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Canada Pension Chief Talks About “One of the Best Investments We’ve Ever Made”: Investing in Alibaba in 2011

The chief executive of the Canada Pension Plan Investment Board (CPPIB) talked with the Financial Post on Thursday about the Board’s investment in Alibaba in 2011.

At the time, Alibaba was an unknown tech company in China. A few years later, the company’s initial public offering was the largest in history.

From the Financial Post:

[Wiseman] said the reason the Canadian pension fund manager was able to make a “very sizeable investment” in what was then “an obscure Internet company” in a city in China few had heard of is because executives had opened an office in Hong Kong back in 2008.

“That investment story which everybody is touting as one of the best investments we’ve ever made, it didn’t happen overnight. That investment started in many respects almost seven year ago,” Mr. Wiseman said.

“It started with a view towards that market, a view that we need to build capabilities in the region, that we need to deepen our understanding of the region, and that we had a long-term view around the Chinese consumer, the importance of the Chinese consumer.”

Mr. Wiseman said the route to the Alibaba investment, which is worth “substantially more” than the fund’s cost base thanks in part to a large investment in the successful IPO last month, illustrates the long-term strategy and the “on the ground” investing style.

“We didn’t get brilliant in four weeks, right? … We had people on the ground in Hangzhou [the city in China where Alibaba is based] before people knew where Hangzhou was,” he said.

“We were there soon after opening our office in Hong Kong, developing those relationships with people who speak the language and who understand the market… To me, this is exactly what we’re trying to do as an organization.”

After the initial investment in 2011, CPPIB increased its stake the following year and then again through the IPO, Mr. Wiseman said.

The CPPIB has a total of $314.5 invested in Alibaba.

Photo by Charles Chan via Flickr CC License

Canada Pension Teams With Hermes, Invests in Massive London Real Estate Project

The Canada Pension Plan Investment Board (CPPIB) has teamed up with Hermes Real Estate to invest in a 1.5 million square foot, partially developed London property.

The building, Wellington Place, will include offices, apartments and retail space.

Canada Pension Eyes Oil As Prices Drop

The head of the Canada Pension Plan Investment Board (CPPIB) said Thursday he sees “increasing opportunity” for investment in Canadian energy companies as oil prices continue their recent decline.

From a Bloomberg interview:

“We are seeing a period now where there may be increasing opportunity in the Western Canadian basin and Canadian energy companies as the market sort of reprices,” Mark Wiseman said in a telephone interview today.

Brent crude extended losses below $80 a barrel, dropping to a four-year low on speculation Saudi Arabia will not reduce output amid a glut of supply.

Wiseman said the resulting decline in oil prices will put pressure on some of the less financially sound energy companies, potentially creating some opportunities for acquisitions.

“Our attraction will be to those best-quality assets, best-quality management teams, and best-quality companies,” he said.

Wiseman, chief executive officer of the fund, pointed to Canada Pension’s investment in Seven Generations Energy Ltd. (VII) as an example. The pension fund is the largest shareholder, holding more than 15 percent of its common shares, according to data compiled by Bloomberg.

Canada Pension, which was an early investor in Seven Generations, didn’t sell shares in the company’s initial public offering last month because it sees long-term opportunities in the company. Seven Generations debuted in Toronto on Oct. 30 at C$18 a share and has since climbed to $22.50 today.

“It’s a great example of the long-term view we take,” Wiseman said. “We made a very conscious decision that we want to watch that value accrete and grow over the long term.”

The CPPIB manages $206 billion in assets for the Canada Pension Plan.

Photo by ezioman via Flickr CC License

Canada Pension Plan Returned 3.4 Percent in Second Quarter

The Canada Pension Plan Investment Board (CPPIB) has crunched its numbers for the second quarter, which ended Sep. 30.

CPPIB investments returned 3.4 percent over the period; that’s an improvement over the 1.6 percent return experienced by plan investments in the first quarter.

The CPPIB returned 16.5 percent in fiscal year 2013-14.

More on the return figures from the Globe and Mail:

CPPIB said its assets grew by $7.6-billion in the fiscal second quarter ended Sept. 30, with assets increasing to $234.4-billion from $226.8-billion in the previous quarter.

Growth consisted of $7.5-billion in net investment income and $0.1-billion from new contributions.

The modest return is in stark contrast to much higher returns posted last year, as growth in global markets slows.

