Canada Pension Buys Big Stake in European High-Speed Rail

transit

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

Caisse’s stake is reportedly worth $850 million, according to the International Business Times Australia.

Caisse purchased the stake from the UK Treasury.

More details from IBT:

Caisse expects to close the deal on the second quarter of 2015, if the state-owned railways in France and Belgium do not exercise their rights to purchase the British government’s stake. Together, France and Belgium own the remaining 60 percent of Eurostar. They could push to exercise their right by paying a 15 percent premium to the agreed price.

“We don’t think they will exercise it and hope they would not… but it remains in their discretion,” Macky Tall, senior vice-president of private equity and infrastructure at the Caisse, was quoted by The Financial Post.

Eurostar, launched in 1994, offers train service up to 300 kilometres an hour through the English Channel tunnel. It runs between London and Paris, as well as London and Brussels. It travels 2 hours and 15 minutes between France and Britain’s two largest cities for £69. In 2014, it carried over 10.4 million people.

Tall said the investment is another opportunity for the company to further build its expertise in the transport sector, noting Caisse’s global infrastructure investment portfolio was valued at more than C$10 billion as of Dec. 31.

When the deal is closed, ownership stakes in Eurostar International will look like this: French National Railway Company (55%), Caisse de dépôt et placement du Québec (30%), Hermes Infrastructure (10%) and National Railway Company of Belgium (5%).

 

Photo by  Renaud CHODKOWSKI via Flickr CC License

Institutional Investors Cite Regulatory Risk, Transparency as Obstacles to Infrastructure Investment

Roadwork

The Organization for Economic Cooperation and Development (OECD) recently surveyed 71 pension funds on their interest in alternative investments.

[The full survey can be found here.]

The findings when it came to infrastructure investing were among the most interesting.

The survey found that the funds had increased their alternative investments across all categories between 2010 and 2013.

But when it comes to allocation, infrastructure still occupies the lowest rung on the totem poll.

The OECD sat down with institutional investors recently to ask why they might be hesitant to invest in infrastructure. From Investments and Pensions Europe:

At the recent OECD roundtable on long-term investment policy, institutional investors in attendance cited two main obstacles to infrastructure investment. First was the lack of a transparent and stable policy framework and regulatory risk was a top concern. Second was a lack of bankable investment opportunities.

Other important issues raised included clear and predictable accounting standards, long-term metrics for performance valuations and compensations, standardisation in project documentation, and transferability of loans and portability of guarantees. The expansion of financial instruments available for long-term investment (eg, bonds, equity, basic securitisation of loans), and the need for a clear risk allocation matrix to assign to the potential risk owner (government, investor or both) were also raised.

Ultimately, the primary concern for investors is investment performance in the context of specific objectives, such as paying pensions and annuities. Infrastructure can become an alternative asset class for private investors provided investors can access bankable projects and an acceptable risk/return profile is offered.

The study and roundtable were conducted as part of the OECD Long-term Investment Project.

Pension Pulse: Diving Deeper Into Caisse’s Big 2014

Canada

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.

_______________________

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):

fp0226_caisse_de_deopt_620_ab-e1424897313958

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:

Fixed Income

Inflation-Sensitive:

Inflation-sensitive

Equities:

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

Video: Caisse CEO Talks Pension’s Transit Partnership

Here’s an interview with Michael Sabia, president and CEO of Caisse de dépôt et placement du Québec.

Last month, the pension fund struck a deal to take over public transportation projects, including a light rail system and a bridge.

Here, Sabia talks about the partnership and how it came about.

Kolivakis: Can the Caisse Make Money on Public Transit?

public transit

Pension360 has covered the fascinating partnership between Caisse de dépôt et placement du Québec and the province’s public transit system.

But some observers – including Moody’s – have doubts that the partnership will prove fruitful for Caisse.

Over at Pension Pulse, Leo Kolivakis has thrown his expertise into the ring. In a post on Monday, he comments on the concerns over the partnership, and what Caisse needs to do to make this venture a successful one.

The post is printed below.

_____________________________________

By Leo Kolivakis, Pension Pulse

A month ago, I covered the announcement of the Caisse handling Quebec’s infrastructure needs and stressed the primacy of good governance.

But now critics are coming out to question the economic viability of this decision as well as the process, stressing a private-public partnership is more efficient. I asked a friend of mine who knows infrastructure and he told me he doesn’t know much about light rail transit. He also somewhat cynically quipped: “Who uses quotes from geography professors?”.

I’m a little more open-minded than my friend as I trust geography professors more than economists when it comes to urban planning. Having said this, I question whether a public-private partnership, especially here in scandal-ridden Quebec, would be more “efficient” and in the best interest of Quebec’s taxpayers.

