investment strategy | Pension360

Pension Pulse: Caisse’s High-Speed Push Into Infrastructure

Last week, Canada’s Caisse de dépôt et placement du Québec acquired a 30 percent stake in Eurostar International, a high-speed rail service that runs between London, Paris and Brussels.

The deal came just months after Caisse partnered with Quebec’s government to take over some of the province’s major infrastructure projects.

Leo Kolivakis of Pension Pulse dove deeper into the Eurostar deal in a post on Wednesday. It is re-printed below.

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By Leo Kolivakis, Pension Pulse

This is a huge deal for the Caisse, which is increasingly shifting its focus on domestic and international infrastructure. It signed a deal with Quebec’s government to develop some of the province’s future infrastructure projects and is now going after prize assets in other developed markets.

But unlike the Quebec project, which is essentially a greenfield project full of critics, the Eurostar International is a mature and coveted infrastructure asset that is profitable and can offer the Caisse and Hermes Investment Management steady cash flows over the next decades, if the deal passes regulatory approval and isn’t nixed by the majority shareholders.

And that’s where things get tricky. Canada’s mighty pensions already own a huge chunk of Britain and there will be fierce opposition to this deal. This is a strategic infrastructure asset with important economic and security concerns. It’s not just any old boring infrastructure asset, it’s a real prize, one of the most recognizable infrastructure assets in the world.

Also, if for any reason the British and European economy stumbles and the dark forces of nationalism rear their ugly head, there could be problems down the road. Just look at what’s going on in Greece with this new leftist government threatening to nationalize key infrastructure assets.

Still, this is a great deal for the Caisse even once you factor in all the economic uncertainty and regulatory risks. If Europe is able to finally turn the corner, which seems to be the case but with lingering risks, then this will really be a great deal for the Caisse. Even if Europe stagnates, people are still going to use high-speed trains to travel within Europe and tourism will boom, adding to the profits of this asset.

As far as pricing, I can’t tell you if the Caisse overpaid but I will take Macky Tall’s word that they didn’t. Keep in mind, these are ultra long-term assets which pay steady cash flows, which is what the Caisse and other large Canadian pensions are increasingly looking for to match their long-dated liabilities. And by going direct, they avoid paying fees to third parties.

Photo by Renaud CHODKOWSKI via Flickr CC License

Study Examines Herd Mentality in Pension Investing

Pension funds exhibit a herd mentality when formulating investment strategies, according to a new paper that studied the investment decisions of UK pension funds over the last 25 years.

The paper, authored by David P. Blake, Lucio Sarno and Gabriele Zinna, claims that pension funds “display strong herding behavior” when making asset allocation decisions.

More on the paper’s conclusions, from ai-cio.com:

According to the study, there was overwhelming evidence of “reputational herding” behavior from pension funds—more so than individual investors.

Pension funds are often evaluated and compared to each other in performance, the paper said, creating a “fear of relative underperformance” that lead to asset owners picking the same asset mix, managers, and even stocks.

Data showed herding was most evident at the asset class level, with pension funds following others out of equities and into bonds at the same time. They were also likely to herd around the average fund manager producing the median return—or a “closet index matcher.”

The paper can be found here.

Photo by Nick Wheeler via Flickr CC License

Pennsylvania Pension Officials Defend Investment Strategy After Governor Calls for Overhaul

Last week, Pennsylvania Gov. Tom Wolf released his first budget proposal.

Wolf has said many times that he doesn’t support a full overhaul of the state’s pension system. But his budget did contain some pension-related changes.

Wolf is calling for the state’s pension funds to take a more passive approach to investing and to cut down the fees it pays to managers. The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

PhillyDeals columnist Joseph N. DiStefano talked to spokesman for the state’s two pension funds – SERS and PSERS – and got their official reactions to the budget proposal.

SERS reaction:

“We are working to gather details on the Governor’s plan, so I can’t speak to it specifically,” SERS spokeswoman Pamela Hile told me. “What I can tell you is that last year, a little more than 0.5% of the total fund value went to management fees. This, in the view of the Board, does not represent an excessive amount.”

“Looking at the issue from a long-term perspective, over the past decade, SERS paid $2.4 billion in fees, while earning $19.7 billion net of fees and expenses AND paying out $23.2 billion in retirement benefits.

