Wednesday, March 29, 2017

PSP Investing in Data Centers?

Benefits Canada reports, PSP Investment consortium acquires U.S. data centre:
A consortium that includes the Public Sector Pension Investment Board has acquired Vantage Data Centers, a U.S.-based provider of data centre solutions.

The consortium, which also includes Digital Bridge Holdings LLC and TIAA Investments, has purchased Vantage Data Centers from technology investor Silver Lake. The terms of the private purchased were not disclosed.

Vantage Data Centers was founded in Silicon Valley, California in 2010. It has four data centres at this location, as well as a campus in Quincy, Washington.

“We are confident that Vantage is ideally positioned to successfully deploy its winning expansion strategy, and look forward to supporting the company’s . . . management team,” said Daniel Garant, executive vice-president and chief investment officer at PSP Investments. “Vantage’s leading market position, in a sector which we believe will grow significantly in the coming years, makes it an attractive investment for PSP Investments.”

Vantage will continue to be led by its president and chief executive officer Sureel Choksi and the existing management team, each of whom has made an investment in the business alongside the consortium. “We’re thrilled about the opportunities to serve our customers’ future expansion plans going forward.,” said Choksi.

“We have been fortunate to have had a great partner in Silver Lake, and are excited to partner with Digital Bridge, PSP Investments and TIAA Investments as we enter this exciting new phase of the company’s growth.”
Bill Stoller of Data Center Knowledge provides more details in his article, Digital Bridge Buys Vantage, Silicon Valley’s Largest Wholesale Data Center Firm:
Boca Raton-based Digital Bridge Holdings just cut another large notch into its already ample M&A belt, acquiring Vantage Data Centers, the largest wholesale data center landlord in Silicon Valley, a deal that has been rumored since January.

Santa Clara-based Vantage becomes the wholesale data center platform for Digital Bridge, a communications infrastructure investor that got into the data center space last year, intending to become one of the forces driving the current wave of consolidation in the market. Digital Bridge plans to invest in expanding Vantage, which is currently in Silicon Valley and Quincy, Washington, into new markets along with its existing cloud, IT services, and large enterprise customers.

The due-diligence process around the deal showed Digital Bridge that Vantage “under promised and over delivered,” Digital Bridge CEO Marc Ganzi said in an interview with Data Center Knowledge. “At the end of the day, Vantage will be able to expand if customers have confidence and want to follow Vantage into other markets to assist with future capacity needs.”

Rapidly Buying Data Centers

Digital Bridge began its data center buying spree last July with acquisition of retail colocation and managed services provider DataBank. In January 2017, DataBank announced acquisition of Salt Lake City-based C7 Data Centers, as well as two data centers located in Cleveland and Pittsburgh, considered “key interconnection assets,”, purchased from 365 Data Centers.

Vantage was purchased by a consortium, including: “Digital Bridge Holdings, LLC, a leading global communications infrastructure company, Public Sector Pension Investment Board (PSP Investments), and TIAA Investments (an affiliate of Nuveen), which made the investment on behalf of TIAA’s general account.” Financial terms of the private purchase from Silver Lake were not disclosed.

To steer Digital Bridge’s data center strategy, Ganzi brought on board Michael Foust, co-founder of the world’s largest wholesale data center provider Digital Realty Trust and its former CEO. He’s been serving as DataBank chairman and has now also been named chairman of Vantage.

In addition to data centers, Digital Bridge owns several wireless tower and communications infrastructure companies, including: Vertical Bridge, ExteNet Systems, Mexico Tower Partners, and Andean Tower Partners.

“Resetting the Shot Clock”

Sureel Choksi, Vantage president and CEO who is staying in his seat post-acquisition, told Data Center Knowledge that he felt “relieved and excited” to be teaming up with Digital Bridge and Foust after an eight-month process. He said the deal was “the ideal scenario,” since existing Vantage management, employees, and customer relationships all remain in place.

Each member of the Vantage management team has also invested in the company alongside the buyer consortium, the company said in a statement.

As the company’s former private-equity owners Silver Lake Partners were exploring their options regarding a sale of Vantage, it felt like “running out the clock” at the end of an NCAA tournament game, he said. The shot clock has now been reset.

