years for investment returns in a decade. As of March 31, when CPPIB’s financial year ends, it had $316.7 billion in assets — up $37.8 billion from a year before through a combination of market gains and new funds.

That trails only the $45.5 million increase in 2014-15, the biggest in the past 10 years.

For 2016-17, the fund realized a gross return of 12.2 per cent or 11.8 per cent in net return after all costs. For the 10-year period, CPPIB’s annualized gross return was 6.7 per cent or 5.1 per cent on a net basis.

And Matt Scuffham of Reuters also reports, Canada Pension Plan says it’s losing out on infrastructure deals:

The Canada Pension Plan Investment Board (CPPIB), one of the world’s biggest infrastructure investors, is regularly losing out in bidding wars for such assets, its chief executive said, as investors seek alternatives to low-yielding government bonds.

The CPPIB is one of the world’s biggest investors in infrastructure such as roads, bridges and tunnels but its CEO Mark Machin said high valuations were making it harder to do deals in the current environment.

“We are consistently outbid for assets around the world because they are really priced almost to perfection and there’s an enormous amount of capital chasing infrastructure, particularly in developed markets,” Machin told reporters after the fund reported results for its last fiscal year on Thursday.

The CPPIB did acquire a 33 percent stake in Pacific National, one of the largest providers of rail freight services in Australia, for about A$1.7 billion ($1.3 billion) last year but was generally less active in the infrastructure space than it has been in previous years.

Machin said there could be opportunities in the United States if U.S. President Donald Trump proceeds with a $1 trillion infrastructure plan.

“If the U.S. comes on stream that would be really interesting because it’s such a massive market. There are pools of capital that are getting ready to invest in it. If policy (makers) in the U.S. got their act together that would produce a good home for a lot of capital looking for that type of opportunity,” he said.

The fund, which manages Canada’s national pension fund and invests on behalf of 20 million Canadians, reported a net return of 11.8 percent on its investments last year, helped by its strategy of diversifying across asset classes and geographies.

The performance represented a significant improvement on the year before, when the fund achieved a net return of 3.4 percent.

The CPPIB said it ended its fiscal year on March 31 with net assets of C$316.7 billion ($232.2 billion), compared with C$278.9 billion a year ago, one of the largest yearly increases in assets since it was created 20 years ago.

CPPIB put out a press release, CPP Fund Totals $316.7 Billion at 2017 Fiscal Year-End:

The CPP Fund ended its fiscal year on March 31, 2017 with net assets of $316.7 billion compared to $278.9 billion at the end of fiscal 2016. The $37.8 billion increase in assets for the year consisted of $33.5 billion in net income after all CPPIB costs and $4.3 billion in net Canada Pension Plan (CPP) contributions. The portfolio delivered a gross investment return of 12.2% for fiscal 2017, or 11.8% net of all costs.

“This was a strong year for the CPP Fund as we achieved one of the largest yearly increases in assets since the inception of CPPIB,” said Mark Machin, President & Chief Executive Officer, Canada Pension Plan Investment Board (CPPIB). “As always, we continue to focus on longer-term performance. Year-by-year results will swing, but it is noteworthy that our 11.8% five-year return mirrors our annual return. We believe this is a strong indicator of our ability to generate steady, sustainable returns for generations of beneficiaries to come.”

In fiscal 2017, CPPIB continued to prudently execute its long-term investment strategy to diversify the CPP Fund across multiple asset classes and geographies. Through four investment departments, the organization completed 182 global transactions.

“The composition of our highly diversified long-term portfolio continues to position us well, allowing us to take advantage of the strong performance of global stock markets this year, amid significant global geopolitical developments,” said Mr. Machin. “Our diverse investment programs generated strong earnings, while fixed income investments remained relatively flat.”

In the 10-year period up to and including fiscal 2017, CPPIB has now contributed $146.1 billion in cumulative net income to the Fund after all CPPIB costs. Since CPPIB’s inception in 1999, it has contributed $194.1 billion. For the five-year period, the net nominal return was 11.8%, contributing $129.6 billion in cumulative net income to the Fund after all CPPIB costs.

Five and 10-Year Returns
(for the year ending March 31, 2017)

“We are building a portfolio capable of delivering superior performance over multiple generations to help ensure the long-term sustainability of the CPP,” said Mr. Machin. “We remain disciplined in doing this, investing only in assets that we believe will collectively deliver superior risk-adjusted returns over time. Our portfolio is designed to withstand short-term market uncertainty.”

Long-Term Sustainability

CPPIB’s 10-year annualized net nominal rate of return of 6.7%, or 5.1% on a net real rate of return basis, was above the Chief Actuary’s assumption over this same period. The real rate of return is reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

In the most recent triennial review released in September 2016, the Chief Actuary of Canada reaffirmed that, as at December 31, 2015, the CPP remains sustainable at the current contribution rate of 9.9% throughout the forward-looking 75-year period covered by his report. The Chief Actuary’s projections are based on the assumption that the Fund’s prospective real rate of return, which takes into account the impact of inflation, will average 3.9% over 75 years.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefit payments until 2021, after which a small portion of the investment income from CPPIB will be needed to help pay pensions. In addition, the report confirmed that the Fund’s performance was well ahead of projections for the 2013-2015 period as investment income was 248% or $70 billion higher than anticipated.

The CPP’s multi-generational funding and liabilities give rise to an exceptionally long investment horizon. To meet long-term investment objectives, CPPIB continues to build a portfolio designed to generate and maximize long-term returns at an appropriate risk level. Accordingly, long-term investment returns are a more appropriate measure of CPPIB’s performance than returns in any given quarter or single fiscal year.

Relative Performance Against the Reference Portfolio

CPPIB also measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market indexes that reflect the level of long-term total risk that we believe is appropriate for the Fund.

To provide a clearer view of CPPIB’s performance given our long-term horizon, we track cumulative value-added returns since the April 1, 2006 inception of the benchmark Reference Portfolio. Cumulative value-added over the past 11 years totals $8.9 billion, after all CPPIB costs.

In fiscal 2017, the Reference Portfolio’s return of 14.9% outperformed the Investment Portfolio’s net return of 11.8% by 3.1% The Reference Portfolio return was $8.2 billion above the Investment Portfolio’s return, after deducting all costs from the Investment Portfolio and CPPIB’s operations. Over the five- and 10-year periods, the Investment Portfolio continued to outperform the Reference Portfolio by $5.6 billion and $6.7 billion, respectively, after all CPPIB costs.

“When public markets soar, as they generally did this year, we expect the public equity-based Reference Portfolio benchmark to perform exceptionally well,” said Mr. Machin. “Over the longer term, the Investment Portfolio has outperformed the Reference Portfolio over both the past five- and 10-year periods. Given our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds, we expect to see swings in performance relative to this benchmark, either positive or negative, in any single year. Our investment portfolio is designed to deliver value-building growth and be resilient during periods of economic stress while adding value over the long term.”

Total Costs

This fiscal year reflected a decline in the operating expense ratio for the second year in a row, as well as a slowdown in the growth of CPPIB’s operating expenses. We are committed to maintaining cost discipline in the years ahead. Approximately 32% of our personnel expenses are denominated in foreign currencies and that percentage is expected to increase in the coming years as we continue to hire specialized talent and skills where most of our investing activities occur.

To generate the $33.5 billion of net income from operations after all costs, CPPIB incurred total costs of $2,834 million for fiscal 2017, compared to $2,643 million in total costs for the previous year. CPPIB total costs for fiscal 2017 consisted of $923 million, or 31.3 basis points, of operating expenses; $987 million in management fees and $477 million in performance fees paid to external managers; and $447 million of transaction costs. CPPIB reports on these distinct cost categories, as each is materially different in purpose, substance and variability. We report the investment management fees and transaction costs we incur by asset class and report the net investment income our programs generate after deducting these fees and costs. We then report on total Fund performance net of these fees and costs, as well as CPPIB’s overall operating expenses.

Investment management fees increased due in part to the continued growth in the level of commitments and the average level of assets with external managers, and the year-over-year growth in the performance fees paid. Notably, performance fees reflect the strong performance of our external managers.

Transaction costs marginally increased by $10 million compared to the prior year. This year, we completed 19 global transactions valued at over $500 million, in addition to other transactions assessed across the investment groups. Transaction costs vary from year to year as they are directly correlated to the number, size and complexity of our investing activities in any given period.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2017, which is available at www.cppib.com.

Asset Mix

We continued to diversify the portfolio by the return-risk characteristics of various assets and countries during fiscal 2017. Canadian assets represented 16.5% of the portfolio, and totalled $52.2 billion. Assets outside of Canada represented 83.5% of the portfolio, and totalled $264.7 billion.

Investment Highlights

Highlights for the year included:

Public Market Investments

  • Invested an additional C$400 million for a 1.4% stake in Kotak Mahindra Bank (Kotak). Kotak is a leading private-sector bank holding company in India, with additional lines of business in life insurance, brokerage and asset management. To date, CPPIB has invested a total of C$1.2 billion, representing a 6.3% ownership stake in the company.
  • Invested US$280 million in convertible preferred equity securities of a parent company of Advanced Disposal Services, Inc. (Advanced Disposal), which converted to approximately 20% common equity of Advanced Disposal upon its initial public offering. Based in Ponte Vedra, Florida, Advanced Disposal is the fourth largest solid waste company in the U.S. with operations across 16 states and the Bahamas.
  • Invested A$300 million for a 9.9% ownership in Qube Holdings Limited (Qube), the largest integrated provider of import-export logistics services in Australia. The investment helped fund Qube’s share of the purchase of Asciano Limited, which was acquired by a consortium of global investors including CPPIB.

Investment Partnerships

  • Invested US$137 million in Daesung Industrial Gases Co., Ltd. (Daesung) for an 18% ownership stake, alongside MBK Partners. Headquartered in Seoul, Daesung is the leading industrial gas producer in South Korea servicing a diversified blue-chip customer base with a resilient business model supported by long-term contracts.
  • Acquired a 3.3% direct ownership interest in Bharti Infratel Limited for US$300 million, as part of the purchase of a 10.3% stake alongside funds advised by KKR, from India’s Bharti Airtel Limited. Bharti Infratel deploys, owns and manages telecom towers and communication structures for various mobile operators, and is India’s leading player.
  • Announced a combined investment of US$500 million with TPG Capital for a 17% stake in MISA Investments Limited, the parent company of Viking Cruises. TPG Capital and CPPIB each invested US$250 million to support and accelerate Viking Cruises’ growth initiatives and strengthen the company’s balance sheet. Viking Cruises is a leading provider of worldwide river and ocean cruises, operating more than 60 cruise vessels based in 44 countries.

Private Investments

  • Acquired an approximate 48% stake in GlobalLogic Inc., a global leader in digital product development services, from funds advised by Apax Partners LLP. Based in San Jose, California, GlobalLogic helps clients build innovative digital products to enhance customer engagement, user experience and service capabilities.
  • Acquired 100% of Ascot Underwriting Holdings Ltd. and certain related entities (Ascot), together with Ascot’s management, for a total consideration of US$1.1 billion. Based in London, England, Ascot is a Lloyd’s of London syndicate and a global specialty insurance underwriter with expertise spanning multiple lines of businesses, including property, energy, cargo, casualty and reinsurance.
  • Invested additional equity into Teine Energy Ltd. (Teine) to support Teine’s acquisition of the Southwest Saskatchewan oil-weighted assets of Penn West Petroleum Ltd. for a cash consideration of C$975 million. Since 2010, CPPIB has invested approximately C$1.3 billion in Teine and holds approximately 90% of the company on a fully diluted basis.

Real Assets

  • Acquired three U.S. student housing portfolios for approximately US$1.6 billion through a joint venture entity owned by CPPIB, GIC and The Scion Group LLC (Scion). CPPIB and GIC each own a 45% interest in these portfolios and Scion owns the remaining 10%. The joint venture’s well-diversified US$2.9 billion national portfolio now comprises 48 student housing communities in 36 top-tier university markets, totalling 32,192 beds.
  • Entered into two agreements to invest alongside Ivanhoé Cambridge and LOGOS, an Australian-based real estate logistics specialist, to develop and acquire modern logistics facilities in Singapore and Indonesia. In Singapore, CPPIB will initially commit S$200 million for an approximate 48% stake in the LOGOS Singapore Logistics Venture. CPPIB will also initially commit US$100 million in equity for an approximate 48% stake in LOGOS Indonesia Logistics Venture.
  • Acquired a 50% interest in a portfolio of high-quality office properties in downtown Toronto and Calgary at a gross purchase price of C$1.175 billion from Oxford Properties Group, which will retain the remaining 50% interest. The 4.2-million-square-foot portfolio includes seven office buildings with a broad mix of tenants. The transaction brings the total size of the jointly owned Oxford-CPPIB office portfolio to over 12 million square feet.
  • Acquired a 33% stake in Pacific National for approximately A$1.7 billion, as part of the consortium that acquired Asciano Limited. Pacific National is one of the largest providers of rail freight services in Australia.

Investment highlights following the year end include:

  • Signed an agreement alongside Baring Private Equity Asia to acquire all the outstanding shares of, and to privatize, Nord Anglia Education, Inc. (Nord Anglia) for US$4.3 billion, including the repayment of debt. Nord Anglia operates 43 leading private schools globally in 15 countries in China, Europe, Middle East, North America and South East Asia. The transaction is subject to shareholder approval and customary closing conditions.
  • Signed a definitive agreement to acquire Ascend Learning LLC (Ascend), a leading provider of educational content, software and analytics solutions, in partnership with private equity funds managed by Blackstone and Ascend management. The transaction is subject to customary regulatory approvals and customary closing conditions.
  • Formed a strategic investment platform with The Phoenix Mills Limited (PML) to develop, own and operate retail-led mixed-use developments across India. CPPIB will initially own 30% in the platform, known as Island Star Mall Developers Pvt. Ltd., a PML subsidiary, which owns Phoenix MarketCity Bangalore, for an equity investment of approximately C$149 million. CPPIB’s total commitment to the platform is up to approximately C$330 million, which will increase CPPIB’s stake in the platform up to 49%.