“Compare that performance to an industry standard 60% equity/40% bond index fund, SERS’ performance added $4.9 billion of value to the fund with 0.5% less volatility.

“To further illustrate this value, our alternative investment program, built with top-tier investment managers, outperformed the U.S. public market equities return by 5% net of all fees over the decade ended 2013… Over the past five years, we reduced fees 30%. We get good value for the fees we pay…

“In 2013, SERS earned $3.7 billion, after all investment management fees and expenses of $175 million were paid. From a basic dollar perspective, that’s like paying $175 over the year to net $3,700 in your pocket at the end of the year.”

The PSERS spokesperson told DiStefano:

“We are not aware of the details of the Governor’s proposal on investment management fees. We have not met with him,” and won’t comment on details of the proposal until they are available.

“Our investment management fees are not excessive relative to the incremental value generated. PSERS paid $482 million in investment expenses for the fiscal year ended June 30, 2014. This amounts to 0.93% of our fund.

“By spending those fees, we earned an additional $1.27 billion (net of fees) ABOVE the index return,” Williams added in an email. “We would not have that additional $1.27 billion or 2.8% in additional investment performance if we did not use active managers.

“Looking longer term for the past 15 fiscal years (2000-2014), PSERS incurred $4.96 billion in investment management fees. In exchange for those fees, the Fund received the index returns plus an additional $16.42 billion in excess performance gross of the fees incurred. So, net of fees, PSERS generated $11.46 billion of incremental performance above the applicable index returns.

Read more of their remarks, including reaction to Wolf’s pension bond proposal, here.

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Texas Pension Official: Sovereign-Wealth Funds Crowd Out Pensions on Co-Investing Opportunities

At a recent board meeting, a top official at the Teacher Retirement System of Texas outlined an emerging source of competition for pension funds looking to co-invest: sovereign wealth funds.

Britt Harris, the pension fund’s CIO, said that his fund might have to consider new strategies to get in on the best co-investing opportunities, according to LBO Wire.

More on Harris’ remarks, as reported by the Wall Street Journal:

“The whole emergence of sovereign wealth funds is disrupting the market,” said Britt Harris, the chief investment officer of the roughly $132 billion pension system during a board meeting in February. “We’re in competition with funds outside the country that are very large and very heavily resourced.”

Texas Teachers, which Mr. Harris said could “easily” do transactions above $100 million, faces intense competition for large co-investment deals as sovereign-wealth funds increase in influence.

[…]

Texas Teachers sources co-investment deals, which it calls “principal investments,” by focusing on a network of existing general partners and strategic partners.

“We have to convince these guys that we are the people to bring big investments to,” Mr. Harris said.

The pension fund may consider stationing staff in other major cities to expand its presence beyond its Austin, Tex., stronghold. It also is trying to structure transactions creatively.

“We have to come up with new ways of structuring things,” said Eric Lang, senior managing director of real assets and private equity.

Texas Teachers said it hopes to become involved in deals before they are signed and syndicated across a manager’s limited partner base.

“We’d like to be a full underwriting partner,” Mr. Lang said. He raised the possibility that if the pension fund has a larger role in due diligence before a deal closes, “We might have to share in deal costs with the [general partner].”

Texas Teachers manages $132 billion in assets.

Photo by Pete via Flickr CC License

Pennsylvania Gov. Budget Proposal: Overhaul Pension Investment Strategy and Cut Fees, Managers

Pennsylvania Gov. Tom Wolf released his first budget proposal last week, and there were several items of interest related to pensions.

On Wednesday, Pension360 covered Wolf’s proposal for issuing $3 billion in pension bonds to attempt to shore up the funding of the state’s two major pension systems.

But Wolf is also proposing an overhaul of the systems’ investment strategy.

Specifically, Wolf is calling for the systems to take a more passive approach to investing and to cut down the fees it pays to managers.

The proposal was short on specifics but called for the funds to “prudently maximize future investment returns through cost effective investment strategies.”

Japan Pension’s Portfolio Overhaul Pays Dividends With Record Quarter

A shift into riskier investments has paid off for Japan’s pension fund – at least in the fourth quarter of 2014.

In late 2014, Japan’s Government Pension Investment Fund (GPIF) began a portfolio overhaul that involved shifting a higher percentage of assets away from bonds and into stocks.