“During the quarter, our investment portfolio reflected mixed performance from the global public equity markets, balanced by solid returns from our fixed income assets and positive contributions from our private investments,” CPPIB president and chief executive officer Mark Wiseman said.

“We continue to realize the benefits of a globally diversified, resilient portfolio that is designed to deliver superior returns over the long term.”

Canada’s largest pension fund manager said on Thursday that the Chief Actuary of Canada has projected that the fund will attain a 4-per-cent rate of return after inflation on a long-term basis.

CPPIB has a five-year rate of return of 8.2 per cent and a 10-year return rate of 5.6 per cent, above the actuary’s assumptions.

The CPPIB’s allocates 33 percent of its assets to public equities, 32.5 percent to fixed income, 10.8 percent to real estate, 5.4 percent to infrastructure and 18.3 percent to private equity.

Canada Pension Plan Among Bidders For $10 Billion of Cement Facilities

The Canada Pension Plan (CPP) has teamed up with Blackstone Group and Cinven to bid on $10 billion of cement assets that are being sold as a result of a pending merger between two major building material suppliers.

The CPP is one of 60 parties who have placed bids.

From the Wall Street Journal:

Private-equity firms are jostling to acquire more than $10 billion of cement facilities being sold as part of the merger of two large European companies, reflecting the dearth of buyout deals available in the region.

The sale of the cement assets in Europe, Canada, Brazil and the Philippines are a precondition to winning antitrust approval of a $50-billion merger between French cement giant Lafarge SA and Swiss rival Holcim Ltd.

The assets have attracted interest among cash-flush private-equity firms. Some 60 parties, a mixture of buyout firms and building-materials companies, have submitted bids for all or some of the assets, said Holcim finance chief Thomas Aebischer. Private-equity bidders include Blackstone Group, KKR & Co. and other top firms, according to people familiar with the matter.

[…]

The cement deals are “sort of classic private-equity assets,” said Josh Lerner, a professor at Harvard Business School, of the Holcim and Lafarge sales. “The idea of a transaction that has the classic PE kind of recipe, where this is a mature industry, is a good thing for them.”

The deal is also attractive because it could create an entirely new cement rival overnight. Some argue creating a new company with the assets could be a challenge for buyers, since the facilities are spread across the globe and aren’t independent companies at this stage.

The $10 billion price-tag on the for-sale assets is too big for many private-equity firms to digest on their own. Many are forming groups to bid for the assets, a practice they have moved away from in recent years since investors prefer to spread their money among several funds invested in different assets.

Among the private-equity bidders are: a group consisting of Blackstone Group, Cinven and the Canada Pension Plan; BC Partners and Advent International; Bain Capital and Onex Partners; and KKR., according to the people familiar with the matter. Industry bidders include Irish cement maker CRH PLC, according to people familiar with the matter. The structure of the consortia could still change, said one person familiar with the deal.

The Canada Pension Plan has $227 billion in assets, which are managed by the Canada Pension Plan Investment Board.

Photo by Parée via Flickr CC License

Ontario Teachers’ Pension Becomes One of BlackBerry’s Top 10 Shareholders

The Ontario Teachers’ Pension Plan saw something it liked in BlackBerry in the third quarter, as the pension fund bought into the company to the tune of 7.8 million shares. Now, the fund is among the company’s ten largest shareholders.

Ontario Regulator Issues Draft of New Guidelines for Pensions Funds Investing in Derivatives

The Financial Services Commission of Ontario (FSCO), the regulatory body that oversees the province’s pension systems, has issued a draft of new guidelines for pensions investing in derivatives.

The guidelines call for “more precise and frequent” risk monitoring and increased documentation.

FSCO drafted the guidelines after “perceived concerns about the lack of understanding of the risks associated with investments in derivatives”, according to Osler Hoskin & Harcourt LLP, one of Canada’s largest business law firms.

Osler Hoskin & Harcourt LLP summarized the guidelines:

FSCO’s Note is framed as a set of expectations of those investing in derivatives and is intended to serve as a starting point for plan administrators. It contemplates a system for internal oversight of derivatives practices that is extremely broad in scope and will increase the costs to pension plans that invest directly in derivatives or that invest in pooled funds that use derivatives. The suggestion in the Note is that prudence might require more, but not less, rigorous practices.

FSCO’s Note sets out explicit expectations for documentation, risk mitigation and risk monitoring as follows:

– Documentation is expected to include more robust authorization regarding derivatives investment and collateral use in the Statement of Investment Policies and Procedures (SIPP) and to include risk monitoring practices (RMP) policies or guidelines relating to derivatives investments.