As far as the Caisse’s infrastructure group, they have made money in the past on transit but this is a different beast altogether. They will be playing a much more direct and central role in developing and overseeing these projects from start to finish, as well as managing fares to make them economically viable.

Macky Tall, a senior vice-president in charge of the Caisse’s infrastructure portfolio, raises excellent points on leveraging the Caisse’s real estate expertise to help fund these projects. More importantly, he’s absolutely right, new model is better for the Caisse than a traditional public-private agreement because it will retain ownership indefinitely, and can spread out its return over a longer period, not having to recoup its initial investment in the first 35 years.

Having said this, there are legitimate concerns about how this project will be handled and how the Caisse can fulfill its dual mandate of achieving the actuarial returns its clients need while it develops Quebec’s economy. If something goes wrong in a major multibillion infrastructure project, this can have a severe impact on the Caisse’s long-term results.

But there is no question that Montreal desperately needs to develop its infrastructure. Peter Hadekel of the Montreal Gazette wrote a comment a couple of weeks ago, Stagnation city: Exploring Montreal’s economic decline, where he stressed among other things the need to focus on infrastructure projects to bolster Montreal’s stagnating economy.

I’m highly skeptical of Montreal’s economic future, especially now that Canada’s crisis is just beginning. On a relative basis the city will do better than Calgary or Edmonton, which will bear the brunt of the economic weakness that comes with the plunge in oil prices. But this city has been stagnating for a very long time and never experienced the boom that Canada’s other major cities experienced.

Moreover, the primary factor behind Montreal’s stagnation remains a political climate that hinders outside investments and forced many anglophones, allophones and even francophones in Quebec to move elsewhere in search of better opportunities. My biggest concern is institutional racism pervading many of Quebec’s government and quasi-government organizations as well as large private corporations (let’s not kid each other, diversity in the workplace is not Quebec’s strong suit, not that the rest of Canada is any better).

But let’s leave the politics aside and get back to the Caisse and building these light rail transit projects. One of the key elements of good pension governance is communication. The Caisse needs to be open, transparent and very clear on the terms and costs at every stage of these projects if they intend to have the public’s support because if something goes wrong, it will be another fiasco that will make the ABCP scandal the media is covering up look like a walk in the park.

 

Photo by  Claire Brownlow via Flickr CC License

CalSTRS Looks to Partner Up For Direct Infrastructure Investments

The CalSTRS Building
The CalSTRS Building

CalSTRS is looking to team up with other institutional investors to bid directly on private infrastructure, according to the Wall Street Journal.

The fund’s investment staff is meeting today [Feb. 6] to amend its investment policy to allow such ventures.

More from the Wall Street Journal:

The nation’s second-largest public pension fund, California State Teachers’ Retirement System, is in talks with other institutional investors about joining forces to get stronger collective rights in infrastructure deals, said people involved in the discussions.

Members of Calstrs’s investment committee will meet Feb. 6 to discuss including new language to its investment policy that states the pension fund may “invest alongside with other like-minded investors” through “consortium investment opportunities.” The approach would be similar in investing through alliances or joint ventures.

The roughly $188.8 billion Calstrs, which established its infrastructure portfolio in 2010, has invested in that sector primarily through funds, said a spokesman. It hasn’t bid on private infrastructure investments with a club of direct investors.

The pension fund, which had a roughly $800 million infrastructure portfolio as of Sept. 30, is planning to build out its private infrastructure footprint to roughly $3 billion in the long term, senior officials said.

CalSTRS manages approximately $189 billion in pension assets.

 

Photo by Stephen Curtin via Flickr CC License

Kolivakis: 5 Reasons Behind Canada Pensions’ Real Estate Binge

Canada

Canadian companies and pension funds collectively invested $2.75 billion in commercial U.S. real estate in the first month of 2015.

In 2014, that number was a hefty $9.7 billion. What’s behind the binge? Leo Kolivakis of Pension Pulse gives 5 reasons why Canada’s pensions are snapping up real estate in the U.S., and elsewhere.

_______________________________

By Leo Kolivakis, Pension Pulse

Why are they doing this? There are a few reasons. First, real estate has long been heralded as the best asset class among Canada’s large public pension funds which are increasingly shifting assets away from volatile public markets into private markets, especially real estate and infrastructure which offer more predictable yields over the long-run.

Second, Canada’s large pension funds aren’t dumb. They read this blog and many other market sources and I’m sure the most savvy of them agree with me, Canada’s crisis is just beginning. This is why they’re scrambling to snap up as much U.S. and European real estate even though the loonie keeps declining. They know it will fall further but they also know there are better opportunities outside of Canada at this time given their long investment horizon.