The well-publicized shift proved to be a boon for the Tokyo stock market, and the pension fund rode that wave as the fourth quarter of 2014 proved to be the second-best quarter in the fund’s history.

From the Wall Street Journal:

The GPIF on Friday reported a ¥6.6 trillion ($55 billion) investment profit in the December-ended quarter, a return of 5.2% compared with the previous quarter. The fund generated a return of 2.9% in the third quarter.

The value of the its assets under management reached ¥137 trillion, the highest since the fund was created in 2001.

GPIF officials don’t reveal the specifics of their investment activities, but figures released Friday showed the fund has likely sold about ¥6.5 trillion of Japanese government bonds during the quarter while buying roughly ¥2 trillion each of overseas and domestic equities, according to a Wall Street Journal analysis.

[…]

At the end of October, the GPIF announced major changes to its asset allocations, cutting its intended weighting to domestic bonds to 35% from 60%. It raised the allocation to foreign and domestic equities to 25% each, from 12% each, and to foreign bonds to 15% from 11%.

The fund is still only halfway toward achieving these targets.

The GPIF manages $1.1 trillion in pension assets and is the largest pension fund in the world.

Photo by Ville Miettinen via Flickr CC License

Pension Pulse: Diving Deeper Into Caisse’s Big 2014

The median U.S. public pension fund returned 6.8 percent in 2014.

But north of the border, one of Canada’s largest public funds blew that figure away.

Caisse de depot et Placement du Quebec, Canada’s second-largest pension fund, posted investment returns of 12 percent in 2014, nearly doubling the returns of its U.S. peers.

Over at Pension Pulse, Leo Kolivakis dives deep into Caisse’s 2014 results. What did he find? The post is re-printed below.

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By Leo Kolivakis, Pension Pulse

You can gain more insights on the Caisse’s 2014 results by going directly on their website here. In particular, the Caisse provides fact sheets on the following broad asset classes:

Keep in mind that unlike other major Canadian pension funds, the Caisse has a dual mandate to promote economic activity in Quebec as well as maximizing returns for its depositors.

In fact, the recent deal to handle Quebec’s infrastructure needs is part of this dual mandate. Some have criticized the deal, questioning whether the Caisse can make money on public transit, but this very well might be a model they can export elsewhere, especially in the United States where CBS 60 Minutes reports infrastructure is falling apart.

Whether or not the Caisse will be successful in exporting this infrastructure model to the United States remains to be seen but if you follow the wise advice of Nobel laureate Michael Spence on why the world needs better public investments, public pensions investing in infrastructure could very well be the answer to a growing and disturbing jobs crisis plaguing the developed world.

As far as the overall results, they were definitely solid, with all portfolios contributing to the overall net investment of $23.77 billion (click on image below):

Of course, what really matters is value-added over benchmarks. After all, this is why we pay Canadian pension fund managers big bucks (some a lot more than others).

In fact, in its press release, the Caisse states in no uncertain terms:

“[its] investment strategy centers on an absolute return approach in which investment portfolios are built on strong convictions, irrespective of benchmark indices. These indices are only used ex post, to measure the portfolios’ performance. The approach is based on active management and rigorous, fundamental analysis of potential investments.”

I’ve already discussed life after benchmarks at the Caisse. So how did their active management stack up? For the overall portfolio, the 12% return edged out the fund’s benchmark which delivered an 11.4% gain, adding 60 basis points of value-added last year (do not know the four year figure).

Below, I provide you with the highlights of the three main broad asset classes with a breakdown of individual portfolios (click on each image to read the highlights):

Fixed Income:

Inflation-Sensitive:

Equities:

Some quick points to consider just looking at these highlights:

Declining rates helped the Fixed Income group generate strong returns in 2014 but clearly the value-added is waning. In 2014, Fixed Income returned 8.4%, 10 basis points under its benchmark which gained 8.5%. Over the past four years, the results are better, with Fixed Income gaining 5.6%, 70 basis points over its benchmark which gained 4.9%. Real estate debt was the best performing portfolio in Fixed Income over the last year and four years but on a dollar basis, its not significant enough to add to the overall gains in Fixed Income.
There were solid gains in Inflation-Sensitive assets but notice that both Real Estate and Infrastructure underperformed their respective benchmarks in 2014 and the last four years, which means there was no value-added from these asset classes. The returns of Infrastructure are particularly bad relative to its benchmark but in my opinion, this reflects a problem with the benchmark of Infrastructure as there is way too much beta and perhaps too high of an additional spread to reflect the illiquid nature and leverage used in these assets. More details on the Caisse’s benchmarks are available on page 20 of the 2013 Annual Report (the 2014 Annual Report will be available in April).
In Equities, Private Equity also slightly underperformed its benchmark over the last year and last four years, but again this reflects strong gains in public equities and perhaps the spread to adjust for leverage and illiquidity. U.S Equity led the gains in Equities in 2014 but the Caisse indexes this portfolio (following the 2008 crisis) so there was no value-added there, it’s strictly beta. However, there were strong gains in the Global Quality Equity as well as Canadian Equity portfolios relative to their benchmarks in 2014 and over the last four years, contributing to the overall value-added.

If you read this, you might be confused. The Caisse’s strategy is to shift more of its assets into real estate, private equity and infrastructure and yet there is no value-added there, which is troubling if you just read the headline figures without digging deeper into what makes up the benchmarks of these private market asset classes.

The irony, of course, is that the Caisse is increasingly shifting assets in private markets but most of the value-added over its benchmarks is coming from public markets, especially public equities.

But this is to be expected when stock markets are surging higher. And as a friend of mine reminded me: “It about time they produced value-added in Public Equities. For years, they were underperforming and so they came up with this Global Quality Equity portfolio to create value.”

Also, keep in mind private markets are generating solid returns and as I recently noted in my comment on why Canadian pensions are snapping up real estate:

… in my opinion the Caisse’s real estate division, Ivanhoé Cambridge, is by far the best real estate investment management outfit in Canada. There are excellent teams elsewhere too, like PSP Investments, but Ivanhoe has done a tremendous job investing directly in real estate and they have been very selective, even in the United States where they really scrutinize their deals carefully and aren’t shy of walking away if the deal is too pricey.

There is something else, the Caisse’s strategy might pay off when we hit a real bear market and pubic equities tank. Maybe that’s why they’re not too concerned about all the beta and high spread to adjust for leverage and illiquidity in these private market benchmarks.

But there are skeptics out there. One of them is Dominic Clermont, formerly of Clermont Alpha, who sent me a study he did 2 years ago showing the Caisse’s alpha was negative between 1998 and 2012. Dominic hasn’t updated that study (he told me he will) but he shared this:

I had done a study two years ago that showed that the Caisse’s alpha was close to -1% and close to statistically significantly different from zero and negative. Part of that regular value lost is compensated by taking a lot more risk than its benchmark by being levered. That leverage means doing better than the benchmark when the markets do perform well, and being in a crisis when the market tanks…

I asked him to clarify this statement and noted something a pension fund manager shared with me in my post on the highest paid pension fund CEOs:

Also, it’s not easy comparing payouts among Canada’s large DB plans. Why? One senior portfolio manager shared this with me:

“First and foremost, various funds use more leverage than others. This is the most differentiating factor in explaining performance across DB plans. In Canada, F/X policy will also impact performance of past 3 years. ‎It’s very hard to compare returns because of vastly different invest policies; case in point is PSP’s huge equity weighting (need to include all real estate, private equity and infrastructure) that has a huge beta.”

Dominic came back to me with some additional thoughts:

I would love to do proper performance attribution, but I had limited access to data. But we can infer a lot with published data. We do have historical performance for all major funds like the Caisse, CPP, Teachers, PSP, etc. in their financial statements. They also publish the performance of their benchmark.

I agree that because of different investment policies, it is difficult to compare one plan to the next. But we can compare any plan to itself, i.e. its benchmark.

Again, I like to do proper performance attribution in a multivariate framework and that is one area of expertise to me. To do it on a huge plan like the Caisse would require a lot of data which I do not have access to. But a simple CAPM type of attribution would give some insight. In this case, the benchmark is not an equity market as in the base case of CAPM, but the strategy mix of the Caisse.

Thus if we regress the returns (or the excess returns over risk free rate) of a plan, over its benchmark return (or excess over RF rate), we would obtain a Beta of the regression to be close to one if the plan is properly managed with proper risk controls. That is what I obtain when I do this exercise with the returns of a well-known plan – well known for its quality of management, and its constant outperformance.

