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Canada Pension Invests Nearly $400 Million In Brazilian Real Estate

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

From Reuters:

In a statement released late on Monday, CPPIB said the investments include the purchase of warehouses, land and stakes in development projects in the logistics and retailing industries, adding to the fund’s portfolio of more than 100 properties in Latin America’s largest economy.

The move brings CPPIB’s real estate commitments in Brazil to over $1.8 billion. Since 2009, CPPIB has bought real estate in Brazil to profit from rising demand for corporate and distribution facilities.

[…]

CPPIB will pay 507 million reais for 30 percent in a joint venture with Singapore’s Global Logistic Properties Ltd. , the world’s No. 2 owner of industrial properties, to run 32 logistics properties in São Paulo and Rio de Janeiro, the statement added.

Another 231 million reais were committed to GLP Brazil Development Partners I, a real estate investment vehicle in which Global Logistic Properties has a 40 percent stake and CPPIB a 39.6 percent stake.

CPPIB also pledged to spend 159 million reais to buy a 25 percent stake in a São Paulo logistics project alongside Cyrela Commercial Properties SA.

The fund also paid 100 million reais for a 33.3 percent stake in the Santana Parque Shopping mall, which is jointly run by partner Aliansce Shopping Centers SA, the statement added. CPPIB has a 27.6 percent in Aliansce, a shopping mall operator.

From a CPPIB statement released Monday:

“Since making our first real estate investment in Brazil in 2009, CPPIB has become one of the largest investors in the sector with ownership interests in logistics, retail, office and residential assets or developments,” said Peter Ballon, Managing Director & Head of Real Estate Investments – Americas. “Over the past 10 months, we deepened relationships with our key partners to commit additional equity in high-quality real estate assets that are important additions to our diversified Brazilian portfolio. Our team of real estate professionals based in our recently opened Sao Paulo office continues to pursue attractive investment opportunities in the region.”

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

How Confident Are Institutional Investors Right Now?

The results of a recent survey, conducted and released by Pyramis, indicate that institutional investors are more confident than ever about their investment returns.

But funds in Asia and Europe are much more optimistic about market volatility than their counterparts in Canada and the U.S.

The survey of 811 pension fund managers found that Canadian pension funds were the most pessimistic of the bunch about future markets.

From Chief Investment Officer:

Despite the return of volatility, confidence in meeting investment goals has resurged as more than nine in 10 institutional investors said they would hit their targeted returns.

Some 91% of 811 investors told a survey, run by fund manager Pyramis, they believed their goals would be hit over the next five years, a large increase on the 65% who said the same in the company’s 2012 survey.

“While the travails of 2008 are far back enough for investors to feel significantly more confident that they will hit their five-year investment targets for their assets, they still remain concerned that there will be a return to volatility, as has been the case in recent weeks,” said Nick Birchall, head of UK institutional business at Fidelity Worldwide Investment, which distributes Pyramis’ products outside North America.

[…]

Volatility cast the longest shadow on institutional investors, according to the survey. Some 22% cited it as their top concern, while investors in the UK were the most nervous, with 31% saying it was their biggest worry.

However, their peers in the US were also concerned by erratic market moves.

Just 7% of US investors agreed with the following statement: “Volatility is decreasing and market bubbles/crashes will become less frequent.”

Some 10% of their Canadian neighbours agreed, while European and Asian investors took the opposite view, with 79% and 91% respectively thinking the statement was dead on the money.

It’s important to note that the survey was conducted back in June, before recent bouts of market volatility.

Canadian pension funds showed some impressive clairvoyance, as they were by far the most pessimistic of the group back in June: 6 out of 10 Canadian respondents said they anticipated increased market volatility in the near future.

From the Business News Network:

The survey, conducted in June and July, found 60 percent of Canadian pension fund managers believe that over the long term, “volatility is increasing and market bubbles/crashes will become more frequent,” while 42 percent in the U.S. agreed with the statement. However, only 4 percent of pension managers in Europe and 5 percent in Asia agreed volatility is increasing.

The survey included 90 Canadian pension funds representing about 25 percent of all pension plan assets in Canada, Pyramis said.