Assets Dispositions

  • Signed an agreement to sell CPPIB’s 25% stake in AWAS, a Dublin-based aircraft lessor, to Dubai Aerospace Enterprise. The sale was made alongside Terra Firma. CPPIB had been an investor in AWAS since 2006.
  • Sold CPPIB’s 45% ownership interest in 1221 Avenue of the Americas, a Midtown Manhattan office property. Net proceeds to CPPIB from the sale were approximately US$950 million. CPPIB acquired the ownership interest in 2010.
  • An affiliate of CPPIB Credit Investments Inc. sold a 16% equity stake in Antares Holdings (Antares) to a private investment fund managed by Northleaf Capital Partners (Northleaf). Northleaf and Antares are forming a broader strategic relationship, which will include developing separately managed accounts and other investment solutions designed specifically for Canadian asset managers, institutional investors and private clients.

Corporate Highlights

  • Welcomed the appointments of three new members to CPPIB’s Board of Directors for three-year terms:
  •  Jackson Tai, appointed in June 2016 as our first non-resident Director, also serves on the       boards of various publicly listed companies, including HSBC Holdings PLC, Eli Lilly & Company and MasterCard Incorporated.
  • Ashleigh Everett, appointed in February 2017, who is President, Corporate Secretary and Director of Royal Canadian Securities Limited and has served on a number of publicly listed companies.
  • John Montalbano, appointed in February 2017, also serves on a number of corporate boards, including Canalyst Financial Modeling Corporation, Wize Monkey Inc. and Eupraxia Pharmaceuticals Inc.
  • Signed a Memorandum of Understanding with the National Development and Reform Commission of the People’s Republic of China to offer CPPIB’s expertise in assisting Chinese policy-makers as they address the challenges of China’s aging population, including pension reform and the promotion of investment in the domestic senior care industry by global investors. Related to this agreement, CPPIB launched the Chinese edition of “Fixing the Future: How Canada’s Usually Fractious Governments Worked Together to Rescue the Canada Pension Plan”.
  • CPPIB Capital Inc. (CPPIB Capital), a wholly owned subsidiary of CPPIB, completed two international debt offerings, comprising three-year term notes totalling US$2 billion, and five-year term notes totalling US$2 billion. CPPIB utilizes a conservative amount of short- and medium-term debt as one of several tools to manage our investment operations. Debt issuance gives CPPIB flexibility to fund investments that may not match our contribution cycle. Net proceeds from the private placement will be used by CPPIB for general corporate purposes.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At March 31, 2017, the CPP Fund totalled $316.7 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn or Twitter.

CPPIB also put out its FY 2017 Annual Report which you should read very carefully here.

In order to understand how CPPIB’s portfolio has shifted over the years, have a look at this image showing the historical comparison of the investment portfolio (click on image):

At the very beginning back in 2000, CPPIB’s portfolio was almost all Canadian bonds and a tiny bit in Canadian equities and now it’s made up of roughly 22% fixed income, 23% real assets, and the rest of it mostly in US and international public and private equities.

In order for CPPIB to invest in private markets all over the world, it needs to find the right partners and hire “boots on the ground” to nurture these relationships and to invest directly where warranted (like infrastructure).

On page 26 of the 2017 Annual Report, there is an interesting discussion on CPPIB’s shift in Reference Portfolio to attain its future funding objectives given the CPP is a partially, not a fully funded plan:

Based on very long-term projections, the Chief Actuary estimates that contributions will finance 65–70% of future Base CPP benefits. Investment returns will finance 30–35%. In other words, contributions will be almost twice as important as investment returns in sustaining future CPP benefits.

This is very different than most fully funded defined benefit pension plans, which are much more dependent on investment returns to finance the larger share of long-term benefits and hence generallymore risk-averse than the CPP Fund needs to be. The funding structure of the CPP means that:

  • Short-term volatility in returns has much less impact on the CPP’s sustainability and minimum required contributions than for conventionally funded plans.
  • A truly long-term perspective can be taken, in which the expected higher returns from undertaking a higher but still prudent investment risk profile tends to increasingly offset the impact of higher short-term volatility as the time horizon lengthens. In fact, it eventually reduces overall risk to the CPP.

Given these key factors, in fiscal 2014, the Board and Management of CPPIB concluded that the risk level of the Fund could and should be increased over time, with a corresponding increase in expected long-term returns. They approved a gradual increase to the equivalent risk level of a portfolio of 85% global equities and 15% Canadian governments’ bonds (click on image)

This shift in the Reference Portfolio makes it that much harder to beat when markets are soaring but over the long term, CPPIB has managed to add considerable value-added with its diversification strategy across public and private markets all over the world.

I explain the above to relate it to this part of CPPIB’s press release:

In fiscal 2017, the Reference Portfolio’s return of 14.9% outperformed the Investment Portfolio’s net return of 11.8% by 3.1%. The Reference Portfolio return was $8.2 billion above the Investment Portfolio’s return, after deducting all costs from the Investment Portfolio and CPPIB’s operations. Over the five- and 10-year periods, the Investment Portfolio continued to outperform the Reference Portfolio by $5.6 billion and $6.7 billion, respectively, after all CPPIB costs.

“When public markets soar, as they generally did this year, we expect the public equity-based Reference Portfolio benchmark to perform exceptionally well,” said Mr. Machin. “Over the longer term, the Investment Portfolio has outperformed the Reference Portfolio over both the past five- and 10-year periods. Given our deliberate choice to build a prudently diversified portfolio beyond just public equities and bonds, we expect to see swings in performance relative to this benchmark, either positive or negative, in any single year. Our investment portfolio is designed to deliver value-building growth and be resilient during periods of economic stress while adding value over the long term.”

This is why I keep stressing you need to evaluate CPPIB’s performance over the last five and ten years, not in any given year. What counts at these large pensions is long-term performance, and here CPPIB has clearly been delivering exceptional results.

In terms of results, one thing I would have liked to have seen is an in-depth discussion on performance attribution on currency hedging — or in the case of CPPIB, non-hedging (CPPIB wisely doesn’t hedge currency exposure).

Go back to read my comment on CPPIB’s FY 2016 results where I stated this:

[..] as stated in the press release above, currency swings matter a lot because CPPIB doesn’t hedge its foreign currency exposure (click on image):

We can debate the merits of not hedging F/X risk but we can’t debate the fact that on any given year, CPPIB will either enjoy bigger gains from foreign currency exposure or suffer F/X losses if the loonie rallies relative to other currencies (for those that hedge currency risk, it’s the exact opposite).

Now, as I was writing this comment and got this far late Thursday afternoon, CPPIB’s CEO Mark Machin called me to go over the results. He was boarding a plane and didn’t have a lot of time to spare so I began by asking him about how currency swings helped boost performance in fiscal 2017.

Mark said that while last year currency swings had a material impact on performance, in fiscal 2017, currency swings were “relatively neutral”.

Mark also told me that the percentage of liquid equities in the portfolio is now 35%, which is another reason why CPPIB will underperform its Reference Portfolio when global stocks are soaring in any given year (78% of the Reference Portfolio is liquid global equities).

More importantly, Mark Machin wanted me to flag page 122 of the 2017 Annual Report where there is a discussion on CPPIB’s value at risk (VaR) and how much the Fund can potentially lose in any given year if a crisis occurs (click on image and read carefully):

Basically, VaR estimates how much a set of investments might lose, given normal market conditions, in a set time period such as a day. It is valid under normal market conditions and does not specifically consider losses arising from severe market events. It also assumes that historical market data is a sound basis for estimating potential future losses.

Market VaR calculated by CPP Investment Board is estimated using a historical simulation method, evaluated at a 90% confidence level and scaled to a one-year holding period. Under these assumptions, CPPIB can lose 12% in any given year.

To complement the VaR measures CPP Investment Board examines the potential impact of exceptional but plausible adverse market events. Stress scenarios are based upon either forward-looking predictive views on events of imminent concern, such as the Brexit, or designed to mimic market moves from periods of historical distress, such as the Global Financial Crisis. A committee with representatives from each investment department meets regularly to identify probable market disruptions and to review underlying assumptions adopted in quantifying the impact of the specific stress scenario. Results are used to detect vulnerabilities in the portfolio and presented to senior management and the Board to affirm overall risk appetite.

I think Mark wanted to stress this point because while it’s nice to see CPPIB gain 11.8% in fiscal 2017, it’s well within the risk forecasts to see the Fund experience a 12% or worse drawdown if markets tumble next year.

And as I stressed in a recent comment, CPPIB is preparing for landing, taking a much more defensive approach in its overall portfolio in terms of public and private markets.

What else did I discuss with Mark Machin? I told him I saw his former colleague who is now running PSP Investments, André Bourbonnais, on Bloomberg Markets discussing how valuations in private markets are high and how PSP is selling some real estate holdings (see below).

Mark agreed, telling me everyone is competing for the same private assets, “outbidding CPPIB”, but he prefers to stay disciplined. I asked him where they’re finding opportunities and he told me by having the right partners and diversifying geographically, they are able to find some well-priced deals. He added: “If there is a crisis, CPPIB stands ready to capitalize on market dislocations.”

Lastly, below I embedded a summary of the compensation of the senior executives at CPPIB (click on image from page 83 of the Annual Report):

As you can see, Mark Machin is the highest paid pension CEO in Canada (and the world). But given the level of responsibility he has at the helm of Canada’s largest pension fund, and the long-term results CPPIB has delivered, and the fact he left Goldman Sachs a while ago to join CPPIB, I can assure you his total compensation is fair and well within reason for the position he holds.

On a personal level, I’ve only met Mark once in Montreal last Fall and found him to be extremely nice, very sharp and I’m happy he is leading CPPIB now. He also has a very experienced team of senior executives helping him manage assets and risks at CPPIB and very qualified and dedicated employees across the organization.

New Jersey’s Big Pension Gamble?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

SNJ Today reports, Underfunded Public Pension Plans Could Hit the Lottery:

Governor Chris Christie is moving forward with his plan to dedicate the state’s lottery revenues to New Jersey’s woefully underfunded public worker pension plans.

The Treasury Department unveiled legislation that the Christie administration wants lawmakers to introduce and approve.

State officials say the plan would immediately reduce unfunded obligations by $13.5 billion for the state’s separate pension funds for teachers, public employees, police, and firefighters.

The state says that would raise the funded ratio of the retirement system from 45 percent to 59 percent.

Democratic Assembly Speaker Vincent Prieto says he continues to question whether it’s an effective plan or a gimmick, but adds that he will review the proposal.

Officials say nothing would change for current state lottery customers.

And Samantha Marcus of NJ Advance Media reports, What you need to know about Christie plan to slash N.J. pension debt with lottery cash:

Gov. Chris Christie’s administration on Thursday released long-awaited details of its proposal to use state lottery proceeds to boost the government worker pension fund.

In a briefing with reporters, the state treasurer emphasized the impact of the proposal, saying it said would take some of the burden off the state budget to come up with more and more money each year and will do more for improve the shaky pension fund than merely contributing the full amount recommended by actuaries.

The strategy is to inject a $13.5 billion asset into the pension fund and give it a guaranteed source of revenue for the next 30 years.

Here’s what you need to know:

How does it work?

Broadly, New Jersey’s lottery will become an asset of the pension fund, just like all of the fund’s stocks, bonds and other investments.

The state hired an outside consultant to determine the value of the fund, and it came back with $13.5 billion. That would immediately slash the state’s pension debt. Treasurer Ford Scudder said the valuation will be updated regularly.

Over the next 30 years, the revenue generated from ticket sales would add $37 billion to the pension fund. The lottery would revert to the state budget after those 30 years.

Who benefits?

While there are seven pension funds, only three are considered eligible. These are the Teachers’ Pension and Annuity Fund, the Public Employees’ Retirement System and the Police and Firemen’s Retirement System.

Under the state Constitution, lottery proceeds must be spent on education and state institutions. These three pension funds qualify, as teacher pensions “constitute state aid for education,” and some members of PERS and PFRS work at state institutions or public universities, according to the governor’s proposed legislation.

But they wouldn’t split it evenly.

The asset would be allocated based on a fund’s share of the liabilities, share of the unfunded liabilities and share of total members.

The teachers’ pension fund is the recipient of about 78 percent. While PERS would receive 21 percent and police and fire, a little more than 1 percent.

What will the impact be on the pension funds?

Overall, the state’s unfunded liabilities — the gap between how much money it has and how much it needs to pay future benefits — will drop from $49 billion to $36.5 billion. The total system will go from 44.7 percent funded to 58.9 percent funded.

The effect on the three pension funds will vary.

TPAF would improve from 47 percent funded to 63.9 percent.

The state portion of PERS would boost from 37.8 percent to 49.6 percent funded.

And the state side of PFRS would increase from 41.2 percent to 44.5 percent.

Both PERS and PFRS receive contributions from the state and local government employers.

What does this mean for the lottery?

Not much, according to the state treasurer.

“There will be absolutely no change in the operations of the lottery. If you like to buy lottery tickets, you’ll notice no difference. If you’re a vendor that sells lottery tickets, you’ll notice no difference … the lottery director will remain in charge of the lottery … the lottery will remain a division of the treasury. It will still be overseen by the state lottery commission,” he said.

According to the draft legislation, the director of investment will join the State Lottery Commission.

“The only thing that will change is rather than net proceeds coming to the general fund, they’ll be going in a new common pension fund.”

Where do lottery revenues go now?

They flow into the state budget. Under the state Constitution, lottery income must be spent on state institutions and state aid for education.

It is expected to bring in $965 million this year, helping fund higher education programs, psychiatric hospitals, centers for people with developmental disabilities and homes for disabled soldiers.