When I do this for the Caisse, I get a Beta of the regression significantly greater than 1 – close to 1.25. It looks like the leverage of the Caisse over the 15 years of the regression was on average close to 25% above its benchmark! Now part of that as you mentioned and as I explain in my study could come from:

Investment in high Beta stocks,

Investment in levered Private equity

Investment in levered Real Estate and Infrastructure

Investment in longer duration bonds

Leveraging the balance sheet of the plan: Check Graphic 1 on the link: http://www.clermontalpha.com/cdpq_15ans.htm

It shows the leverage of the Caisse going from 18% in 1998 to 36% in 2008! So my average of 25% excess Beta is in line with this documented leverage.

The chart also shows Ontario Teachers’ and OMERS’ leverage. The difference is that Teachers’ leverage is IN its benchmark, while the Caisse is NOT. Thus the Caisse is taking 25% more risk than its clients’ policy mix! You would think that all these clients risk monitoring would be complaining… They are not.

Of course, that leverage is good when markets return positively and you can see that on the colored chart. But that leverage is terrible when the markets drop 2008, 2002, 2001. When that happen, it is time to fire the management, restart with a new one and blame the previous management for the big loss. Some of those big losses were also exaggerated by forced liquidation accounting (we all remember the ABCP $6 billion loss reserve which was almost fully recovered in the following years inflating the returns under the new administration).

By not doing proper attribution, we are not aware of the continuous loss (negative alpha) hidden by the excess returns not obtained by skilled alpha, but by higher risk through leverage. The risk-adjusted remains negative… And we are not focusing our energies into building an alpha generating organisation with optimal risk budgeting. Why bother, the leverage will give us the extra returns! But that is not true alpha, not true value added.

Which brings me to the alpha of the regression. I told you that this other great institution which does proper risk controls, gets a Beta close to one. They also get a positive alpha of the regression which is statistically significant (t stat close to 2). Not surprising, they master the risk budgeting exercise, and they understand risk controls.

For the Caisse, the Alpha of the regression is close to -1% per year and it is statistically significant. Nobody in the private market could sustain such long period of negative alpha. Nobody could manage a portfolio with 25% more risk than what is requested by the client.

In my report, I also talk about the QPP contribution rate. When Canada created the CPP in the mid-60s, Quebec said “Hey, we want to better manage our own fund.” That led to the creation of the Caisse de Depot and it was an excellent decision as the returns of the QPP were much better because they were managed professionally in a diversified portfolio (vs provincial bonds for the CPP). Unnoticed by everyone in Quebec, the contribution rate started to increase in 2012 and will continue to increase up until 2017 at which time Quebecers will pay 9% more than the rest of Canadians for basically the same pension plan (some tiny differences). And the explanation is this negative alpha.

I also explained that with proper risk budgeting techniques at all levels, the Caisse could deliver an extra $5 billion with 20% less risk! Instead of increasing the contribution rate of all CDPQ clients QPP, REGOP, etc., we could have kept them at the same level or lower. And part of that extra $5B return every year would find its way into the Quebec government coffer through reduced contributions and higher taxes (the higher contributions to QPP, Regop, etc. that Quebecers pay are tax deductible…)

For how long are we going to avoid looking at proper attribution? For how long are we going to forfeit this extra $5B per year in extra returns?

I shared Dominic’s study with Roland Lescure, the CIO of the Caisse, who shared this with me:

You are right, we have significantly lowered leverage at the Caisse since 2009. Leverage is now solely used to fund part of our real estate portfolio and the (in)famous ABCP portfolio which will be gone by 2016. As you rightly point out, most Canadian pension funds use leverage to different degrees. Further, we also have significantly reduced risk by focusing our investments on quality companies and projects, which are less risky than the usual benchmark-driven investments. And those investments happen to have served us well as they did outperform the benchmarks significantly in 2014. You probably have all the details for each of our portfolios but I would point out that our Canadian equity portfolio outperformed the TSX by close to 300 bps. And the global quality equity portfolio did even better.

I thank Dominic Clermont and Roland Lescure for sharing their insights. Dominic raises several excellent points, some of which are politically sensitive and to be honest, hard to verify without experts really digging into the results of each and every large Canadian pension. Also, that increase in the contribution rate for public sector workers is part of tackling Quebec’s pension deficits, slowly introducing more risk-sharing in these plans.