Mr. Young said he believes the findings reflect the broader global focus of Canadian pension funds, saying funds in other regions are often more inward-looking and focus more on their regional markets. They may have responded based on a consideration of their own local economies, while Canadian pension funds may have been assessing the volatility more broadly in all major markets, he said.

“I do believe that Canada has a very unique and global perspective compared to most countries,” [Pyramis vice-chairman] Mr. Young said.

CalPERS, Other Major Funds To Bid On Bankrupt Indiana Toll Road

CalPERS, the Canada Pension Plan Investment Board and other large funds from around the world are lining up to bid on an Indiana toll road that filed for bankruptcy last month.

The toll road is operated by a private company, ITR Concession Co LLC.

From Reuters:

The interest in the asset shows that infrastructure investors have not been fazed by the failure of one of the largest privatisations of U.S. infrastructure, even though any deal is expected to come at a significant discount to its original value.

Canada Pension Plan Investment Board (CPPIB) has teamed up with Ferrovial SA’s toll road operator Cintra and Canadian investment manager Brookfield Asset Management to make an offer, the people said this week.

Australia’s Hastings Funds Management has partnered with the California Public Employees’ Retirement System (Calpers) and Italian toll road operator Autostrade Meridionali SpA , the people said.

Spanish infrastructure operator Abertis Infraestructuras SA has teamed up with Borealis, which is the infrastructure investment arm of the Ontario Municipal Employees Retirement System, the people said. Australian infrastructure fund manager IFM Investors is also leading its own consortium, the people added.

The composition and number of the consortia could still change, the people said. Alberta Investment Management Corporation (AIMCo) and Abu Dhabi Investment Authority (ADIA) have considered joining the race but have yet to make a decision, some of the people said.

Sources told Reuters that the price tag will likely wind up somewhere between $4 billion and $5 billion.

Indiana leased the toll road out to ITR Concession Co for 75 years in 2006. In return, the state received $3.8 billion.

Canada Pension To Invest Up To $500 Million In Mexico Real Estate Projects

Caisse de depot et placement du Quebec, the entity that manages Quebec’s public pension assets, has unveiled plans to invest up to $500 million in residential and urban housing projects in Mexico.

First up: a $100 million investment in two yet-unbuilt condo complexes.

From the Yucatan Times:

Ivanhoe Cambridge, the real estate unit of the Caisse de depot et placement du Quebec, a public pension funds manager, is teaming up with United States-based Black Creek Group with an investment of up to US $500 million.

Its first project, reported to be its first foray into Mexico, will be a residential development in the borough of Cuajimalpa in Mexico City consisting of two residential condominium buildings with 479 units in total.

It will invest $100 million in the 46,500-square-meter project.

Black Creek is a private-equity firm and real estate company with 17 years’ experience in Mexico in building infrastructure, retail and residential developments, targeting low and middle-income Mexican families. Another market is second homes for American and Canadian baby-boomers.

“With this investment, Ivanhoe Cambridge is setting a major foothold in Mexico, which will provide excellent access to opportunities, including long-term investments in a portfolio of high-quality assets,” said Rita-Rose Gagne, an executive vice-president with Ivanhoe Cambridge.

“The investment is part of Ivanhoe Cambridge’s strategy of developing a long-term, active presence in growth markets. The economic growth and demographic trends in Mexico are producing a large and sustained local demand for commercial and residential real estate.”

Caisse de depot et placement du Quebec manages around $180 billion (USD) of assets.

Some Pension Funds Want Longer Private Equity Deals; Funds Bypassing PE Firms To Avoid Fees

Private equity investments typically operate on a five-year timeline. But some pension funds are talking with private equity firms about longer-term deals. And at least one pension fund is cutting out the middleman and buying companies outright to avoid fees.

Reported by the Wall Street Journal:

Canada Pension Plan Investment Board is “open to conversations” with private-equity firms about partnerships to buy and hold companies for longer than the traditional five-year investment period, said Neal Costello, a London-based manager at the C$227 billion ($203 billion) pension fund.

Blackstone Group LP and Carlyle Group LP are among private-equity firms exploring how they can do longer-term deals with investors such as CPP and sovereign-wealth funds, people familiar with the firms have said.