– Risk mitigation strategies for over-the-counter (OTC) derivatives should include an evaluation of pricing and other terms and conditions to ensure they are appropriate, and standardized netting agreements. Administrators should also consider appropriate collateral requirements for all derivatives, impose “specific and unambiguous” quantitative limits on a fund’s exposure to derivatives (including “soft limits, where positions must be analyzed, and hard limits, where positions must be liquidated”), and ensure compensation for staff involved in derivatives activities is set to avoid undue risk-taking.

– Risk monitoring for derivatives is expected to be more precise and frequent than for other investments, including monitoring of market risk, liquidity risk, counterparty risk, basis risk and operations and systems risk. Scenario analysis and stress testing are expected to be carried out.

A notable aspect of FSCO’s expectations regarding risk management and monitoring is the setting of a 10% limit on exposure to derivatives transactions with the same counterparty or associated counterparties. This is similar to the 10% diversification rule for investments under Schedule III to the Pension Benefits Standards Regulations, 1985, which is adopted in Ontario. FSCO’s expectation is that prudence may require a limit lower than 10% to be set. Such a rule would require new levels of monitoring of OTC derivative and repo contracts to ensure that they do not exceed this limit (or such other lower limit as is set by the administrator).

Read the draft of the guidelines here.

The FSCO is seeking public comment on the draft until November 24.

Report: Canada Pension Board Maintains Two Dozen Shell Companies To Avoid Taxes

Canada’s Public Sector Pension Investment Board (PSP), the entity that manages pension assets for the Public Service Pension Plan, the Canadian Forces Pension system and others, maintains a complex arrangement of offshore companies for the purpose of avoiding taxes on investments in Europe.

CBC reported the story Wednesday:

The federal agency that invests civil servants’ pensions set up a complex scheme of European shell companies and exploited loopholes that helped it avoid paying foreign taxes — a move that could undermine Canada’s standing internationally as its allies try to mount a crackdown on corporate tax avoidance.

The arrangement involved two dozen entities, half of them based in the financial secrecy haven of Luxembourg, and all of them set up in order to invest money in real estate in Berlin by a Crown corporation called the Public Sector Pension Investment Board.

The blueprint for the tax-avoidance plan was obtained by the Washington-based International Consortium of Investigative Journalists and shared with CBC News as part of a larger leak of records exposing hundreds of corporate offshore schemes set up to capitalize on advantageous tax and secrecy rules in Luxembourg.

[…]

While the Canadian government corporation’s transactions were not illegal, a senior German tax official who reviewed them said the pension investment board had used “a very aggressive way to avoid taxes.”

“The only goal is to avoid taxes,” Juergen Kentenich, director of the regional tax office in Trier, Germany, said of the tangle of Luxembourg companies.

The scheme is legal, but was used to avoid paying taxes on German real estate owned by PSP. CBC reports that the fund successfully managed to avoid paying $20 million in German taxes:

The documents — which consist of a tax plan devised for the pension board by global accounting firm PricewaterhouseCoopers — show that the pension fund acquired 69 mixed residential and commercial buildings, totalling nearly 4,500 suites and units, in Berlin in 2008.

CBC News has learned the buildings were acquired for close to $390 million. But as a result of the way the transaction was structured, the pension investment board would have avoided paying $20 million in German taxes.

The purchase exploited a loophole in Germany’s land transfer tax, which is normally levied on any entity that acquires 95 per cent or more of the shares of a real-estate holding company.

Instead, the pension board bought a direct 94.4 per cent interest in a number of Luxembourg-based property holding companies, and then obtained an indirect interest by taking a large majority position in entities that held the remaining 5.6 per cent.

The board thus obtained a 96.4 per cent overall stake in the Berlin buildings, but the German loophole meant the indirect holdings weren’t counted toward the real-estate transfer tax — so it didn’t pay any.

The Public Sector Pension Investment Board manages $93.7 billion in assets.

Ontario Teachers’ Pension Finalizes Deal to Buy DTZ

The Ontario Teachers’ Pension Plan is part of a group of investors that bought Chicago-based property services firm DTZ this week, according to a DTZ release.

The deal was announced in June but was only completed this week.

From the DTZ release:

DTZ, a global leader in property services, today confirmed the close of its sale to the private investment consortium of TPG Capital (TPG), PAG Asia Capital (PAG) and Ontario Teachers’ Pension Plan (the TPG & PAG Consortium), and its beginning as an independent, privately owned global property services company.