Again, this is why even though I’m against an omnipotent regulator looking at systemic risks at pensions, I believe all of Canada’s large pensions need to provide details of their public and private investments to the Bank of Canada and we need to introduce uniform comprehensive performance, operational and risk audits at all of Canada’s major pensions.

These audits need to be conducted by independent and qualified third parties that are properly staffed to conduct them. The current auditing by agencies such as the Auditor General of Canada is simply too flimsy as far as I’m concerned, which is why we need better, more comprehensive audits across the board and the findings should be made public for all of Canada’s large pensions.

And let me say while the Caisse has clearly reduced leverage since the ABCP scandal which the media keeps covering up, it is increasingly shifting into private markets, introducing more illiquidity risk that can come back to haunt them if global deflation takes hold.

As far as stocks are concerned, I see a melt-up occurring in tech and biotech even if the Fed makes a monumental mistake and raises rates this year (read the latest comment by Sober Look to understand why market expectations of Fed rate hikes are unrealistic). It will be a rough and tumble year but my advice to the Caisse is to stay long U.S. equities (especially small caps) and start nibbling at European equities like Warren Buffett. And stick a fork in Canadian equities, they’re cooked!

Will the liquidity and share buyback party end one day? You bet it will but that is a topic for another day where I will introduce you to a very sharp emerging manager and his team working on an amazing and truly unique tail risk strategy.

As far as U.S. equities, I think the Caisse needs to stop indexing and start looking at ways to take opportunistic large bets using some of the information I discussed when I covered top funds’ Q4 activity. This would be above and beyond the information they receive from their external fund managers.

By the way, if you compare the Caisse’s top holdings to those of the Bill and Melinda Gates Foundation, you’ll notice they are both long shares of Waste Management (WM), one of the top-performing stocks in the S&P 500 over the last year.

I’ll share another interesting fact with you, something CNBC’s Dominic Chu discussed a few days ago. Five stocks — Apple (AAPL), Amazon (AMZN), Biogen Idec (BIIB), Gilead (GILD), and Netflix (NFLX) — account for all of the gains in the Nasdaq this year. If that’s not herd behavior, I don’t know what is!!

Lastly, it takes a lot of time to write these in-depth comments and you won’t read this stuff in traditional media outlets which get hung up on headline figures and hardly ever dig deeper. Please take the time to contribute to my blog on the top right-hand side, or better yet, stop discriminating against me and hire the best damn pension and investment analyst in the world who just happens to live in la belle province!

Below, Michael Sabia, CEO of the Caisse, discusses the Caisse’s 2014 results with TVA’s Pierre Bruneau (in French). Michael also appeared on RDI Économie last night where he was interviewed by Gérald Filion. You can view that interview here and you can read Filion’s blog comment here (in French).

Also, some food for thought for the Caisse’s real estate team. A new report from Zillow shows that rents across the U.S. are increasing, and not just in the expected regions of New York City, San Francisco and Boston. Overall, rents increased 3.3% year-over-year as of January. But many cities outpaced that, including Kansas City, which saw rent grow more than double the national average, jumping 8.5% year-over-year. St. Louis saw rent increase by 4.5% over the same period. Rents in Detroit grew by 5.0% and rents in Cleveland grew by 4.2%.

Photo credit: “Canada blank map” by Lokal_Profil image cut to remove USA by Paul Robinson – Vector map BlankMap-USA-states-Canada-provinces.svg.Modified by Lokal_Profil. Licensed under CC BY-SA 2.5 via Wikimedia Commons – http://commons.wikimedia.org/wiki/File:Canada_blank_map.svg#mediaviewer/File:Canada_blank_map.svg

Private Equity Eyes Longer Timelines For Largest Investors

Some private equity firms are considering offering new investment structures that would allow their largest clients to invest over a longer period of time, according to a New York Times report.

The new structure would extend the timeline of some investments to over 10 years, which could appeal to institutional clients looking for longer-term, lower-risk investments in the private equity arena.

More details from the New York Times:

Joseph Baratta, the head of private equity at the Blackstone Group, the biggest alternative investment firm, said at a conference in Berlin on Tuesday that the firm was speaking with large investors about a new investment structure that would aim for lower returns over a longer period of time.