Such deals could represent a major shift in the private-equity industry. The firms may use their own balance sheets rather than their funds to buy large companies with investors, people have said.

[…]

Large institutional investors are balking at paying expensive private-equity fund fees, and they are seeking to hold investments for longer. CPP is already buying companies outright, in addition to investing in private-equity funds and taking direct stakes alongside those funds. Earlier this year, it bought insurance company Wilton Re for $1.8 billion.

“That’s a very long-term asset,” Mr. Costello said Thursday at a conference in London organized by the British Private Equity and Venture Capital Association. “We can look at a 20-year investment period.”

Universities Superannuation Scheme, a London-based pension manager of £42 billion ($67.6 billion), would also consider longer-term deals in partnership with private-equity firms, according to Mike Powell, head of the private markets group at USS Investment Management.

“If we find good assets, we want to hold on to them as long as we can,” Mr. Powell said in an interview at the conference.

USS has already bypassed private equity and other fund managers entirely: It owns direct stakes in London’s Heathrow Airport and NATS, the U.K.’s air traffic service. Investing directly in infrastructure projects and companies is a way of avoiding paying high fees to fund managers, Mr. Powell said.

One problem that arises with a longer timeline is the issue of fees; most pension funds would balk at the additional expenses that accompany PE partnerships longer than five years. From the WSJ:

An obstacle to doing longer term deals with private-equity firms is figuring out how to pay the deal makers for such transactions, Mr. Powell said. Private-equity firms typically charge an annual fee of between 1% and 2% and keep 20% of profits when they sell a company, a model that won’t work if assets are held for many years.

“How do we remunerate them over the long term?” Mr. Powell said. “That’s up to Carlyle and Blackstone to come up with the answer.”

Ontario Municipal Employees Retirement System, a Canadian pension manager, has stopped investing in private-equity funds to avoid paying their fees, Mark Redman, the European head of its private-equity group said at the conference. The pension fund is buying companies directly instead.

The switch will benefit the pensions of the Canadian workers such as firefighters and policemen by saving them money, Mr. Redman said.

“The amount of fees that we were paying out for a fund, 2 and 20 [percentage points] and everything that goes with that, was a huge amount of value that we were losing to the fund,” Mr. Redman said. “If we could deliver top quartile returns and we weren’t hemorrhaging quite so much in terms of fees and carry that would mean that we would be able to meet the pension promise.”

Pension funds might have some leverage here — Pension360 has previously covered how PE firms want more opacity in their dealings with pension funds. The firms have been upset about the amount of private equity information disclosed by pension funds as part of public records requests.

Photo by 401kcalculator.org

Kolivakis: Time To Face The “Brutal Truth” About Defined-Contribution Plans

Leo Kolivakis, the man behind the Pension Pulse blog, has long been a critic of replacing defined-benefit plans with 401(k)-style plans as a means of reforming public pension systems.

The Canadian Public Pension Leadership Council released a report last week arguing that converting large public DB pension plans to DC plans would be costly and ineffective. In light of that report, Kolivakis took to his blog to re-explain his aversion to the oft-considered reform tactic. From Pension Pulse:

I’m glad Canada’s large public pension funds got together to fund this new initiative to properly inform the public on why converting public sector defined-benefit plans to private sector defined-contribution plans is a more costly option.

Skeptics will claim that this new association is biased and the findings of this paper support the continuing activities of their organizations. But if you ask me, it’s high time we put a nail in the coffin of defined-contribution plans once and for all. The overwhelming evidence on the benefits of defined-benefit plans is irrefutable, which is why I keep harping on enhancing the CPP for all Canadians regardless of whether they work in the public or private sector.

And while shifting to defined-contribution plans might make perfect rational sense for a private company, the state ends up paying the higher social costs of such a shift. As I recently discussed, trouble is brewing at Canada’s private DB plans, and with the U.S. 10-year Treasury yield sinking to a 16-month low today, I expect public and private pension deficits to swell (if the market crashes, it will be a disaster for all pensions!).