Third, some of Canada’s large public pension funds, like bcIMC, are much more exposed to Canada’s commercial real estate market than others. bcIMC recently announced it agreed to sell Delta Hotels and Resorts to Marriott International for $168 million, but it has a lot more work to properly diversify its real estate holdings outside of Canada.

Fourth, 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.

Fifth, I don’t see interest rates rising anytime soon. In fact, I see central banks pumping a lot more liquidity into the global financial system. And as I recently explained, I’m not in the camp that the Fed will raise rates in 2015 and risk making a monumental mistake.

Having said all this, the rush into real estate and other illiquid alternatives worries me. Why? Because I’m increasingly worried about global deflation and the long-term effects it will have on all investments, especially illiquid private markets.

Don’t get me wrong, done properly, real estate, infrastructure and private equity are great asset classes. But as global pension funds and sovereign wealth funds topple over each other to find deals, they are significantly bidding up prices, lowering prospective returns on all private market investments, and this will really hurt them if a prolonged period of deflation sets in.

A long time ago I wrote a comment asking whether pensions are taking too much illiquidity risk. I think you should all read that comment again and keep it mind as you plow into U.S. and global real estate. Sure, pensions should take the long, long view, but they also need to be acutely aware of price entry and how a prolonged period of debt deflation impacts all their investments, especially private market investments.

 

 

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

Canada Pension To Invest $400 Million in Australian Freeway

free way

The Canada Pension Plan Investment Board (CPPIB) announced on Sunday a $407 million investment in an Australian freeway project.

CPPIB is part of a group of investors that bought the toll road. The pension fund’s $400 million investment will snag it a 25 percent stake.

More from the Wall Street Journal:

Canada’s largest pension fund said Sunday it would invest over a half-billion Australian dollars in an Australian motorway project aimed at reducing traffic congestion in the suburbs north of the country’s largest city, Sydney.

The Canada Pension Plan Investment Board said in a statement it was part of consortium that agreed to buy and operate a new toll road located northwest of Sydney. CPPIB said its investment of 525 million Australian dollars ($407.9 million) in the NorthConnex tunnel motorway represented a 25% stake. Its consortium partners include two Australia-based entities, Transurban Group and Queensland Investment Corp.

[…]

The project is designed as a 5.6-mile tunnel in northern Sydney, which is Australia’s largest city, and would link two main highways. Construction is scheduled to begin in early 2015 and is expected to be completed in 2019.

CPPIB manages $184 billion in assets.

Moody’s Has Concerns About Quebec Pension Taking Over Public Infrastructure Projects

public transit

Caisse de dépôt et placement du Québec, Canada’s second-largest pension fund, recently reached an agreement to finance, execute and own the province’s new public transit projects.

Moody’s views the deal as a credit negative for the pension fund.

From Chief Investment Officer:

Rating agency Moody’s has outlined concerns it has over a C$4 billion (US$3.2 billion) public infrastructure deal signed by one of Canada’s provincial pension funds.

[…]

“Although the province is responsible for identifying projects of public interest and has the right to select projects on the basis of optimal solutions provided by the Caisse, the Caisse will be responsible for the execution of the selected projects,” Moody’s said in its latest credit outlook.

Moody’s clarified that the Caisse itself was not rated by its analysts, but the company created to carry out the projects—CDP Financial Inc—currently held an Aaa stable assessment from the agency.

The C$4 billion project is viewed as credit negative by Moody’s.

“The province could participate as an equity partner in projects, but will not have voting rights,” Moody’s said. “As a result, the pension fund will have greater exposure to operational and reputational risks associated with the performance of public infrastructure projects, risks that would have otherwise rested with the provincial government.”

The Caisse de dépôt et placement du Québec manages $214 billion in assets.

 

Photo by  Claire Brownlow via Flickr CC License

India Invites Foreign Pensions to Invest in Railroad System

India

India’s Union Railway Minister said last week that investments in railroads were needed to avoid a “deterioration of services”.

On Monday, Minister Suresh Prabhu said the foreign pension funds would be an ideal investment partner.

From The Hindu Business Line:

The Union Railway Minister Suresh Prabhu on Monday called for tapping overseas pension funds to raise financial resources for the Railways.

Apart from the domestic pension fund, foreign pension funds could be tapped to get cheaper loans for infrastructure and network expansion, Prabhu said.

“We will invite foreign pension funds to invest in the Indian Railways as loans. We have to bring in investments from both within and outside the country,” he said at the 15th National seminar on ‘PPP and FDI in Indian Railways’ here.

Countries such as Australia and Canada have utilised the pension fund route to develop their economies.

The Minister said private investors were willing to invest in railway projects, expecting “some returns, not large returns”. “Investors must benefit reasonably (while investing in railway projects), but should not expect a windfall,” he added.

The Canada Pension Plan Investment Board has already shown interest in Indian infrastructure.

 

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