Scudder said those programs won’t be left behind. Once the lottery revenue is rerouted to the pension system, they will be funded out of the state budget.

How, when resources are already stretched thin? That’s more complicated.

Once the lottery is deposited in the pension system, it would dramatically decrease the unfunded liabilities, or debt. That would, in turn, eventually reduce the amount of money that needs to be budgeted for the pension contribution.

It’s like a credit card. Your minimum payment is based on how much you owe. The higher your balance gets, the higher your minimum payment gets. But if you pay down your balance, your minimum monthly payment should drop.

In the state’s case, that will free up some money to do other things, like pay for those programs.

According to an analysis provided by the state, the state budget will be able to absorb those costs without any impact for five years. From 2023 to 2029, there will be a hit of about $160 million to $235 million a year.

Where will the ticket proceeds go?

Proceeds from ticket sales can be used to pay out monthly benefits or invest along with the pension system’s other assets.

The lottery’s monthly cash flows will make it easier for the pension fund to pay benefits without having to sell off investments, Scudder said.

I want to first thank Suzanne Bishopric for bringing this to my attention. It has been two years since I discussed New Jersey’s pension war and three years since I discussed how that state’s pension is GASBing for air.

In my opinion, this latest attempt to shore up its chronically underfunded state pensions by using lottery proceeds is a desperate move which will only kick the can further down the road. It will help at the margin, especially for the state teachers’ pension fund, but it’s doing nothing to address serious structural flaws that continue to hamper the state’s pensions.

Worse still, lotteries are a form of regressive taxation, so here you’ll have New Jersey’s poor and working poor buying lottery tickets to fund chronically underfunded state pensions and the cuts in social programs will mostly affect them.

Sure, if the funded status of these chronically underfunded state pensions improves, it will free up money in the state budget to spend on other programs but the truth is there will be cuts to social programs to fund these pensions, and those projections from 2023 to 2029 look awfully optimistic.

And if something goes wrong, and invariably something always goes wrong, that’s it for New Jersey’s pensions, this last attempt to shore them up using state lottery proceeds will be the final straw.

“Ok Leo, so what would be your solution?” My solution would be to amalgamate these state pensions into one large state pension, adopt better governance to remove any political interference, implement a risk-sharing model, hike the contribution rates and lower the benefits for a period of five to ten years, and introduce a special property tax which is progressive, not regressive, for the same time period and make sure these tax revenues are earmarked only for these state pensions.

But Gov. Chris Christie decided to go for the politically expedient and in my opinion, dangerous route of using state lottery proceeds as the cash cow to fund chronically underfunded state pensions.

Why not? US politicians are like all other politicians, their first goal is to be reelected, so they will keep kicking that can down the road until there are no more cans left to kick.

Canada’s Pensions to the Rescue?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Theophilos Argitis and Kristine Owram of Bloomberg report, Home Capital Is a Minor Meltdown That’s Left a Major Mark on Canada:

The story Canada has been telling itself about its economy is starting to sound like wishful thinking.

It’s too early for the meltdown at Home Capital Group Inc. to show up in the data — and, with just 1 percent of the national market, the mortgage lender may be too small to do so anyway. But it’s already had a big impact on how investors and analysts are weighing the country’s weaknesses against its strengths.

[Note: Home Capital accounts for only 1 percent of the national market but is much more present in the Greater Toronto Area, and this is where the concern lies.]

Boom-times in Vancouver and Toronto look increasingly like the spillovers from debt-fueled housing bubbles, the kind that wrought havoc in so many Western countries last decade. A banking system long considered among the world’s soundest got hit by a Moody’s downgrade this week. The government has touted a transition away from commodity-dependence and toward hi-tech smarts; Canadians are waking up to the possibility that their economy got hooked on real-estate instead.

None of that is to say that Canada has become a basket case overnight, of course. Still, expectations that it’ll grow faster than developed-world peers this year — as forecast by the Bank of Canada — may be unsustainable, according to Craig Fehr, Canadian investment strategist at money-manager Edward Jones & Co.

“Every time I see estimates for 2 plus percent GDP growth this year I just think they’re far too rosy,” he said. “It’s a function of the imbalances that exist in the economy.”

Housing is exhibit no. 1. Estimates of its direct contribution to the economy exceed 20 percent (click on image).

The figure is much higher when secondary effects are included, from lawyer fees to higher government revenue to increased retail spending driven by homeowners’ inflated sense of their own wealth, as house prices in some regions shot up more than 20 percent a year. Consumer spending as a share of gross domestic product is hovering around the highest since possibly as far back as the 1960s.

“The question is just how will the economy look as that ceases to contribute quite so forcefully,” said Eric Lascelles, chief economist at RBC Global Asset Management Inc. “All bubbles come to an end. I think it could be an interesting year or two ahead.”

Both home-ownership and consumption are being financed by record levels of household debt. Canada’s traditional remedy for commodity busts involved scraping together enough foreign financing to cushion the initial blow, then depreciating the currency to stoke manufacturing and exports.

This time, after the oil crash of 2014, there’s little sign of an industrial revival. There has been plenty of overseas borrowing: External debt was about 60 percent of GDP a decade ago; now, at C$2.3 trillion, it’s larger than the economy. But much of it has been channeled to households.

As a result, they’re “indebted to a level that is unprecedented,” said Michael Emory, chief executive officer of Allied Properties Real Estate Investment Trust, who describes that as the economy’s biggest concern. “Canadian consumers historically have been very prudent with the levels of debt they bear,” he said.

Not anymore (click on image).

Moody’s Investors Service cited the private-debt burden when it cut ratings on the country’s six biggest banks, expressing concern about asset quality.

That backdrop makes the Home Capital crisis more threatening than it otherwise might have been. A run on deposits, even at a small lender, sparks concern about contagion. Default levels across the system remain low, but could rise if the economy slows and financial conditions tighten.

Which they likely will, according to David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, who expects credit growth to tail off. “That alone will probably cause the Bank of Canada to keep interest rates that much lower for longer,” he said.

Investors looking for the drama of a full-blown financial crash may be disappointed.

Even while downgrading Canadian banks, Moody’s acknowledged that they “maintain strong buffers in terms of capital and liquidity.” Regulators keep a relatively tight grip on the system.

And history shows that, when forced to confront problems, the industry tends to circle the wagons. Home Capital’s troubles, for example, have prompted other lenders to step up to limit the fallout. MCAP Corp. agreed to pick up C$1.5 billion in mortgages and renewals from its rival, according to the Globe and Mail. Investment funds at Canadian Imperial Bank of Commerce are buying Home Capital’s equity.

All has that contributed to a rally in the shares this week. They’re still trading at less than half the level of a month ago, and plunged again at the market’s opening on Friday after company management said on a conference call that there’s no immediate prospect of additional asset sales.

Canada’s wider financial markets have been lackluster rather than dismal. The loonie is down 1.9 percent this year, the most among 16 major currencies tracked by Bloomberg. The main stock gauge has underperformed other developed countries, but it’s still up 1.7 percent.

So investors aren’t exactly flashing warning signals. Still, they’re finding more things to worry about than was the case a month ago.

When the U.S. housing bubble collapsed, it triggered first a financial crisis and then a recession. In the event of a replay north of the border, Canada might avoid the first pitfall, if its banks are as sound as everyone says. That doesn’t mean its economy won’t get hurt in the fallout.

On Friday, Matt Scuffham of Reuters reports, Home Capital shares fall after flagging going concern issues:

Shares in Home Capital Group Inc (HCG.TO) fell as much as 20 percent in early trading on Friday after the lender said uncertainty around future funding had cast doubt about whether it could continue as a going concern.

Shares in Canada’s biggest non-bank lender hit a low of C$8.70 in early deals before recovering to trade down 11 percent at C$9.60.

Home Capital issued first-quarter results after the market closed on Thursday, alongside which it stated that: “Management believes that material uncertainty exists regarding the company’s future funding capabilities as a result of reputational concerns that may cast significant doubt upon the company’s ability to continue as a going concern.”

Depositors have withdrawn nearly 94 percent of funds from Home Capital’s high-interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when Canada’s biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business.

Home Capital relies on deposits from savers to fund its lending to borrowers, such as self-employed workers or newcomers to Canada, who may not meet the strict criteria of the country’s biggest banks.

Reuters reported on Thursday that Home Capital was in talks to divest about C$2 billion in assets to help pay down a high-interest loan, according to people familiar with the situation.

The lender needs to raise funds to help repay a C$2 billion loan from Healthcare of Ontario Pension Plan (HOOPP), which provided the high-interest line of credit last month, charging interest of 10 percent on outstanding balances. Home Capital has so far drawn down C$1.4 billion from the facility but is hoping to secure alternative funding on more favorable terms.

In a conference call with investors on Friday, Chief Financial Officer Robert Morton confirmed the company is considering selling assets to enable it to refinance quicker and pay off the emergency loan provided by HOOPP.

[Note: Boyd Erman of Longview Communications reached out to me and provided a transcript of the conference call which shows it wasn’t Robert Morton but a director, Robert J. Blowes, who said this.]

“Given the cost of the C$2 billion credit line repayment of amounts, repayment of the amounts drawn under this facility in a timely fashion is an essential part of management’s plans. This may necessitate asset dispositions,” he said.

Home Capital disclosed data on Friday that showed the rate of withdrawals by depositors was slowing, a day after the company raised doubts about its ability to continue as a going concern.

At this writing, late Friday morning, shares of Home Capital Group (HCG.TO) are down roughly 12% but enjoyed a hell of a run this week, doubling from the lows before falling back, and this on much higher than normal volume (click on image):

While some see this as a ‘classic contrarian opportunity’, I’m on record stating I wouldn’t touch these shares with a ten-foot pole given the uncertainty surrounding the fate of the company. But I also said that you shouldn’t be surprised to see them bounce every time some potentially good news story leaks and shorts sellers cover.

Ten days ago, Reuters reported that buyout firms Apollo Global Management, Blackstone Group, and Centerbridge Partners LP are among potential suitors studying bids for Canada’s biggest alternative mortgage lender. According to the article, Brookfield Asset Management and Fairfax Financial Holdings are also among other firms interested in buying Home Capital.

On Thursday, John Tilak and Matt Scuffham of Reuters reported, Home Capital plans $2 billion in asset sales to ease loan burden:

Home Capital Group, Canada’s biggest non-bank lender, is in talks to divest about C$2 billion in assets to help pay down a high-interest loan and delay a potential sale of the entire company, according to people familiar with the situation.

The company wants to sell all or part of its commercial mortgage portfolio, its consumer finance business and a small portion of its traditional residential mortgage portfolio to raise the $2 billion, the people said.

U.S. buyout firms Cerberus Capital Management L.P., Fortress Investment Group LLC and Apollo Global Management LLC are among those in active talks with Home Capital about buying some of its assets, the people said, declining to be named as the matter is not public.

Home Capital and Cerberus declined comment. Fortress and Apollo did not respond to requests for comment.

Toronto-based Home Capital expects the proceeds of the sales to help repay a $2 billion loan from Healthcare of Ontario Pension Plan, which provided a high-interest line of credit last month, the people said. Home Capital has said it plans to secure a loan on more favorable terms.

Caisse de depot et placement du Quebec, as well as other pension funds and some private equity firms, are in talks with Home Capital about providing an alternative loan, the people said.

Caisse did not immediately respond to a request for comment.

Depositors have withdrawn more than 90 per cent of funds from Home Capital’s high-interest savings accounts since March 27, when the company terminated the employment of former Chief Executive Martin Reid.

The withdrawals accelerated after April 19, when Canada’s biggest securities regulator, the Ontario Securities Commission, accused Home Capital of making misleading statements to investors about its mortgage underwriting business. The company has said the accusations are without merit.

The pace of decline of withdrawals has slowed down, recent data shows..

The sale of assets, if successful, is likely to delay the sale of the entire company, the people said.

Home Capital’s commercial mortgage business, which includes both residential and non-residential mortgages targeting higher-quality borrowers, may be worth about C$2 billion, the people said.

The consumer finance business includes secured and unsecured credit cards and could be worth about C$400 million, the people said. Home Capital could also sell as much as C$1 billion in single-family residential mortgages, the people said.

Reuters reported last week that buyout firms Apollo and Blackstone Group LP are among potential suitors studying bids for Home Capital.

On Friday morning, Matt Scuffham of Reuters confirmed Home Capital eyes disposals to address funding issues, stating this in his article:

Reuters reported on Thursday that Home Capital was in talks to divest about C$2 billion in assets to help pay down a high-interest loan, according to people familiar with the situation.

The lender needs to raise funds to help repay a C$2 billion loan from Healthcare of Ontario Pension Plan (HOOPP), which provided the high-interest line of credit last month, charging interest of 10 percent on outstanding balances. Home Capital has so far drawn down C$1.4 billion from the facility but is hoping to secure alternative funding on more favorable terms.

In a conference call with investors on Friday, Chief Financial Officer Robert Morton confirmed the company is considering selling assets to enable it to refinance quicker and pay off the emergency loan provided by HOOPP, which he said would significantly impact the company’s performance in 2017.

[Note: Boyd Erman of Longview Communications reached out to me and provided a transcript of the conference call which shows it wasn’t Robert Morton but a director, Robert J. Blowes, who said this.]

“Given the cost of the C$2 billion credit line repayment of amounts, repayment of the amounts drawn under this facility in a timely fashion is an essential part of management’s plans. This may necessitate asset dispositions,” he said.

Alan Hibben, a former Royal Bank of Canada executive who was brought in a week ago to bolster Home Capital’s board, replacing company founder Gerald Soloway, fielded many of the questions on the call, which was the first time Home Capital executives have spoken publicly since the withdrawal of deposits sparked concerns over the lender’s liquidity.

Hibben said he “fundamentally believed in the funding model of Home Capital and the role that it played in the market”.

“This company has faced a crisis in confidence and liquidity but a number of steps have been taken to address both our governance and near-term liquidity issues, which will provide a platform which we can build on to assess our strategic alternatives,” he said.