Mr. Baratta, whose remarks were reported by The Wall Street Journal, said the investments would be made outside of Blackstone’s traditional funds, which impose time limits on the investing cycle. Invoking Warren E. Buffett’s Berkshire Hathaway, Mr. Baratta said he wanted to own companies for more than 10 years.

”I don’t know why Warren Buffett should be the only person who can have a 15-year, 14 percent sort of return horizon,” Mr. Baratta said, according to The Journal.

His remarks, at the SuperReturn International conference, were only the latest example of chatter about this sort of structure in private equity circles.

News reports last fall said that Blackstone and the Carlyle Group, the private equity giant based in Washington, were both considering making investments outside their existing funds. Such moves would let the firms buy companies they might otherwise pass on — big, established corporations that don’t need significant restructuring but could benefit from private ownership.

[…]

Blackstone, which has not yet deployed such a strategy, might gather a “coalition of the willing” investors to buy individual companies, Mr. Baratta said. This approach could be attractive to some of the world’s biggest investors, including sovereign wealth funds and big pension funds, which, though they want market-beating returns, also want to avoid taking too much risk.

Read the full NY Times report here.

Photo by Santiago Medem via Flickr CC

Disagreements Get Personal At San Diego Pension Board Meeting; One Trustee: “I Am Very Concerned For My Safety”

Until now, the major points of contention among trustees of San Diego County’s pension fund have been matters of investment policy.

[Pension360 has covered some of the drama surrounding the fund’s outsourced CIO and its investment strategy.]

But things are getting personal among the fund’s board members. An email exchange obtained by U-T San Diego reveals the extent of the personal issues, particularly between trustees David Myers and Samantha Begovich:

The ongoing divide about investment strategies on the county pension board has spilled over into personal allegations of sexual harassment and racial discrimination, with threats of a potential lawsuit between board members and one trustee saying she fears for her personal safety.

[…]

According to the emails, Begovich told pension system CEO Brian White earlier this month that Myers has harassed and ridiculed her in public and private, and she is afraid he may lose his composure and commit violence against her.

“I am very concerned for my safety now,” Begovich wrote to White on the evening of Feb. 4, the night before a pension board meeting. “I wonder if we can have him not bring his gun to meetings.”

White responded 21 minutes later, telling Begovich he did not understand her statement about fearing for her safety at meetings of the San Diego County Employees Retirement Association.

“Are you saying that you are concerned that Dave Myers might shoot you?” replied White, who shared her private correspondence with the entire board without seeking Begovich’s approval. “I cannot give that any credence. I once again ask if you would like me to arrange a change in your seat with another board member.”

Begovich wrote back in five minutes: “Yes. That is what I am concerned about given his behavior to date and your unilateral decision to release a privileged document with my private conclusions relayed to you.”

More of the surreal email exchange can be read here.

Study: Pensions Put Pressure on Private Equity to Formulate Environmental, Social Investment Policies

Research from the London Business School shows that the vast majority of large private equity firms – 85 percent – are feeling increased pressure from Europe’s institutional investors to incorporate environmental, social and governance (ESG) considerations into their investment policies and processes.

Details from Investments & Pensions Europe:

The study was based on responses from 42 private equity firms with collective assets under management of more than $640bn.

“Issues such as climate change, sustainability, consumer protection, social responsibility and employee engagement are no longer viewed solely as components of risk management, but have also gained recognition in recent years as important drivers of firm value, particularly in the long term,” the study said.

[…]

But even though ESG policies were being adopted more and more, there were still some big obstacles to these being implemented, the study showed.

The most notable barrier was the difficulty in collecting the necessary data, it said.

Also, some respondents cited the attitude of internal managers as a barrier to implementation.

“It appears that, while ESG integration has become common, there remain pockets of internal managerial resistance to the whole idea of considering such issues as relevant for investment decisions,” the study said.

[…]

Ioannis Ioannou, assistant professor of strategy and entrepreneurship at the London Business School, said: “The private equity industry is increasingly placing greater importance to ESG, moving it from a purely compliance and risk mitigating strategy to a key long-term strategy through which private equity firms pursue value creation.”

Read the research report here.

Photo by penagate via Flickr CC License

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