“Today’s dynamic business environment holds both opportunities and challenges for our clients. DTZ is a progressive partner who understands their needs and can deliver tailored solutions wherever they do business, while offering the client experience of a smaller, more nimble and more tenacious organization.”

DTZ will continue to operate under the DTZ brand and its seasoned executive leadership team. Brett White, former Chief Executive Officer of CBRE Group, will begin serving as full-time Executive Chairman of the new company in March 2015. Tod Lickerman will continue in his current role as Global Chief Executive Officer of DTZ and report to Brett White.

“DTZ now has the independent governance, strong capital base and speed-to-market of a private company, which will allow us to grow and serve our clients’ ever-changing needs,” said Tod Lickerman. “Today’s dynamic business environment holds both opportunities and challenges for our clients. DTZ is a progressive partner who understands their needs and can deliver tailored solutions wherever they do business, while offering the client experience of a smaller, more nimble and more tenacious organization.”

DTZ’s new capital structure and strong financial backers better positions DTZ to make continued investments to expand its capabilities and offer clients a complete suite of services in every major market around the world. In September, an affiliate of DTZ Investment Holdings (backed by the TPG &PAG Consortium) announced it had entered into an agreement to acquire Cassidy Turley, with plans to combine it with the DTZ business during 2015. The acquisition of Cassidy Turley is expected to be completed by December 31, 2014.

The Ontario Teachers’ Pension Plan manages $140.8 billion in assets.

Kolivakis On Canada Pension’s Big Brazil Bet

On Tuesday the Canada Pension Plan Investment Board (CPPIB), the entity that manages investments for the Canada Pension Plan, unveiled plans to invest $396 million in commercial real estate in Brazil.

The CPPIB now has nearly $2 billion committed to real estate investments in Brazil.

Leo Kolivakis, who runs the Pension Pulse blog, weighed in on CPPIB’s Brazil bet in a post this week:

Let me share my thoughts on this Brazilian real estate deal. From a timing perspective, this deal couldn’t come at a worse time. Why? Because the Brazilian economy remains in recession and things can get a lot worse for Latin American countries which experienced a boom/ bust from the Fed’s policies and China’s over-investment cycle. This is why some are calling it Latin America’s ‘made in the USA’ 2014 recession, and if you think it’s over, think again. John Maudin’s latest, A Scary Story for Emerging Markets, discusses how the end of QE and the surge in the mighty greenback can lead to a sea change in the global economy and another emerging markets crisis.
Mac Margolis, a Bloomberg View contributor in Rio de Janeiro, also wrote an excellent comment this week on why the oil bust has Brazil in deep water, going over the problems at Petroleo Brasileiro (PBR).

The re-election of President Dilma Rousseff didn’t exactly send a vote of confidence to markets as she now faces the challenge of delivering on campaign promises to expand social benefits for the poor while balancing a strained federal budget. President Rousseff says the Brazilian economy will recover and the country will avoid a credit downgrade but that remains to be seen.
Having said all this, CPPIB is looking at Brazil as a very long-term play, so they don’t care if things get worse in the short-run. In fact, the Fund will likely look to expand and buy more private assets in Brazil if things do get worse. And they aren’t the only Canadian pension fund with large investments in Brazil. The Caisse also bought the Brazilian boom and so have others, including Ontario Teachers which bet big on Eike Batista and got out before getting burned.

Are there risks to these private investments in Brazil? You bet. There is illiquidity risk, currency risk, political and regulatory risk but I trust CPPIB’s managers weighed all these risks and still decided to go ahead with big investment because they think over the long-run, they will make significant gains in these investments.

My biggest fear is how will emerging markets act as QE ends (for now) and I openly wonder if big investments in Brazil or other countries bound to oil and commodities are worth the risk now. Also, the correlation risk to Canadian markets is higher than we think. My only question to CPPIB’s top brass is why not just wait a little longer and pick these Brazilian assets up even cheaper?

But I already know what Mark Wiseman will tell me. CPPIB takes the long, long view and they are not looking at such deals for a quick buck. As far as “egos at CPPIB” that Mr. Doak mentions in the BNN interview, I can’t speak for everyone there, but I can tell you Mark Wiseman doesn’t have a huge ego. If you meet him, you’ll come away thinking he’s a very smart, humble and hard working guy who’s very careful about the deals he enters.

Canada Pension Plan Investment Board manages $226 billion in assets.

Read the entire Pension Pulse post here.

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