Hibben said he was taking on a grater role, alongside management, to address a “wide range of potential funding sources and strategic transactions”.

He added, however, that he did not expect deals in the coming weeks.

“We have some breathing room so that we can address medium and longer-term issues in a thoughtful way. I don’t expect there to be any new, significant, transactions within the next days and weeks,” he said.

Home Capital disclosed data on Friday that showed the rate of withdrawals by depositors was slowing, a day after the company raised doubts about its ability to continue as a going concern.

Alan Hibben wasn’t the only person Home Capital brought in to shore up its board. Earlier this week, the company announced that pension heavyweights Claude Lamoureux, Ontario Teacher’s former CEO (featured in the image at the top), and Paul Haggis, the former CEO of OMERS are joining Home Capital’s Board along with Sharon Sallows.

I don’t know if traders and investors picked up on that, but in my opinion, the addition of these credible board members had a lot to do with the rally in Home Capital’s shares this week, along with the news of interest from top buyout funds, the Caisse and other pensions.

All this got me thinking if Canada’s big pensions are behind the move to save Home Capital to limit contagion risks to the Canadian financial system.

It sounds crazy but think about it, Canada’s big pensions have a material interest in making sure the big banks don’t suffer significantly from Home Capital’s woes.

First, we had HOOPP giving the company a big loan with hefty terms and now we have interest from top buyout funds, the Caisse and “other pensions”, and well-known former CEOs of big Canadian pensions being nominated to Home Capital’s Board (soon after Jim Keohane stepped down).

If I didn’t know any better, it sounds like Canada’s big pensions are all colluding to save Home Capital Group to limit contagion risk to the Canadian financial system.

And that’s my weekend conspiracy theory. Buy Home Capital’s shares at your own risk. I’m still kicking myself for not holding my nose and buying Valeant Pharmaceuticals (VRX) for a quick trade earlier this week. Oh well, could have, should have, didn’t and that trade has sailed!

As far as Canadian banks, I don’t like them for a lot of reasons, and they have nothing to do with Home Capital’s problems. I see the US economy slowing down considerably in the second half of the year and we could have a perfect storm hitting the Canadian economy — US and global slowdown, lower oil prices and the bursting of the housing bubble — all of which don’t bode well for Canada’s big banks.

Add to this intensifying deflationary headwinds which will cap any increases in rates, and you understand why I don’t like financials in general, although I’m particularly worried about Canada’s big banks.

In fact, I was looking at the weekly chart of CIBC (CM), one the big six banks that’s most exposed to a downturn in housing, and it’s been hit very badly recently (click on image):

The thing with Canadian banks is every time they dip hard, Canada’s big pensions come in to buy them, but I wouldn’t rush to buy any dip here, there could be another crisis on its way, which will give investors the opportunity to buy at a lower price.

That’s all from me, hope you enjoyed reading this comment. As always, these are my views and have nothing to do with Canada’s pension giants. Do your own due diligence before buying and selling anything. I’m just providing you with my two cents.

Also, please remember to kindly donate and/ or subscribe to this blog on the right-hand side under my picture. I accept all donations and thank those of you who take the time to contribute (I’ve heard PayPal is frustrating but it should be simple, if you encounter problems, email me at LKolivakis@gmail.com).

Ron Mock on Canada’s Infrastructure Needs?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Ron Mock, Ontario Teachers’ president and CEO was in Montreal briefly last week following the Milken Institute Conference in Los Angeles to discuss “The Real Infrastructure Questions for Canada” at The International Finance Club of Montreal.

You can read the entire speech here.  In his speech, Ron covered seven questions:

  1. What is our longer-term vision for major-project infrastructure strategy in Canada?
  2. Why should we care?
  3. What are our priorities?
  4. How should we fund these projects?
  5. What are the impediments to execution?
  6. Have other countries figured this out?
  7. Does the public support private capital investments in large infrastructure projects?

Take the time to read the entire speech here, it’s quite short and makes the critical points below:

  • On the first question: “I can’t say strongly enough that this is not about the financing. It is about having the projects with ongoing funding plans, guided by the vision that will lead us to success. My belief is that this vision remains a work in progress and when it is crystallized it will propel us forward.”
  • On the second question: Yes, we should all care, Ron is right, “we can’t afford not to. For the sake of productivity, global competitiveness and jobs.” I would also add for the sake of our environment.
  • On the third question: Ties into the vision for infrastructure. Not investing in infrastructure will lead to more congested roads, ports, airports and impede the flow of goods and services and limit the advancement of technology hubs like the one between Toronto, Kitchener and Waterloo.
  • On the fourth question: Even though Canada invests quite a bit of its GDP on infrastructure (18%), it’s not enough to meet the growing needs of investing far more ($62 billion per year till 2030 to support economic growth). Governments need capital and institutional investors trying to meet their long-dated liabilities are looking for good infrastructure projects to invest in. Moreover, on top of capital, Ontario Teachers [and other large Canadian investors] has a long history of investing in this sector and has the right partners which bring critical knowledge on managing these projects efficiently.
  • On the fifth question: The major impediments to investing in infrastructure in Canada are twofold: first, infrastructure assets are owned by three levels of government and none of them is ready to cede control and second and more importantly, “the political reality of an election cycle, which is far shorter than the time frame needed to deliver an infrastructure project from the ground up.” In this regard, all three levels of government will play a critical role, much more important than being a financing partner, in getting everyone on-side and moving in the same direction. Ron was clear on this” I believe the new infrastructure bank of Canada should be a bank on projects, not a bank of cash.”And these infrastructure projects require long-term sustainability in which partners can implement realistic user-pay rates and adjust them according to market conditions and offer a critical mass customers, have clarity around government policies and tax incentives, have a clear understanding of the need and role for regulators to protect the public’s interest, etc.
  • On the sixth question: Ron cites examples in Australia, the UK, Belgium and Denmark to make his point that some countries have figured out how the “right governance, structure and  projects” create a “win-win” situation for everyone.
  • On the last question: Ron was clear: “In order to be successful as a country, if we want to pursue this model, we are going to have to find ways to clearly demonstrate the benefits, and to gain the public trust.” Canada has many right things to make this model successful but the devil is in the details and “in an environment where our productivity is declining as our
    demography ages, I hope it won’t take a crisis for us to be forced to finally sort out those details.”

I agree and hope they do get the details right on Canada’s new infrastructure bank, government policy, the projects and a lot more.

Again, take the time to read the entire speech here, it covers the points above in more detail.

CPPIB Retreats From Farmland?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

John Tilak and Matt Scuffham of Reuters report, Canada’s CPPIB pension fund plans farmland retreat:

Canada Pension Plan Investment Board (CPPIB) has decided against making further investments in farmland and is open to selling its existing portfolio after reviewing the operations, people familiar with the matter told Reuters this week, a shift in strategy after some local farmers voiced concerns.

CPPIB began buying farmland in North America in 2012 and has since purchased about 120,000 acres in the United States and a similar amount in Canada. The country’s biggest public pension fund purchased 115,000 acres of Saskatchewan farmland from Assiniboia Farmland LP in 2013 for C$128 million ($95 million)and had intended to invest another C$500 million in Canadian farmland over a five-year period.

However, its plans met with a backlash from some local farmers who believed they would be squeezed out of buying land themselves and feared rising rents if the CPPIB pursued its mandate to maximize returns for Canada’s pensioners.

Those concerns eventually prompted the Saskatchewan government to ban some institutional investors from buying farmland in the province, whose plains usually grow more wheat than Argentina, thwarting CPPIB’s plans for expansion.

CPPIB, a late entrant to farmland business, declined to comment specifically on the changes, but the fund’s global head of public affairs, Michel Leduc, said:

“We assess performance of each investment program with that in mind as well as fit within our total portfolio approach, contribution to diversification and desired return-risk profile.”

CPPIB, which had C$298 billion ($219.62 billion) under management at the end of 2016, oversees the national pension fund on behalf of 20 million Canadians.

The fund’s move stands to be good news for some farmers and not so good for others. Those who want to expand the size of their farms are winners because they have one less tough bidder to compete against, but those hoping to sell the farm and retire may find fewer buyers.

Although CPPIB continued to buy farmland in the United States, plans to purchase farmland in Australia, New Zealand and Brazil also failed to materialize. Frustrated by the fund’s lack of progress, CPPIB Chief Executive Mark Machin recently ordered a review of the business led by its global head of real estate investments, Graham Eadie, the people told Reuters.

The sources spoke on condition of anonymity because the matter is confidential.

Eadie’s review concluded the business was not sufficiently scalable to justify further investment. As a result, CPPIB has decided not to acquire more farmland and is open to selling what it already has, the sources added.

It is not clear whether the fund is actively seeking buyers.

CPPIB’s decision comes as some large pension funds continue to look for opportunities in the sector. Wealth funds of Gulf Arab states have been buying farmland in developing nations to ensure food security. Recently, some of the Australian pension funds have started buying farmland after staying away as the local farms were often too small in value to be of interest to the A$2 trillion ($1.51 trillion) pension fund industry.

Global farmland investors range from pension plans like CPPIB to companies including Ontario-based Bonnefield and U.S.-based real estate investment trust Farmland Partners Inc.

The CPPIB has decided instead to focus on the processing, delivery and storage of agricultural products following last year’s acquisition of a 40 percent stake in Glencore Plc’s agricultural business for $2.5 billion.

As part of the changes, the fund has parted company with Angus Selby, who was based in London and had led the bank’s global investment strategy for agriculture and farmland for five years, the people added. The fund’s agriculture trading group was also laid off at the end of last year, one of the people said. Selby was not available for comment and CPPIB declined to comment.

Let me begin my comment by stating I agree with CPPIB’s decision to exit farmland. Graeme Eadie (not Graham Eadie), CPPIB’s Senior Managing Director & Global Head of Real Assets, is right, it’s not scalable and in my opinion, CPPIB is better off focusing on other private markets right now, like infrastructure, real estate, private equity and private debt.

A little over two years ago, I openly questioned whether farmland is a good fit for pensions, stating the following:

[…] the bubble in farmland is bursting and second, when it bursts and farmers walk away from their leases, it could potentially mean costly and lengthy court battles pitting landowners (ie. endowment funds and public pension funds like CPPIB and PSPIB which also invests in farmland) against farmers. That doesn’t look good at all for pensions.

All this to say, while it’s really cool following Harvard’s mighty endowment into timberland and farmland, when you come down to it, managing and operating farmland is a lot harder than it seems on paper and the risks are greatly under-appreciated. Add the potential of global deflation wreaking havoc on all private market investments and you understand why I’m skeptical that farmland is a good fit for pensions, even if they invest for the long, long run.

No doubt about it, the farm bubble burst, peaking around 2013 (click on image):

Glenn Kauth, editor of Benefits Canada, recently reported on navigating the complexities of investing in agriculture:

While a recommendation that the government reverse course on maintaining the retirement age at 65 was one of the headline suggestions to come out of the recent report from the federal advisory council on economic growth, a key focus was on four sectors the group felt have a high potential for growth in Canada. One of the four sectors was agriculture.

With US$26.1 billion in agricultural exports in 2015, Canada is already the world’s fifth-largest exporter in that sector, the report noted. The growth of the global middle class signals further growth potential, with worldwide demand expected to rise by 70 per cent by 2050. In his recent budget, Finance Minister Bill Morneau embraced the call to focus on agriculture. As part of the budget’s innovation and skills plan, the government is targeting a rise in exports in the agricultural and food category to $75 billion a year by 2025.

But while J.P. Gervais, vice-president and chief agricultural economist at Farm Credit Canada, says recent years “have been great” for agriculture in Canada, he notes predictions are for a decline of up to four per cent for farm cash receipts in 2016. The reasons, according to Gervais, include weather issues in some regions that have led to poor yields for certain crops. And while falling commodity prices have put a damper on the U.S. agricultural sector, Gervais says the decline of the Canadian dollar has helped to shield Canadian farmers from some of the pressures. “Anything but cereals is generally doing well,” he says, noting crops such as oilseeds and canola are doing better.

Focus on farmland

While Canadian agriculture shows some promise, institutional investors have been active on the global front, particularly when it comes to farmland. The activity started to pick up in 2012, when the Caisse de dépôt et placement du Québec and the British Columbia Investment Management Corp. both invested in an agricultural company launched by the U.S.-based Teachers Insurance and Annuity Association of America-College Retirement Equities Fund (TIAA-CREF). The company, TIAA-CREF Global Agriculture LLC, included $2 billion in commitments to invest in farmland in the United States, Australia and Brazil.

The move followed an investment in 2011 by the Alberta Investment Management Corp. in timberland assets owned by Australia’s Great Southern Plantations. The Alberta fund’s plan is to boost its investment in part by converting some of the land to a higher use, such as agriculture. More recent moves by Canadian plans include the Public Sector Pension Investment Board’s 2015 investment in cattle properties through Queensland-based Hewitt Cattle Australia.

Australia, in fact, seems to be a key focus for Canadian pension funds’ agricultural interests. In 2014, the Ontario Teachers’ Pension Plan invested in Aroona Farms, a grower of almonds that operates two properties in the states of Victoria and South Australia. The plan owns a 99 per cent stake in Aroona Farms.

“As part of our natural resources, we have an agriculture strategy,” said Bjarne Graven Larsen, executive vice-president and chief investment officer at the Teachers’ plan, during an announcement in March of the organization’s annual results for 2016. “And we like that a lot because it diversifies. It gives us, at least to some extent, exposure to inflation in food prices and land as well.”

While farm values have been on a long-term upswing, they’ve been on a recent downturn in one key market, the U.S. Midwest. The overall decline in U.S. farm values in 2016 was just 0.3 per cent, according to the U.S. Department of Agriculture. The declines were higher, however, in the midwestern states. Karen Dolenec, global head of real assets at Willis Towers Watson in London, England, notes Australia has generally been attractive for agricultural investments, while South America has good potential for boosting properties to higher uses.