Since 2010, Vantage has built 51MW of IT load in Santa Clara and secured expansion capacity for 93MW total. The company’s Quincy campus currently has a 6MW data center and additional land and power for expansion.

Building a Platform of Scale

According to Ganzi, in addition to building first-class facilities, the Vantage team understood the intricacies of underwriting and allocating capital wisely, things that are very important to the long-time real estate investor.

The three investors acquiring Vantage in aggregate have over $1 trillion worth of assets under management.

Ganzi previously was CEO and sole founder of Global Tower Partners, which was acquired by publicly traded wireless tower REIT American Tower Corporation (AMT) in October 2013.

“The data center space is actually in the early innings,” he told us in an interview earlier this year. “There’s still a fantastic opportunity to roll up the space and to create a platform of scale.”

His company is now well on its way to making that happen with both Choksi and Foust on board.
Lastly, PSP Investments put out this press release, Consortium of Digital Bridge, PSP Investments and TIAA Investments Acquires Vantage Data Center:
Vantage Data Centers, a leading provider of data center solutions in support of mission-critical applications, today announced it has been acquired by a consortium which includes Digital Bridge Holdings, LLC, a leading global communications infrastructure company, Public Sector Pension Investment Board (PSP Investments), and TIAA Investments (an affiliate of Nuveen), which made the investment on behalf of TIAA's general account.  Financial terms of the private purchase from Silver Lake were not disclosed.

Founded in 2010 in the heart of Silicon Valley, Vantage's customer base includes the world's leading cloud service providers and large enterprises. With four data centers on the flagship Santa Clara campus, two more under construction, and a second large-scale campus under development, Vantage has the largest wholesale data center footprint in Silicon Valley. The company has built 51 megawatts of IT load in Santa Clara and has secured expansion capacity totaling 93 megawatts of IT load. The company also owns and operates a data center campus in Quincy, Washington, including a 6 megawatt data center and additional expansion land and power in that market. Vantage is well positioned for continued growth in the industry, with plans to significantly expand its data center footprint in existing and new markets.

"Vantage is one of the highest quality businesses I have encountered in more than two decades of investing in the sector," stated Marc Ganzi, co-Founder and CEO of Digital Bridge. "This is a unique and special opportunity to invest in a company that has operational excellence, quality customers, and a current lease portfolio with long duration. It also has significant expansion capacity in Silicon Valley, perhaps the best data center market in the U.S."

Vantage will continue to be led by President & CEO Sureel Choksi and the existing management team, each of whom has made an investment in the business alongside the consortium. In connection with the transaction, Mike Foust, Senior Advisor to Digital Bridge and former CEO of Digital Realty, will join the Vantage board of directors as Chairman, and Raul Martynek of Digital Bridge will also join the board.

"We're incredibly proud of what the Vantage team has achieved by providing flexible solutions to our customers and delivering an industry-leading service experience," said Choksi. "We're thrilled about the opportunities to serve our customers' future expansion plans going forward. We have been fortunate to have had a great partner in Silver Lake, and are excited to partner with Digital Bridge, PSP Investments and TIAA Investments as we enter this exciting new phase of the company's growth."

"We are confident that Vantage is ideally positioned to successfully deploy its winning expansion strategy, and look forward to supporting the company's top tier management team," said Daniel Garant, Executive Vice President and Chief Investment Officer at PSP Investments. "Vantage's leading market position, in a sector which we believe will grow significantly in the coming years, makes it an attractive investment for PSP Investments."

"This communication infrastructure investment represents a growing and attractive asset class within TIAA's infrastructure portfolio," stated Marietta Moshiashvili, Managing Director & Head of Infrastructure Asset Management for TIAA Investments. "Partnering with the successful Vantage management team and this group of investors will strengthen the firm's expansion plans and position in the marketplace, generating what we believe will be significant value for all parties."

"Silver Lake is proud to have supported Vantage's vision and accomplishments since inception," said Greg Mondre, Managing Partner at Silver Lake. "From a standing start seven years ago, the company has become a leading wholesale data center provider, with an established platform for long-term growth."