Folks, the next ten years will be very rough. Historic low rates, record inflows into hedge funds, the real possibility of global deflation emanating from Europe, will all impact the returns of public and private assets. In this environment, I can’t underscore how important it will be to be properly diversified and to manage assets and liabilities much more closely.

And if you think defined-contribution plans are the solution, think again. Why? Apart from the fact that they’re more costly because they don’t pool resources and lower fees — or pool investment risk and longevity risk — they are also subject to the vagaries of public markets, which will be very volatile in the decade(s) ahead and won’t offer anything close to the returns of the last 30 years. That much I can guarantee you (just look at the starting point with 10-year U.S. treasury yield at 2.3%, pensions will be lucky to achieve 5 or 6% rate of return objective).

Public pension funds are far from perfect, especially in the United States where the governance is awful and constrains states from properly compensating their public pension fund managers. But if countries are going to get serious about tackling pension poverty once and for all, they will bolster public pensions for all their citizens and introduce proper reforms to ensure the long-term sustainability of these plans.

Finally, if you think shifting public sector DB plans into DC plans will help lower public debt, think again. The social welfare costs of such a shift will completely swamp the short-term reduction in public debt. Only economic imbeciles at right-wing “think tanks” will argue against this but they’re completely and utterly clueless on what we need to improve pension policy for all our citizens.

The brutal truth on defined-contribution plans is they’re more costly and not properly diversified across public and private assets. More importantly, they will exacerbate pension poverty which is why we have to enhance the Canada Pension Plan (CPP) for all Canadians allowing more people to retire in dignity and security. These people will have a guaranteed income during their golden years and thus contribute more to sales taxes, reducing public debt.

Read his entire post on the subject here.

Photo by TaxCredits.net

Lessons In Infrastructure Investing From Canada’s Pensions

Canada’s pension plans were among the first in the world to invest in infrastructure, and they remain the most prominent investors in the asset class.

Are there any lessons to be learned from Canada when it comes to infrastructure investing? Georg Inderst, Principal of Inderst Advisory, thinks so.

In a recent paper in the Rotman International Journal of Pension Management, Inderst dives deep into Canada’s infrastructure investing and emerges with some lessons to be considered by pension funds around the world.

The paper, titled Pension Fund Investment in Infrastructure: Lessons from Australia and Canada, starts with a short history of Canadian infrastructure investing:

Some Canadian pension plans, notably the Ontario Teachers’ Pension Plan (OTPP) and the Ontario Municipal Employees Retirement System (OMERS), were early investors in infrastructure in the late 1990s and early 2000s, second only to Australian superannuation funds. Other funds followed, and the average allocation has been growing steadily since, reaching C$57B by the end of 2012 (5% of total assets). Here, too, there is a heavy “size effect” across pension funds: bigger pension plans have made substantial inroads into infrastructure assets in recent years (see Table 2), while small and medium-sized pension funds have little or no private infrastructure allocation.

The main driver for infrastructure investing appears to be the wish to diversify pension funds’ assets beyond the traditional asset classes. While Canadian pension funds have been de- risking at the expense of listed equities, regulators have not forced them into bonds, as was the case in some European countries. Real estate and infrastructure assets are also used in liability-driven investing (LDI) to cover long-term liabilities.

Canada frequently makes direct investments in infrastructure, an approach that is now being tested by pension funds around the world. From the paper:

According to Preqin (2011), 51% of Canadian infrastructure investors make direct investments, the highest figure in the world. This approach (known as the “Canadian Model”) has attracted considerable attention around the world, for several reasons:

• lower cost than external infrastructure funds

• agency issues with fund managers

• direct control over assets (including entry and exit decisions)

• long-term investment horizon to optimize value and liability matching

This direct approach to infrastructure investment must be seen in the context of a more general approach to pension plan governance and investment. Notable characteristics of the “Maple Revolutionaries” include

• Governance: Strong governance models, based on independent and professional boards.

• Internal management: Sophisticated internal investment teams built up over years; the top 10 Canadian pension plans outsource only about 20% of their assets (BCG 2013).

• Scale: Sizable funds, particularly important for large-scale infrastructure projects.