When it comes to the merits of various crops, Dolenec emphasizes diversification. Options include investing in annual row crops that require planting every year, versus permanent ones, such as vineyards, orchards and nuts. Permanent crops, says Dolenec, can require higher upfront and ongoing investments but they do offer an investor the opportunity to add value.

At the Ontario Teachers’ plan, Graven Larsen says the focus is on slower-growing crops. “We like almond, avocado, something of the not-so-fast crop, so far,” he said last month.

How to invest is one of the key questions when it comes to deciding whether to acquire farmland as a landlord renting out the property to farmers or with more of an active role. For Canadian pension plans, the typical approach has been to be a landlord, as is the case with investments like the TIAA-CREF funds. But in Canada, a smaller player on the scene, Area One Farms Ltd., offers what president and chief executive officer Joelle Faulkner describes as a joint venture that’s “more like private equity in that we’re equity partners with the farmer.”

“They put in equity and we put in equity and they co-own,” says Faulkner, noting both owners share in the profits, with an extra portion going to the farmer for running the operation.

Investors get access to higher-quality land that often isn’t available on the open market, according to Faulkner. The idea, she adds, is to boost farm productivity. “We do upgrade about half of our portfolio.”

Faulkner expects Area One Farms, which started in 2012, to close the deal on its third fund soon and she says it’s now seeing some institutional interest. While it targets a return of 15 per cent to investors, Faulkner admits that’s largely on the capital appreciation side. The balance would be from a targeted three to five per cent from crop income.

On the other side, Justin Ourso, managing director and portfolio manager at TIAA Investments, says renting out farmland can be very “fixed income-like.” Investors, he notes, can remove themselves from the volatility of farming and avoid production risks.

The challenges

While rising farmland values are good news for investors already in the area, they can be a challenge for those looking to buy now, an issue Dolenec acknowledges is a concern but one she says is true of all real assets.

And then there are the legal difficulties. Many governments are protective about foreign investment in farmland. Saskatchewan, for example, prohibits foreigners and publicly traded entities from owning more than four hectares of land. According to Faulkner, the rules initially limited pension fund involvement in Saskatchewan farmland to the Canada Pension Plan Investment Board, which in 2013 acquired the assets of Assiniboia Farmland LP. The transaction, which involved a portfolio of more than 45,000 hectares of farmland, included an initial equity investment of about $120 million. The board then bought 12 more farms for $33.7 million.

While the board had been planning additional investments in Canadian farmland, the Saskatchewan government, amid concerns about the impact of inflated farm prices, put a halt to further purchases in 2015. Asked about the board’s investments in agriculture, spokesman Dan Madge declined to comment. “Agriculture isn’t something we’re focused on right now,” he told Benefits Canada.

Pension fund involvement is even more controversial in countries like Brazil. Canadian groups, including several unions and non-profit organizations, have taken investors like the Caisse and bcIMC to task for their involvement in Brazil through TIAA-CREF Global Agriculture LLC and demanded they refrain from further investments in its funds. The controversies centre on concerns about violence and land conflicts in areas where the fund has been acquiring farms.

Asked about the allegations, Ourso questions their accuracy and says the TIAA-CREF fund has worked to address the concerns. “We take those allegations quite seriously,” he says.

“We don’t believe that they are accurate.”

The actions the fund has taken include title searches to verify ownership for a minimum of 20 years and an assessment of legal, civil, tax or criminal matters related to the seller of the land. In Brazil, it reviews licences permitting land conversion to agriculture and satellite images to assess historical uses.

Devlin Kuyek, a researcher at Grain, a non-profiit organization that has criticized farmland investments by pension plans in Brazil, acknowledges that TIAA-CREF has made strides on disclosing the locations of its holdings in that country. The organization still has concerns about the acquisitions, however. “If TIAA is sincere about its intentions, then it should not be investing in any part of the world where there are land conflicts and ongoing processes of agrarian reform,” he says.

And beyond the legal and financial concerns is a more practical one. According to Dolenec, the fund offerings available to institutional investors remained limited, despite the interest in agriculture over the past decade.

“The range of offerings has really not grown as quickly as people expected,” she says.

But as Dolenec notes, there are other opportunities in agriculture besides farmland. Last year, for example, the CPPIB announced it was buying a 40 per cent stake in Glencore Agricultural Products, a global grains and oilseeds company whose operations include processing, storage, logistics and marketing.

As for farmland, the investment opportunities have typically been on the small side, Ontario Teachers’ Graven Larsen noted last month.

Climate change, he added, is another big consideration. “We will continue to focus on that area, but it’s not going to be huge,” he said in reference to agriculture.

“But it’s probably going to be larger than today.”

Nobody knows more about the challenges of investing in farmland than TIIA, one of the largest global investors in farmland.

Recently, protesters rallied outside TIAA’s New York offices to protest its farmland deals and TIAA’s investment services clients – 14,000 of them – and a broad coalition of international organizations requested last week that TIAA address material financial risks in how the firm’s manages its global agriculture investments:

TIAA is one of the largest global investors in farmland, with over 607,000 hectares under management in the U.S. and around the world. These farmland assets are worth about USD 8 billion. In aggregate, they represent about 1 percent of TIAA’s overall assets under management.

To mitigate this material financial risks, back in 2011, TIAA signed the Farmland Principles for responsible investing focusing on robust investment and sustainable management of farmland assets. Now this TIAA–CREF client–led coalition is requesting that TIAA demonstrate compliance with these principles in how they manage their assets under management.

This is because recent reports, described in The New York Times in 2015, claim that TIAA has promoted land speculation by investing hundreds of millions of dollars in Brazil’s cerrado wooded prairielands. These TIAA clients allege that the firm’s investments lead to land speculation in Brazil that contravenes Brazilian law restricting land ownership by foreign corporations.

Similarly, according to TIAA’s 2015 report Responsible Investing in Farmland, the firm owns 256,300 hectares of farmland in Brazil. Their clients are extremely concerned that reports of land grabbing and human rights violations in Brazil are systemic.

Beyond its direct land investments, as of March 20, 2017, TIAA has at least USD 170 million invested in SE Asian palm oil companies, some of who also represent similar material financial risks to TIAA and its clients.

As reported by Chain Reaction Research, Pepsico and TIAA face financial risks from agricultural investments and supply chains.

When you read these articles, you realize that investing in farmland isn’t clean and smooth, it’s fraught with all sorts of political, legal and financial risks.

Yes, on a smaller scale, Ontario Teachers’ CIO Graven Larsen is right, you can invest in some nice deals. I too like almonds, avocados, and walnuts, all are regular staples of my daily diet.

But investing in farmland on a much larger scale is fraught with all sorts of risks, so maybe a better approach is the private equity approach where you partner up with local experts and farmers who have an equity stake in the investment (like Area One Farms in Canada). Another approach is what CPPIB did with its massive Glencore deal.

All I know is I think CPPIB made a wise decision to retreat from farmland, especially now that it’s preparing for landing and taking a much more defensive stance, waiting for the right moment to pounce on opportunities as they arise in the future.

A Caisse of Outrageous Compensation?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

This is a bilingual comment so bear with me. La Presse Canadienne recently reported on the compensation of the Caisse’s senior managers, Combien ont gagné les patrons de la Caisse de dépôt et placement du Québec en 2016?:

Les six principaux dirigeants de la Caisse de dépôt et placement du Québec (CDPQ) se sont partagé près de 11 millions $ en rémunération totale l’an dernier, indique le rapport annuel de l’institution dévoilé mardi.

C’est un peu plus que les quelque 10,7 millions $ en salaires qui avaient été octroyés en 2015.

Son président et chef de la direction, Michael Sabia, a touché un total de 2,82 millions $, en hausse de 8,5 pour cent. Ce montant tient compte du versement d’une rémunération incitative différée de 1,12 million $. En 2013, M. Sabia avait choisi de différer 900 000 $, une somme qui a évolué en fonction de la performance de la Caisse sur trois ans, ce qui lui a permis de réaliser un rendement de 221 723 $.

L’an dernier, M. Sabia a décidé de différer 1,74 million $.

Celui qui était jusqu’à tout récemment premier vice-président et chef des placements, Roland Lescure, arrive au deuxième rang au chapitre du salaire global, avec 2,62 millions $, en hausse de 20 pour cent.

M. Lescure, qui a quitté ses fonctions au début du mois pour se joindre à la campagne du candidat à la présidentielle française Emmanuel Macron, a touché une somme différée de 987 739 $.

En 2016, la Caisse a affiché un rendement de 7,6 pour cent, soit 18,4 milliards $, dépassant son indice de référence fixé à 5,8 pour cent. Sur cinq ans, il s’agissait toutefois de la moins bonne performance annuelle du bas de laine des Québécois.

Sur cinq ans, le rendement de la CDPQ a été de 10,2 pour cent, soit 1,1 point de pourcentage de plus que son indice de référence.

Au total, les employés de l’investisseur institutionnel ont touché des primes de 59 millions $, en hausse de 21 pour cent par rapport à l’an dernier. La Caisse justifie cette progression par son rendement sur cinq ans ainsi qu’une “valeur ajoutée” de 12,3 milliards $ générée l’an dernier.

L’ensemble des employés ont choisi de différer jusqu’en 2019 une somme de 32 millions $.

Below, I translate the key takeaways:

  • According to the latest annual report which came out last Tuesday, the top six directors at the Caisse were compensated a total of $11 million in 2016, a bit more than the $10.7 million they received in total compensation in 2015.
  • Michael Sabia, the President and CEO, received a total of $2.82 million in 2016, up 8.5 per cent from the previous year. This amount includes the payment of a deferred incentive fee of $1.12 million. In 2013, Mr. Sabia chose to defer $900,000, a sum that evolved based on the Caisse’s performance over three years, resulting in a return of $221,723. Last year, Mr. Sabia decided to defer $1.74 million.
  • Roland Lescure who up until recently was the CIO of the Caisse, came in second in the overall compensation at $2.62 million, up 20 per cent from the previous year. Mr. Lescure, who left office earlier last month to join the campaign of French presidential candidate Emmanuel Macron, received a deferred sum of $987,739.
  • In 2016, the Caisse posted a return of 7.6 per cent, or $ 18.4 billion, exceeding its benchmark of 5.8 per cent. Over five years, however, it was the worst annual performance of the Fund. Over five years, the Caisse’s performance was 10.2 per cent, 1.1 percentage points more than its benchmark.
  • In total, the Caisse’s employees received $59 million in compensation in 2016, up 21 per cent from the previous year. The Caisse justifies this increase by its five-year return and a “value added” of $12.3 billion generated last year. All employees chose to defer a total of $32 million in compensation until 2019.

Now, let’s go over the main tables going over compensation, starting with table 41 on page 103 of the Caisse’s 2016 Annual Report (click on image):

In order to understand these figures, it’s important to carefully read the Report of the Human Resources Committee which begins on page 93 of the Annual Report. La Caisse’s employees receive total compensation based on four components:

  1. Base salary
  2. Incentive compensation
  3. Pension plan
  4. Benefits

I’d like to highlight passages from pages 97 and 98 of the Annual Report (click on image):


Below, I embed an extract from page 100 of the Caisse’s 2016 Annual Report discussing Michael Sabia’s compensation (click on image):

And below is figure 36 which goes over the performance components of the President and CEO’s total compensation (click on image):

Also worth mentioning some added information provided on Michael Sabia’s compensation:

  • The compensation and other employment conditions of the President and Chief Executive Officer are based on parameters set by the government after consultation with the Board of Directors.
  • In accordance with his request, Mr. Sabia has received no salary increase since he was appointed in 2009. In 2016, Mr. Sabia’s base salary remained unchanged at $500,000.
  • In 2016, Mr. Sabia received his deferred incentive compensation amount for 2013. The amount of this deferred incentive compensation totalled $1,121,723 and included the return credited since 2013.
  • When he was appointed in 2009, Mr. Sabia waived membership in any pension plan. He also waived any severance pay, regardless of the cause. Even so, given that membership in the basic pension plan is mandatory under the provisions of the Pension Plan of Management Personnel (under Retraite Québec rules), Mr. Sabia is obliged to be a member despite his waiver. In 2016, contributions to the mandatory basic plan represented an annual cost to la Caisse of $20,779.

What else is important to note in terms of compensation at the Caisse? As mentioned on page 99 of the Annual Report, under the incentive compensation program, executives must defer a minimum of 55% of their calculated incentive compensation into a co-investment account. Deferred incentive compensation for 2016 is presented in Table 42 below (click on image):

Tables 43 and 44 below provide the pension summary and severance for the president and five most highly compensated executives at the Caisse (click on images):


Table 45 below provides details of the reference markets used to reference the compensation of the president and five most highly executives of the Caisse (click on image):

Make sure you read the footnotes to these tables to understand how compensation is determined.

The reference markets used for the CEO and executive VPs and non-investment positions used for referencing compensation are provided in tables 37, 38, 39 and 40 below (click on images):



As you can see, I provided you with a thorough discussion on how exactly compensation is determined at the Caisse. The key points are that the incentive plan is based on five-year returns and a significant portion of incentive compensation for senior executives and for employees is deferred (at the end of each three-year period, the deferred amount, plus or minus the average return credited for the period, will be paid to each participant as a deferred incentive payment with restrictions).

[Note: Read my comment going over the Caisse’s 2016 results.]

Obviously, any layperson, teacher or public sector employee looking at these figures and reading articles in the Journal de Montréal will think the Caisse’s top executives are extremely well compensated.

And no doubt, they are, and total compensation has increased over the last few years but it’s based on long-term performance and added-value over a benchmark (over the last five years) and is in line with what the Caisse’s peer group doles out to its senior executives and investment professionals.