RBC Capital Markets, LLC and DH Capital served as financial advisors, and Simpson, Thacher & Bartlett LLP acted as legal advisor to Vantage in connection with the transaction. Jones Day acted as lead M&A counsel, Kleinbard LLC acted as investment structure counsel, and Ernst and Young LLP served as accounting advisor to Digital Bridge. Davies Ward Phillips & Vineberg LLP acted as legal advisor to PSP Investments, and Arnold & Porter Kaye Scholer LLP acted as legal advisor to TIAA Investments. TD Securities together with CIT Bank, N.A., RBC Capital Markets, and SunTrust Robinson Humphrey provided debt financing commitment for the acquisition.

About Vantage Data Centers

Vantage is a leader in highly scalable, flexible and efficient data center solutions offering unique value through its commitment to exceptional customer service. Operating campuses in Silicon Valley, Calif., and Quincy, Wash., Vantage offers industry leading data center design solutions engineered to meet the unique requirements of enterprises, technology companies and service providers. Vantage's first Silicon Valley campus includes four data centers totaling 51 megawatts (MW) of critical IT load, with an additional 24MW of expansion capacity under development. In addition, Vantage is developing a second Vantage Silicon Valley campus offering an additional 69MW of capacity. Vantage also operates a 6MW data center in Quincy, Washington with plans to add four additional data centers to the campus. For more information, visit www.vantagedatacenters.com.

About Digital Bridge Holdings, LLC

Founded in 2013 by Marc C. Ganzi and Ben Jenkins, Digital Bridge is focused on the ownership, investment, and active management of companies in the mobile and internet infrastructure sector. Since inception, Digital Bridge has raised over $6.5B USD of equity and debt capital used to acquire and invest in all three core pillars (data centers, towers and fiber/small cells) of mobile and internet infrastructure through six businesses, including Vantage Data Centers, DataBank, ExteNet Systems, Vertical Bridge, Andean Tower Partners, and Mexico Tower Partners. For more information, please visit http://www.digitalbridgellc.com/

About PSP Investments

The Public Sector Pension Investment Board (PSP Investments) is one of Canada's largest pension investment managers with C$125.8 billion of net assets under management as at September 30, 2016. It manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt. Established in 1999, PSP Investments manages contributions to the pension funds of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has business offices in Montréal, New York and London. For more information, visit investpsp.com or follow Twitter @InvestPSP.

About Nuveen

Nuveen offers a comprehensive range of outcome-focused investment solutions designed to secure the long-term financial goals of institutional and individual investors. As the investment management arm of TIAA, Nuveen has $882 billion in assets under management as of 12/31/16 and operations in 16 countries. Its affiliates offer deep expertise across a comprehensive range of traditional and alternative investments through a wide array of vehicles and customized strategies. For more information, please visit www.nuveen.com.

Nuveen, formerly known as TIAA Global Asset Management, provides investment services through TIAA and its registered investment advisers. C38555

About Silver Lake

Silver Lake is the global leader in technology investing, with over $24 billion in combined assets under management and committed capital and a team of approximately 100 investment and value creation professionals located in Silicon Valley, New York, London, Hong Kong and Tokyo. Silver Lake's portfolio of investments collectively generates more than $142 billion of revenue annually and employs more than 300,000 people globally. The firm's current portfolio includes leading technology and technology-enabled businesses such as Alibaba Group, Ancestry, Broadcom Limited, Ctrip, Dell Technologies, Fanatics, Global Blue, GoDaddy, Motorola Solutions, Sabre, SolarWinds, Symantec, and WME│IMG. For more information about Silver Lake and its entire portfolio, please visit www.silverlake.com.
Even though the details of this latest deal are not public, Fortune reported back in October of last year that Silver Lake Partners was looking to sell Vantage Data Centers and was hoping to value the company well in excess of $1 billion, including debt.

Despite the terms being private, I think PSP and its consortium partners just made a great deal acquiring Vantage Data Centers, a leading whole wholesale data center platform.

Over the last five years, everything in the IT space is about the rise of data analytics and cloud computing. Everyone from Amazon, Google, IBM, Microsoft, and a lot of other smaller technology players are investing heavily in data analytics and cloud computing, as are many other non tech companies, and they all need state of the art data centers.

Moreover, US businesses' burgeoning demand for data and video is fueling a revival in fiber optic services and data storage. Many technology companies have turned to vendors such as Vantage to host and maintain their servers in a bid to cut costs.