Potential challenges for the direct investing approach include insufficient internal resources, reputational and legal issues when things go wrong, and the need to offer staff market-based compensation in high-compensation labor pools.

Despite these challenges, however, the direct internal investment approach of large Canadian pension funds is now being tried in other countries. Other lessons from the Canadian experience include the existence of a well-functioning PPP model, a robust project bond market, and long-term involvement of the insurance sector.

Finally, the paper points to some lessons that can be learned from Canada:

Lessons learned include the following:

• Substantial infrastructure investments are possible in very different pension systems, with different histories and even different motivations.

• Infrastructure investment vehicles can evolve and adjust according to investors’ needs. In Australia, listed infrastructure funds were most popular initially, but that is longer the case.

• Pension plan size matters when investing in less liquid assets. Private infrastructure investing is driven primarily by large- scale funds, while smaller funds mostly invest little to nothing in infrastructure. In Australia, two-thirds of pension funds do not invest in unlisted infrastructure at all.

• Asset owners need adequate resources when investing in new and difficult asset classes. Some Canadian plans admit that their own estimates of time and other inputs were too optimistic at the outset.

• New investor platforms, clubs, syndicates, or alliances are being developed that should also attract smaller pension funds, such as the Pension Infrastructure Platform (PIP) in the United Kingdom or OMERS’ Global Strategic Investment Alliance (GSIA). However, industry experts stress the difficulties of such alliances with larger numbers of players, often with little experience and few resources. Decision time is also a critical factor.

The full paper offers much more insight into Canada’s approach as well as Australia’s. The entire paper can be read here.

Video: CFO of Canada’s 2nd Largest Pension Asset Manager Talks Investment Strategy

Here’s a 24-minute talk with Maarika Paul, chief financial officer at Caisse de Depot et Placement du Québec, Canada’s second-largest pension fund.

Paul touches on infrastructure, e-commerce and real estate investing, as well as investing in Europe.

The video was taken at the Bloomberg Canadian Fixed Income Conference in New York.

Montreal Unions Will Fight “Unjust” Pension Reform Bill

A union coalition representing 65,000 workers has announced workers may strike for 24 hours in protest of the proposed pension reforms contained in Bill 3. Additionally, the union spokesman said a legal challenge could be in the works.

Bill 3 would increase pension contributions and eliminate COLAs for many workers.

Funded Status Of Canadian Pensions Falls in Third Quarter

The funded statuses of Canada’s defined benefit plans collectively fell in the third quarter to 91.1 percent, marking a 4.9 percent decline over the last three months; at the end of the second quarter, plans were 96 percent funded.

The data comes from Aon Hewitt, who surveyed 275 of Canada’s defined benefit plans, both public and private.

From MarketWired:

[The DB plans’] median solvency funded ratio — the market value of plan assets over plan liabilities — stood at 91.1% at September 26, 2014. That represents a decline of 4.9 percentage points over the previous quarter ended June 30, 2014, a 5.5% drop from the peak of 96.6% reached in April 2014, and a 3.1% increase over the same quarter in 2013. With the decline, this quarter’s survey results reverse a trend throughout 2013 and 2014 of improving solvency positions for the surveyed plans. As well, approximately 23% of the surveyed plans in Q3 were more than fully funded at the end of the third quarter this year, compared with 37% in the previous quarter and 15% in Q3 2013.

[…]

“Canadian DB plans have strung together a nice run of winning quarters, but as we have been saying for some time now, market volatility continues to present significant risks and plan sponsors should be implementing or fine-tuning their de-risking strategies in order to stay current and optimized in the face of ever-changing capital market conditions,” said William da Silva, Senior Partner, Retirement Practice, Aon Hewitt.

“Now that we have seen plan solvency decline for the first time in over a year and a half, hopefully this will serve as a wake-up call to all plan sponsors to consider their funding and investment strategies with risk management as their key objective. Overall Canadian plan solvency is still relatively strong compared to where things stood just a few years ago, so there is still time to act. But with new mortality tables coming into effect, we expect material increases in liabilities for many plans. Clearly, that is another signal that the time to act is now.”

The 4.9 percent drop in funding was the first funding decline in nine quarters, or over two years.

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