It’s been a while since I last went into a full discussion on compensation at Canada’s large public pension funds. Over two years ago, I discussed a list of the highest paid pension fund CEOs  but I need to do a more thorough job of going over compensation to explain in great detail how it’s determined and why it’s important in terms of attracting and retaining top talent to do a job that is arguably far more important and difficult than most people realize.

Michael Sabia is paid very well but he’s the President and CEO of the second largest pension fund in Canada, he and his senior executives have delivered on long-term performance targets and his job is arguably a lot more difficult than that of his peers because there is a political dimension to it which quite frankly is daunting at times (for example, he recently appeared in front of Quebec’s National Assembly to defend the Caisse’s investments in companies that are registered offshore, which by the way most funds that pensions invest in are registered in!).

As for the rest of the Caisse’s top executives, they too are paid well but in line with their peer group (and even below) and it’s important to understand they have huge responsibilities and very difficult objectives to achieve.

Lastly, one person who is missing from this list is Daniel Fournier, the Chairman and CEO of the Caisse’s real estate subsidiary, Ivanhoé Cambridge (click on image):

Mr. Fournier is also a member of the Board of Otéra Capital, a CDPQ’s subsidiary specialized in commercial real estate financing and for which he is responsible. He reports to his own board, not Michael Sabia.

There are no public reports going over compensation at Ivanhoé Cambridge but given that real estate is the most important asset class at the Caisse, and that long-term performance has been stellar in this asset class, I wouldn’t be surprised if Daniel Fournier gets paid even more than Michael Sabia (just a guess here but he has huge responsibilities).

Anyway, these are my comments on compensation at the Caisse. Just like in other large shops, the top executives make the most because they have the most responsibility.

This comment is to provide many of you with more details on how compensation is determined at Canada’s second largest pension fund and if you go over the annual reports of other large Canadian pensions, you will find a similar thorough discussion on compensation.

One thing I would like these big public pensions to provide is information on the median compensation of top executives relative to median compensation of the rest of the employees at these funds and how this ratio has varied over time.

Once again, if you have anything to add, feel free to email me at LKolivakis@gmail.com.

CPPIB Preparing For Landing?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Benefits Canada reports, CPPIB to sell Irish aircraft leasing company:

The Canada Pension Plan Investment Board and its co-investors have announced the sale of Dublin-based aircraft leasing company AWAS to Dubai Aerospace Enterprise Ltd.

The CPPIB first invested in the company with European private equity firm Terra Firma in 2006.

“We are pleased with the outcome of this transaction,” said Ryan Selwood, managing director and head of direct private equity at CPPIB. “We continue to believe that the aircraft leasing industry is a highly attractive market for CPPIB over the long term and look forward to exploring future opportunities to invest in the sector at scale, subject to market conditions.”

AWAS leases airplanes to 87 airline customers in more than 45 countries and has assets totalling about $10 billion as of last November. The company owns 214 aircraft with an average age of 5.8 years, and has also ordered 23 new aircraft.

In March 2015, AWAS sold 84 aircraft to Macquarie Group Ltd. Since then, it has continued to grow its business and portfolio.

The deal is subject to regulatory approval and is expected to close in the third quarter of 2017.

The Telegraph also reports, Guy Hands’ Terra Firma sells aircraft leasing investment to Dubai-based rival:

Private equity baron Guy Hands has sold an aircraft leasing business his hedge fund Terra Firma has co-owned for more than a decade.

The fund, alongside co-investors and the Canada Pension Plan Investment Board (CPPIB), has sold the Dublin-based aircraft lessor Awas to Dubai Aerospace Enterprise, the largest aircraft lessor in the Middle East. The terms were not disclosed.

Awas was formed in 2006 when Terra Firma and CPPIB bought the underlying business and later snapped up rival Pegasus in 2007. It now boasts $7.5bn of owned aircraft assets that it leases out to 87 airlines in more than 45 countries. Besides the 214 aircraft it owns, Awas also has 23 new ones on order.

At acquisition in 2006, Awas owned 154 Airbus and Boeing aircraft, with long-term leases and what the investors saw as good rental income.

Terra Firma said its decision to invest in the company was based on its view the aviation sector would grow rapidly, with the world fleet expected to double by 2034, and steady demand from airlines for leased aircraft.

International Airlines Group said in its recent results in February it had 32 additional leased aircraft compared to the same period last year partially due to fleet renewal with 13 less owned aircraft.

But some airlines are eyeing greater levels of ownership, with easyJet stating in its full-year results in November last year the size of its leased fleet had decreased by 6.4pc to 64 while its owned fleet rose by more than 10pc to 180 thanks to its recent purchase of 20 A320 aircraft.

Mr Hands, chairman and chief investment officer of Terra Firma, said it was “the right time for Terra Firma to realise maximum value for our investors”.

“Under our ownership, we have transformed the company to better reflect the fast-changing market that it serves,” he said.

“This has been achieved through an active aircraft acquisition and disposal strategy to optimise the business’ portfolio and align with its diverse customer base.”

The sale of the business comes just over two years after the company sold 84 aircraft to Macquarie Group, a transaction that Terra Firma said was a significant stage in preparing the business for sale.

Dubai Aerospace Enterprise was founded in 2006 and counts airlines such as Emirates, EVA Airways, easyJet, Wizz and EgyptAir among its customers.

Ryan Selwood, managing director, head of direct private equity, at CPPIB, said in spite of the sale it would look for other opportunities in the aircraft leasing space in the future.

Goldman Sachs is acting as financial advisor and Milbank as legal advisor to the seller. The deal is subject to regulatory approval and is expected to close in Q3 2017.

Anshuman Daga of Reuters also reports, Dubai Aerospace to buy aircraft lessor AWAS, catapults to top tier:

Government-controlled Dubai Aerospace Enterprise Ltd (DAE) is acquiring Dublin-based AWAS, the world’s tenth biggest aircraft lessor, in a deal that will add over 200 planes to its fleet and more than double the size of its current business.

AWAS is the latest asset to be sold in the rapidly consolidating global aircraft leasing industry whose top 50 lessors had a fleet value of $256 billion last year, according to consultancy Flightglobal. The sector is seeing increased investment from players in emerging markets such as China, which were also in the running for AWAS, sources said.

Reuters had reported in December citing sources that AWAS had been put up for sale in an auction that could value the lessor at $7 billion, including debt.

DAE, controlled by the government of Dubai, signed a definitive agreement to buy AWAS from British financier Guy Hands’ private equity firm Terra Firma Capital Partners and Canadian Pension Plan Investment Board (CPPIB), the companies said on Monday. They did not disclose financial terms of the deal.

DAE, which calls itself the largest aircraft lessor in the Middle East with a portfolio of 112 planes, said the combined company will have an owned, managed and committed fleet of 394 planes with a total value of over $14 billion. It will have more than 110 airline customers spread across 55 countries.

“This acquisition of AWAS is strategically compelling and propels DAE into a top 10 aircraft leasing platform,” DAE Managing Director Khalifa H. AlDaboos said in a statement.

“Our leasing business has been growing at a rapid clip and this acquisition will more than double the current size of our business…”he said.

Paid for in U.S. dollars, aircraft are comparatively easy to re-lease to various airline operators across the world.

AWAS has a fleet of 263 owned, managed and committed narrow and wide-body aircraft, including a pipeline of 23 new aircraft on order to be delivered before the end of 2018.

DAE said its transaction will be financed by the group’s internal resources and committed debt financing. The deal is subject to regulatory approvals and is expected to be completed in the third quarter of this year.

The latest sale marks the exit of Terra Firma and CPPIB from AWAS, in which they first put in money in 2006. In 2015, Macquarie Group bought about 90 planes from AWAS for $4 billion.

DAE was advised by Freshfields Bruckhaus Deringer LLP and Morgan Stanley & Co. LLC. DAE was also advised by KPMG and Latham and Watkins LLP. Goldman Sachs is acting as financial adviser and Milbank as legal adviser to the seller.

You can read CPPIB’s press release on this deal here. What do I think of this deal? It’s a great deal for all parties involved.

Let me provide you with some background. Back in March 2011, CPPIB spent $266 million to help fund an expansion of AWAS:

The Canada Pension Plan Investment Board has pledged to spend $266 million to help fund expansion at Dublin-based aircraft leasing firm AWAS.

AWAS has a fleet of over 200 commercial aircraft on lease to more than 90 customers in approximately 45 countries. It employs roughly 120 people worldwide, and has 110 aircraft on order from Airbus and Boeing.

CPPIB’s investment adds to the $347 million US that CPPIB has already directly invested in the company.

The investment is part of $529 million US in total that AWAS secured to fund its expansion plans Thursday. The other major partner is Terra Firma — which pledged an additional $246 million US — but other investors are also putting up $17 million US.

CPPIB already owns 16 per cent of AWAS and the investment will increase its stake to 25 per cent. Terra’s stake will increase to 60 per cent, and other investors will own the remaining 15 per cent. CPP’s stake could increase beyond 25 per cent because it has committed a further $200 million US that AWAS could draw on at a later date.

The aircraft leasing firm’s plan to grow comes at an opportune time, CPPIB management said in a release.

“We are delighted to help fund AWAS’ acquisition strategy at what we feel is an attractive point in the aviation cycle to invest,” said Andre Bourbonnais, senior vice-president for private investments at CPPIB.

“We see this as another affirmation of the value of our proven platform, growth strategy,” AWAS president Ray Sisson said of the deal.

The CPPIB invests surplus money from employer and employee contributions that aren’t required to pay current retirement benefits. It had $140.1 billion in assets at the end of December.

As you can see, CPPIB can also thank André Bourbonnais (and Mark Wiseman) for this deal which netted it a very handsome return (AWAS was bought for roughly $4 billion and reportedly sold for over $7 billion).

Interestingly, Mr. Bourbonnais is now the CEO of PSP Investments which launched its own aviation leasing platform back in 2015 (SKY Leasing) with industry veteran Richard Wiley (Jim Pittman who is now the head of private equity at bcIMC worked on that deal).

What does Dubai Aerospace Enterprise (DAE) get from this deal? It’s catapulted to a top tier global  aircraft leaser and will enjoy rental income for many more years ahead but will likely ride out some turbulence in the short run depending on how bad the next global economic downturn is (you can read more on giants of aircraft leasing here).

If you look at the latest press releases from CPPIB, you’ll see it has been very busy lately with mega private deals which I would characterize as more defensive in nature (this after I recently stated CPPIB is sounding the alarm on markets).

For example, along with Blackstone, it recently acquired Ascend Learning from private equity funds advised by Providence Equity Partners and Ontario Teachers’ Pension Plan.Ascend is a leading provider of educational content, software and analytics solutions.

Today CPPIB announced that it and funds affiliated with Baring Private Equity Asia (BPEA) announced their intention to purchase all outstanding shares of, and to privatize, Nord Anglia Education, Inc. (Nord Anglia), the world’s leading premium schools organization, for a purchase price of USD 4.3 billion, including repayment of debt:

  • Nord Anglia operates 43 leading private schools globally in 15 countries in China, Europe, Middle East, North America and South East Asia
  • Funds affiliated with BPEA are the majority shareholders of Nord Anglia and BPEA controls 67% of Nord Anglia’s issued and outstanding share capital

The transaction is subject to shareholder approval and customary closing conditions.

Keep in mind, this mega deal comes after another deal announced in March when CPPIB and Singapore’s GIC bet big on US college housing.

Why invest billions in private schools and higher education? It makes perfect sense from a long-term perspective. It’s a play on global wealth inequality and how rich foreigners will spend a lot of money sending their kids to private schools and US colleges.

But it’s also a play on the need for students from all socioeconomic backgrounds to invest in higher education to compete in an increasingly more competitive workplace where certain skills are highly coveted (interestingly, the Fed’s Kashkari thinks spending on education, not infrastructure, is the key to US economic growth).

Lastly, please take the time to read this recent interview with John Graham, Managing Director, Head of Principal Credit Investments at CPPIB. Graham discusses CPPIB’s approach in private credit investments, including which segments are most attractive in this space and how CPPIB is dealing with increased competition from other institutions getting into private debt markets.

Are State Pensions Failing to Deliver?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Rupert Hargreaves of ValueWalk reports, State Pension Funds Take On More Risk, Higher Fees For Worse Returns:

State and locally run retirement systems are increasingly turning to alternative and complex investments to help boost returns but these decisions may not be the best for all stakeholders involved, that’s according to a new report from The Pew Charitable Trusts.

The report, which is the latest in a series of reports from Pew on the topic, uses data from the 73 largest state-sponsored pension funds, which collectively have assets under management of over $2.8 trillion (about 95 percent of all state pension fund investments).

The use of alternative investment by pension funds varies widely across the industry. The use of alternative investments for the 73 largest public funds analyzed by Pew within its report varies from 0 to over 50% of fund portfolios. There are also vast differences in returns and returns reporting.

State Pension Funds Take On More Risk, Higher Fees For Worse Returns

For the 41 largest state funds that can be clearly compared against target returns—those reporting performance after accounting for management fees and on a fiscal year basis— the average annual target return in 2015 was 7.7 %. Actual annualized returns over ten years, however, averaged 6.6 % and ranged from 4.7 % to 8.1 % a year. Only one of the 41 (and two of all 73 funds) exceeded their target return in 2015.

At the same time, the majority of funds report on the basis of a fiscal year ending June 30 and include 10-year performance returns minus the fees paid to investment managers, although 12 funds report on a different period and more than a third provide ten year returns only “gross of fees.”

States also vary in whether they include performance-based fees for certain investments, known as carried interest, for private equity. States that disclose the cost of carried interest report higher fees than states that do not.

Over the past three decades, public pension funds have increasingly relied on more complex investments to reduce volatility and improve returns. A difference of just one percentage point in annual returns on the $3.6 trillion managed by the US pension industry equates to a $36 billion impact on pension assets.

However, while asset managers have been diversifying into assets such as real estate, hedge funds, and infrastructure in an attempt to reduce volatility and improve returns, Pew’s research shows US public pension plans’ exposure to financial market uncertainty has increased dramatically over the past 25 years. Between 1992 and 2015 the expected equity risk premium for public funds increased from less than 1% to more than 4%, as bond yields declined in the assumed rates of return remained relatively stable. What’s more, research shows that the asset allocation required to yield target returns today has more than twice as volatile as the allocations used 20 years ago as measured by the standard deviation of returns.

Given the fact that the majority of pension funds target a long-term return rate of 7% to 8%, with three only falling outside the range and given the current depressed interest rates available on fixed income securities, is easy to see why funds are investing in more complex instruments in an attempt to improve returns.

Indeed, Pew notes public pension funds more than doubled allocations to alternative investments between 2006 and 2014 with the average allocation rising from 11% of assets to 25% on assets. The higher expected return on these assets has allowed pension funds to keep return assumptions relatively constant.

But while managers have diversified in an attempt to improve returns, it seems exactly the opposite is happening. The shift to alternatives has coincided with a substantial increase in fees as well as uncertainty about future realized returns. State pension funds reported investment fees equal to approximately 0.34% of assets in 2014, up from an estimated 0.26% in 2006, which may seem like a small increase but in dollar terms, it equates to over $2 billion.

Pennsylvania’s state public pension funds are some of the highest fee payers in the industry with reported annual fees coming in at more than 0.8% of assets, or 0.9% when unreported carried interest for private equity is included. The dollar cost is $700 million per annum.

In total, the US state pension system paid $10 billion in fees during 2014 this figure includes unreported fees, such as unreported carried interest for private equity. Pew’s analysts estimate that these unreported fees could total over $4 billion annually on the $255 billion private equity assets held by state retirement systems.

Unfortunately, for all the additional risk being taken on, and fees being paid out, alternative investments and not helping state pension funds hit their return targets. 10-year total investment returns for the 41 funds Pew looked at reporting net of fees as of June 30, 2015, ranged from 4.7% to 8.1%, with an average yield of 6.6%. The average return target for these plans was 7.7%. Only one plan met or exceeded investment return targets over the ten-year period ending 2015.

You can click on the images below that accompanied this article:





Let me first thank Ken Akoundi of Investor DNA for bringing this report to my attention. For those of you who like keeping abreast on industry trends, I highly recommend you subscribe to Ken’s daily emails with links to investment and pension news. All you need to do is register here.

You can go over the overview of The Pew Charitable Trusts report here and read the entire report here.

Take the time to read this report, it’s excellent and very detailed in its analysis of state funds, highlighting key differences and interesting points on unreported fees and the success of shifting ever more assets into alternative investments like private equity, real estate and hedge funds.

A few things that struck me. First, it’s clear that state pensions are paying billions in hidden fees and something needs to change in terms of reporting these fees:

Comprehensive fee disclosure in annual financial reports is still uncommon, but a few other states have also adopted the practice. The South Carolina Retirement System (SCRS) collects detailed information on portfolio company fees, other fund-level fees, and accrued carried interest in addition to details provided by external managers’ standard invoices. Likewise, the Missouri State Employees’ Retirement System (MOSERS) is particularly thorough in collecting and reporting these fees, not only by asset class but also for each external manager. Both states reported performance fees of over 2 percent of private equity assets for fiscal 2014 in addition to about 1 percent in invoiced management fees.

If the relative size of traditionally unreported investment costs demonstrated by CalPERS, MOSERS, and the SCRS holds true for public pension plans generally, unreported fees could total over $4 billion annually on the $255 billion in private equity assets held by state retirement systems. That’s more than 40 percent over currently reported total investment expenses, which topped $10 billion in 2014. Policymakers, stakeholders, and the public need full disclosure on investment performance and fees to ensure that risks, returns, and costs are balanced to meet funds’ policy goals. Such assessments are unlikely when billions of dollars in fees are not reported.

I totally agree with that last part, we need a lot more fee transparency on all fees paid by asset class and each external manager. In fact, there should be a detailed breakdown of fees paid to brokers, advisors, lawyers, and pretty much all service providers at any public pension plan.

Moreover, it’s completely ridiculous that more than a third of state pensions only provide ten-year returns “gross of fees”. All public pensions should report all their returns net of all fees and costs because that represents the true cost of managing these assets.

Worse still, if you look at the state pensions that do report their ten-year returns gross of fees, you will see some well-known US pensions like CalSTRS and Mass PRIM (click on image):

It makes you wonder whether they have the appropriate systems to monitor all fees and costs or they are deliberately withholding this information because net of fees, the returns are a lot less over a ten-year period.

The Pew report also highlights mixed results among state pensions in terms of returns following a shift to alternative investment strategies:

Although no clear relationship exists between the use of alternatives and total fund performance, there are examples of top-performing funds with long-standing alternative investment programs. Conversely, funds with recent and rapid entries into alternative markets—including significant allocations to hedge funds—were among those with the weakest 10-year yields.

Among the funds with successful long-standing alternative investment programs, the report cites the Washington Department of Retirement Systems (WDRS):

For example, the Washington Department of Retirement Systems (WDRS) is among the highest-performing public funds and has had a private equities program since 1981, making it one of the earliest adopters of alternative investments. In 2014, the WDRS had 36.3 percent of total investments in alternative asset classes, including 22.3 percent in private equity, 12.4 percent in real estate, and 1.6 percent in other alternatives. Hedge funds were notably absent from the mix. The fund’s long-term experience with the complexities of alternatives is reflected in its performance metrics: The WDRS has one of the highest 10-year returns of plans examined here, at 7.6 percent in 2015, buoyed in large part by the performance of its private equity and real estate holdings.

Now, a few points here. Notice that almost all of the alternative investments at WDRS are in private equity (22.3%) and real estate (12.4%) and more importantly, they were early adopters of such investments and have relationships that go back decades? This means they really know their funds well and likely also do a lot of co-investments with their GPs (general partners or funds they invest in) to lower their overall fees.

Another success in shifting into alternatives was South Dakota’s Retirement System:

Similarly, the South Dakota Retirement System began its private equity and real estate programs in the mid-1990s and realized 10-year returns of over 8 percent in 2015. The fund held nearly 25 percent of assets in alternative investments in 2014, but lowered this to less than 20 percent in 2015, comparable to the 18.3 percent held in alternatives in 2006. The 2015 allocation includes over 10 percent in real estate, 8 percent in private equity, and 1 percent in hedge funds. The fund reports net since inception internal rates of return of 9 percent for private equity and 21.4 percent for real estate, in comparison to the S&P 500 index of 5.8 percent for the same period.

But most state plans have struggled shifting assets into alternatives:

Conversely, plans with more recent shifts into alternatives—especially those with significant investment in hedge funds—are among those that exhibit the lowest returns. For example, the three funds with the weakest 10-year performance among net fiscal year reporters—the Indiana Public Retirement System, the South Carolina Retirement System, and the Arizona Public Safety Personnel Retirement System—are also among the half dozen funds with the largest recent shifts to alternative investments. All three have increased their allocations to alternatives by more than 30 percentage points since 2006. Significantly, these funds also have hedge fund allocations above the median fund, and all three rank in the top quartile for reported fees.

For example, in contrast with the WDRS and South Dakota’s early diversification, South Carolina shifted into alternatives precipitously in 2007 when the state enacted legislation to establish a new retirement system investment commission and provide the needed statutory authority to invest in high-yield, diversified nontraditional assets. Within a year, over 31 percent of plan assets were invested in alternatives, and by 2014 those assets made up nearly 40 percent of the fund’s total.

As detailed in an independent audit, rapid diversification into alternative investments proved difficult for a newly founded, under-resourced investment commission: The South Carolina Retirement System’s 10-year return of only 5 percent in 2015 is among the lowest of the plans studied. Given the long-term, illiquid nature of these investments, correcting misjudgments or realigning investments made quickly during the commission’s first years may prove challenging.

Ah yes, I remember when South Carolina was going to throw in the towel on alts. Instead, it kept on going, praying for an alternatives miracle just like North Carolina.

But there are no miracles in alternative assets, just more complexity and higher fees and if not done properly, it’s a total disaster for the plan and its stakeholders.

The report also notes that many states have consistently achieved relatively high returns without a heavy reliance on alternatives:

The Oklahoma Teachers Retirement System (OTRS) stands out in terms of performance among state-sponsored pension funds. It ranked near the top percentile of all public funds in the United States with a 10-year return of 8.3 percent gross of fees in 2015. The OTRS holds 17 percent of its assets in alternatives—below the fund average of 25 percent—with the bulk of its investments in public equities (62 percent) and fixed income (20 percent). Diversifying within the equity portfolio, employing low-fee strategies, and cutting operating costs are explicitly part of the fund’s overall strategy.

The Oklahoma Public Employees Retirement System (OPERS) takes this approach even further, with 70.2 percent of its investments in equity and 29.5 percent in fixed income. The fund holds no alternative investments. OPERS’ investment philosophy is guided by the belief that a pension fund has the longest of investment horizons and, therefore, focuses on factors that affect long-term results. These factors include diversification within and across asset classes as the most effective tool for controlling risk, as well as the use of passive investment management. Still, the fund does employ active investment strategies in less efficient markets (click on image).


The report also highlighted the need for greater standardized reporting to increase transparency:

Public retirement systems’ financial reports are guided by GASB standards, in addition to those of the Government Finance Officers Association (GFOA) and the CFA Institute. Collectively, these guidelines are widely recognized as the minimum standards for responsible accounting and financial reporting practices. For example, both GASB and the CFA Institute require a minimum of 10 years of annual performance reporting; the CFA suggests that plans present more than 10 years of data. The GFOA recommends reporting annualized returns for the preceding 3- and 5-year periods as well.

However, funds apply these standards differently. And because the performance and costs of managing pension investments can significantly affect the long-term costs of providing retirement benefits to public workers, boosting transparency is essential.

In a recent brief on state pension investment reporting, Pew reviewed the disclosure practices of plans across the 50 states and highlighted the need for greater and more consistent transparency on alternative investments. State funds paid more than $10 billion in fees and investment expenses in 2014, their largest expenditure and one that has increased by about 30 percent over the past decade as allocation to alternatives has grown.

However, over one-third of the funds in the study report 10-year performance results before deducting the cost of investment management—referred to as “gross of fees reporting.”

But the biggest problem of all at most US state pensions is they’re delusional, stubbornly clinging on to their pension rate-of-return fantasy which will never materialize. They do this to keep contributions low to make their members and state governments happy but sooner or later, the chicken will come home to roost, and that’s when we all need to worry.

The other problem and I keep referring to this on my blog, is lack of proper governance, which effectively means there is way too much political interference at state pensions, making it extremely hard for them to attract and retain qualified candidates that can manage public, private and hedge fund assets internally, significantly lowering costs of running these state pensions (basically the much touted Canadian pension model).

There are powerful vested interests (ie. extremely wealthy, politically connected private equity and hedge fund managers) who want to maintain the status quo primarily because they are the main beneficiaries of this US pension model which increasingly relies on external managers to attain an unattainable bogey.

But after reading this report, you need to ask some hard questions as to whether this shift into alternatives, especially hedge funds, has benefitted US state pensions net of all the billions in fees being doled out.

“Ok Leo, but what’s the alternative? You yourself have pointed out there is a major beta bubble going on in markets and now that the next economic shoe is dropping and the Fed is considering to shrink its balance sheet, what are these state pensions suppose to do?”

Good question. First, every investor needs a reality check and to prepare for lower returns ahead. Second, if deflation is coming, it will decimate all pensions, especially chronically underfunded pensions. They need to mitigate downside risks as much as possible and in a deflationary environment, the truth is only good old US long bonds (TLT) are the ultimate diversifier.

But bond yields are low and headed lower, which effectively means pensions need to diversify and take intelligent risks to make their required rate-of-return. Here is where it gets tricky. There are intelligent ways to take on more risk while reducing overall volatility of your funded status (think HOOPP, Ontario Teachers’ and other large Canadian public pensions) and dumb ways to increase your risk which will only make your general partners very wealthy but not benefit your plan’s funded status in a significant and positive way (think of most US state pensions).

My only gripe with The Pew Charitable Trusts report is it doesn’t focus on funded status to tie in all other information they present in the report. Pensions are all about managing assets and liabilities and it would have made the report a lot better if they focused first and foremost on funded status of each state pension, not just returns and fees.

Still, take the time to read the entire report and you have to only hope that one day Pew will do the same report for Canada’s large public pensions and compare the results to their US counterparts.

A Chilean Love Affair?

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Benefits Canada reports, OMERS enters into infrastructure investment in Chile:

Borealis Infrastructure, the infrastructure investment manager of the Ontario Municipal Employees Retirement System, has signed an agreement to acquire a 34.6 per cent stake in a liquified natural gas company based in Chile.

The remaining stakeholders in GNL Quintero S.A. include Enagás, a large builder and operator of regasification plants and pipeline systems and Empresa Nacional del Petróleo, Chile’s state-owned energy company. As part of the transaction, OMERS has agreed to grant Enagás a 12-month call option for five per cent of its shares.

“Today marks not only our first direct infrastructure investment in Chile, but also signals our entrance into South America,” said Ralph Berg, executive vice-president and global head of infrastructure at OMERS Private Markets.

“GNLQ is a well-managed, world-class asset that aligns closely with our ongoing effort to diversify our global portfolio of core infrastructure holdings — and pay pensions to our members. We look forward to working constructively with our fellow GNLQ shareholders, GNLQ management and all local stakeholders in the years ahead.”

Located northwest of Santiago, Chile, GNLQ is a land-based terminal dedicated to the receiving, unloading, storage and regasification of up to 15 million cubic meters per day of liquefied natural gas. It’s focused on providing clean, efficient and safe energy to markets, which include residential and industrial users, power generators and the transportation sector.

Since it commenced operations, GNLQ has served nine gas-fired power plants, two refineries, 450 industries, more than 700,000 commercial and residential customers and 7,000 commercial vehicles. As well, the terminal has dispatched more than 40,000 liquefied natural gas tanker trucks to serve customers that aren’t connected to the pipeline grid, through satellite regasification units located up to 1,000 kilometres away from the facility.

You can read OMERS’s press release on this deal here, but it basically goes over the same things mentioned above.

Canada’s large pensions have a long love affair with Chile. In fact, it was over ten years ago that a consortium led by Brookfield Asset Management, which included Canada Pension Plan Investment Board (CPPIB), British Columbia Investment Management Corporation (bcIMC) and another institutional investor, entered into a definitive agreement to acquire Transelec, the largest electricity transmission company in Chile, from Hydro-Quebec International Inc. for US$1.55 billion.

Ontario Teachers’ has major stakes in two Chilean water utilities and last year made a $1.35 billion bet on Latin American infrastructure in a partnership with CPPIB and Latin American infrastructure group IDEAL, an infrastructure development and operating company that is among the holdings of Mexican billionaire Carlos Slim.

That toll road deal was CPPIB’s first infrastructure investment in Mexico, but there are others in South America including two in Chile, and a gas pipeline in Peru.

Back in 2012, CPPIB committed $1.14 billion to acquire about half ownership in five major toll roads in Chile, part of its strategy of making long-term investments to support future benefit payments.

In early 2016, Alberta’s AIMCo sold its stake in a Chilean toll highway for about $1.5-billion to its partner. AIMCo bought a 50 per cent interest in Autopista Central de Chile in late 2010 for $878-million and made a great return on it.

So what is it about Chile that attracts so much attention from Canada’s large pensions? For this, let’s examine a recent article by Nathaniel Parish Flannery of Forbes, How Will Chile’s Economy Perform In 2017?:

Since the 1990s Chile has earned a reputation for being the best managed economy in Latin America. Policymakers built up strong institutions, developed new industries and helped foster more than two decades of impressive growth. Although copper mining is still the backbone of Chile’s economy companies such as FirstSolar and SunEdison have invested heavily in the country’s burgeoning solar energy sector.

Still despite its sizable upside, Chile is still defined by extraordinarily high levels of inequality and in recent years has been rocked by a number of massive and sometimes violent protests. Voters have grown disenchanted with current left-of-center president Michelle Bachelet (who also served a previous term as president from 2006 to 2010). Voters will elect Chile’s new president in November 2017. With Bachelet so unpopular right now the election will be worth watching. Voters could choose right-of-center billionaire businessman Sebastian Piñera who served as president from 2010 to 2014 and placed his assets  in a blind trust. (Forbes estimates Piñera’s assets are worth $2.7 billion. He is the wealthiest top-level politician in Latin America.)

With so much unrest bubbling under the surface of Chile’s well-polished veneer of stability and civility, voters could also turn to a candidate who is more independent from the political establishment. Already this year companies such as BHP Billiton have been affected by labor unrest and a longstanding conflict with the country’s Mapuche indigenous group continues to simmer. To get a sense of what people can expect from Chile’s economy in 2017, I reached out to Michael Baney, a Latin America expert and senior analyst at Allan & Associates, a boutique political risk consultancy.

Nathaniel Parish Flannery: What can we expect in terms of GDP growth in Chile this year? Some economists are estimating growth is going to be a bit slower than what we’ve seen over the last few years. Do you seen any causes for concern?

Michael Baney: A few days ago, Chile’s central bank revised its growth projection range down to 1% to 2%, largely based on concerns over the impact of a recent strike at Escondida, the world’s largest copper mine. Chile’s economy is heavily dependent production and export of the red metal: copper and copper products account for just under half of its exports, with China being by far its largest trading partner.

Even if growth in Chile reaches 2% this year, it would still be far more sluggish than what was seen during the height of the global commodities boom. Back in 2004, growth reached 7%, for example, and after it dipped during the financial crisis, it recovered to 5.8% in 2011 and 2012.

Such were the boom days for Chile and much of Latin America, a key source of raw materials. Those days are definitively over, however, and while 2% growth isn’t terrible for a country as wealthy as Chile, it will likely be some time before rates reach their former highs. One bright spot for Chile is that the copper glut appears to be coming to an end, which may attract further mining investment, although part of the reason for the recent increase in copper prices is concerns about labor unrest in Chile itself.

Parish Flannery: Chilean voters are going to head to the ballot box again. What’s at stake in the upcoming election? Do you think we are going to see a surprise ending?

Baney: The past year has been marked by major protests against the administration of President Michelle Bachelet, whose approval ratings have hovered around 25%. Bachelet can’t run again this year, and probably wouldn’t want to even if she could. While the country has yet to hold primary elections, leftist senator Alejandro Guillier and conservative former president Sebastián Piñera are shaping up to be the main two contenders for the presidency. Piñera has led in several polls, but after Brexit, the Colombian peace referendum, and the election of Donald Trump, I think we’ve all learned to be somewhat skeptical of political polling data.

One thing to watch is the congressional elections. Chile used to have a strange electoral system that had the effect of deadlocking the congress between the two main coalitions no matter who won the most votes. A constitutional reform made with the intent of finally completing Chile’s long transition to full democracy abolished that system, however, and this will be the first congressional election run without it.

Interestingly, the election comes at a time when party affiliation is at a low and general disgust with politics is at a high. While we may not see any surprises during this electoral cycle, the reform would make it easier for an anti-system populist from outside the two main coalitions to gain a foothold in congress, much like has been seen elsewhere in the world. It would be ironic if the reform meant to fully democratize Chile helped lead to the rise of a candidate with questionable respect for democratic institutions.

Parish Flannery: As we look ahead in 2017 are there any particular political risk flash-points that you think merit attention?

Baney: The past month has seen a major escalation of the conflict between the state and radical Mapuche groups. The Mapuche are an indigenous group in who live in the heart of southern Chile’s timber region, and some Mapuche organizations have hijacked logging trucks, burned millions of dollars’ worth of equipment and structures, and threatened to attack hydroelectric dams. A few weeks ago, one Mapuche group destroyed 19 parked trucks, a warehouse, and several pieces of industrial equipment owned by a logistics company in what was the most significant such attack the country has seen in decades. Chile has a reputation for being among the safest and most stable countries in Latin America, but it is far from being without risks.

Chile does have a great reputation but this article highlights the main risks of investing in infrastructure in Latin America or elsewhere, namely, political and regulatory risks.

We all remember the boom-bust story of Brazil. In 2013, I asked whether Eike Batista burned Ontario Teachers’ and a year later, I covered CPPIB’s risky bet on Brazil. Whether it’s Brazil, Mexico, Columbia, Chile, Peru or Argentina, investing in Latin America is risky business. You absolutely need the right partners to deal with thorny political and regulatory risks.

But there’s no denying that things are changing for the better in Latin America where growth projections and inflation expectations are relatively high compared to the G7 developed economies.

Still, there is cause for concern. Emerging markets in Latin America are inextricably linked to China and there are economic and demographic factors that can hamper future growth. In his new book, behind Upside: Profiting From the Profound Demographic Shifts Ahead, demographer Kenneth W. Gronbach outlines some of his concerns:

Gronbach also looks at trends shaping the rest of the planet. He offers a fascinating analysis on China, including the problem of a profound gender imbalance with far more men than women. He expresses concern over the impact of aging rates in Latin America. Access to information is a global shift —in the era of Big Data, we have more power than ever to read the numbers as we chart our future course. Gronbach is a well qualified, highly engaging guide.

I’ve covered Chile’s Pension Crunch when I went over the global pension crunch last year. These are serious structural issues that Chile and others need to address or else they will impact long-term growth.

What else concerns me? Samuel Gregg of the American Spectator reports the model in Chile is under siege:

Whenever anyone thinks of economic success stories, Latin America doesn’t exactly leap to mind. For the most part, modern Latin American economies have been characterized by corruption, cronyism, statism, populism, boom-bust cycles, failed reform efforts, and colossal meltdowns. There is, however, one major exception to that rule — Chile.

Beginning with General Pinochet’s military regime in 1973 and continuing after the 1990 transition to democracy, Chile’s economy underwent significant liberalization. Today, Chile is officially classified as a developed country. And the benefits have encompassed the less well-off. As the World Bank stated in 2016:

The percentage of the population considered poor (those who live on US$ 2.5 per day) declined from 7.7 percent in 2003 to 2.0 percent in 2014, and moderate poverty (US$ 4 per day) fell from 20.6 percent to 6.8 percent during the same period. Moreover, between 2003 and 2014, the average income of the poorest 40 percent of the population increased by 4.9 percent, a figure considerably above the average income growth of the population as a whole (3.3 percent).

Some nations would kill for these numbers. They are primarily the result of Chile embracing free trade, labor market deregulation, anti-inflationary policies, large-scale privatizations, and strong private property protections.

Undergirding this has been the long-term commitment by intellectuals, such as those associated with the think-tank Libertad y Desarrollo, to making tough-minded and in-depth arguments for market economies and their institutional prerequisites such as rule of law. Above all, many Chileans decided decades ago to stop blaming “the North” and mysterious “interests” “out there” for the country’s problems.

All these hard-won achievements, however, are now under threat. Since 2014, President Michelle Bachelet’s center-left administration has sought to undermine what Chileans call “the model.”

In the name of equality (by which they mean the equalization of starting points and results), Bachelet’s government is trying to turn Chile into a European social democracy. The fact that social democracies are faltering everywhere in Western Europe isn’t, apparently, a relevant consideration.

As I learned during a recent visit to Chile, the word used to describe this dismantling project is retroexcavadora (literally, “backhoe”). It was first used by a left-wing senator, Jaime Quintana, in March 2014 to explain how the government would root out the Chilean model’s political and economic foundations.

In 2016, for example, Chile’s labor market laws were changed to make it harder for businesses to let employees go. The same legislation forbids companies from extending benefits to workers who don’t belong to unions. It also privileges unions as the main bargaining unit, regardless of whether individual workers actually want to belong to them. So much for the right of free association. Instead, it’s back to the redundant “capital-and-labor” logic of the 19th century.

Chile’s educational institutions are also under assault. This involves a concerted drive by Bachelet’s government to undercut a largely user-pays, demand-driven higher education system. The goal is to extend “free” higher education to ever-increasing numbers of students. How this “free” learning will be paid for is, at best, unclear.

Accompanying this measure are efforts to diminish parental choice, private schools, and Chile’s voucher system. Vouchers, it appears, have produced good outcomes for Chilean students across socioeconomic levels. They have also boosted private school attendance. By 2011, about 40 percent of Chilean students from the lower income bracket went to private schools.

Again, however, what matters to the Chilean left is the ideological priority of equalization and its distrust of non-public institutions. Free choice is out. Leveling down is in.

The Bachelet government’s number-one target, however, is Chile’s constitution. First approved via referendum in 1980 and considerably modified through referenda and legislation since then, the Chilean left has never accepted its legitimacy. That’s partly because the constitution was implemented under Pinochet. But it’s also because Chile’s constitution limits state power in ways which are anathema to the left.

Their long-term goal is a new constitution: one that waters-down the present constitution’s strong guarantees of private property and the commitment to the Catholic principle of subsidiarity, which pervades the text. Subsidiarity’s decentralizing implications are especially important, because they ensure that Chile’s constitution attaches a higher premium to limited government than your average Latin American country.

There’s considerable evidence that Bachelet’s government is trying to rig the consultative process for the drafting of a new constitution. Moreover, based upon what Bachelet ministers have said, their preferred arrangements would take Chile closer to the constitutions adopted by left-populist governments in countries like Ecuador and Bolivia in recent years. A quick glance at these documents soon indicates that they are the polar opposite of Chile’s present constitutional provisions — not least because they amount to institutionalized populism.

Retroexcavadora, however, is now encountering problems. Just five minutes of conversation with Chilean parents soon reveals just how they resent the government’s willingness to sacrifice educational choice and quality of education to the god of equality. Angry parents means angry — and motivated — voters.

Another difficulty is that President Bachelet herself is caught up in a series of corruption scandals involving family members. Although Bachelet was once very popular, her approval ratings presently linger in the mid-20 percentiles.

Nor is a perceptible decline in economic conditions helping Bachelet’s government. Chile’s unemployment rate, for instance, is now 6.4 percent. That’s up from 5.8 percent a year ago. In 2016, the Chilean economy expanded at the anemic European-like growth-rate of 1.6 percent, down from 2.3 percent in 2015. This year’s growth projections aren’t that great either.

The question of whether retroexcavadora succeeds, however, ultimately depends on presidential and legislative elections due at the end of 2017. The constitution bars Bachelet from seeking another consecutive term. But it does allow her predecessor, the conservative pro-market Sebastian Pinera, to run. And running he is.

It’s too early to predict the likely outcome. Yet one thing is certain. If Chilean voters decide they want to maintain the model, Chile will continue to show that Latin America nations aren’t doomed to become Argentina, let alone left-populist disasters like Venezuela. On the other hand, if Chileans effectively endorse retroexcavadora, Latin America risks losing the example that shows the entire continent the politics and rhetoric of envy need not be its future.

For 647 million Latin Americans, the stakes couldn’t be higher.

As you can read, the stakes are high for this year’s elections in Chile, and you can be sure Canada’s large pensions will be following political developments there very closely.

However, as I keep stressing on this blog, Canada’s large pensions have a very long investment horizon, if they’re making long-term infrastructure investments in Chile, Mexico and elsewhere in Latin America, it’s because they believe they can manage the political, regulatory and currency risks and come out ahead as these investments will offer them stable returns over the long run.

I’ll put it to you this way, Canada’s large pensions aren’t buying infrastructure stakes in airports, ports, toll roads or natural gas, electric transmission utilities to flip them a year later. Sure, if some entity offers them an attractive price, they will sell these assets on occasion, but they typically want to keep them on their books for a long time because it’s part of their strategy to meet long-dated liabilities with as much certainty as possible.

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