The players involved in this deal are experts in IT. Silver Lake is arguably the best private equity fund in this space and Digital Bridge Holgings is a top communications infrastructure investor.

I find it particularly interesting that Marc Ganzi, co-Founder and CEO of Digital Bridge, was previously the CEO and sole founder of Global Tower Partners, which was acquired by publicly traded wireless tower REIT American Tower Corporation (AMT) in October 2013.

So these data centers fall in between real estate, private equity and communications infrastructure. It's a very exciting, high growth area and it's a super hot sector right now with tremendous long-term potential.

In fact, Bill Stoller wrote a great article on data center REITS last November, asking whether the sky is falling, and he went over the pros and cons of investing in this space.

But this deal is private, so just like CPPIB and GIC bought a $1.6 billion US student housing portfolio along with their partner, the Scion Group, PSP invested directly in this private company to avoid market beta and paying fees to any REIT manager.

Get it? When you're the size of CPPIB and PSP, you can invest directly in great properties and private companies, avoiding fees and public market beta.

Retail investors looking to invest in data centers can do so through data center REITs but they're volatile and move with other REITs and the market (click on image):


Still, this is definitely a sector worth investing in through public or private markets like PSP and others have done.

Again, without beating the drum too loudly, this is a great deal for PSP and the consortium. It comes on the heels of other great IT deals like CPPIB acquiring GlobalLogic and Ontario Teachers’ Pension Plan's acquisition of Compass Datacenters, a wholesale data center developer it acquired in partnership with RedBird Capital Partners.

Speaking of Ontario Teachers', its 2016 results are out and I had a chance to go over them and a lot more with Ron Mock, OTPP's President and CEO, earlier today. I will go over the results and my conversation with Ron as soon as possible.

All I can say is that I definitely don't get paid enough to provide you with this information and remind all of you reading my blog posts to kindly support my work via PayPal donations or subscriptions on the top right-hand side. I thank those few who do so without me asking them.

Anyway, one last news item on PSP, it settled its lawsuit with Saba Capital over bond valuations, which is a good thing for both parties.

Below, Fortune Senior Editor Geoff Colvin interviews Emerson's CEO David Farr who talks about serving the power needs of mega data centers. A very interesting discussion which ties into the other clips.

Second, Vantage Data Centers offers the best data centers in Silicon Valley, bringing together the highest levels of customer service and support, and a customized experience to meet the highest levels of demand.

Also, take a tour of Vantage Data Center in Quincy, Washington servicing a large manufacturer and taking advantage of some of the lowest power rates in the country, with capacity to grow and expand.

Lastly, have a first look at the latest addition to the Vantage Santa Clara Data Center campus. Coming summer 2017, this new facility will bring a completely new modern wholesale data center, adding 9MW to the Vantage campus.

Once you watch these clips, you'll understand why this is a great long-term deal for PSP, its partners and its beneficiaries.




Tuesday, March 28, 2017

Hedge Funds Dying at an Alarming Rate?

Lucinda Shen of Fortune reports, Eton Park Closing Shows How Hedge Funds Are Dying at an Alarming Rate:
While doors are opening all over the White House for Goldman Sachs alumni, another one is being closed by one of its former shooting stars.

Eton Park Capital Management, helmed by Eric Mindich, is shutting down and returning its capital to investors, the hedge fund told its clients in a letter Thursday. It's a disappointing end for the hedge fund, which opened in 2004, riding on Mindich's financial pedigree and reputation as a wunderkind. At the time, Eton Park was said to be the biggest-ever hedge fund launch, with $3.5 billion in capital commitments, according to the New York Sun.

But now, its holdings, which once ballooned to $14 billion, have withered down to $7 billion, after the hedge fund made several bad stock bets, accelerating the exodus of investors who have lost faith not only in Eton Park, but also in the industry.

"Recently, a combination of industry headwinds, a difficult market environment and, importantly, our own disappointing 2016 results have challenged our ability to continue to maintain the scale and scope we believe necessary to pursue our investment program consistent with our founding principles," Mindich wrote in a letter to investors.

Mindich is not alone. The challenges he has faced are well known to the 9,893 hedge funds left in the $3 trillion industry.

Not only were markets choppy in the early months of 2016, but increasingly, investors have begun questioning whether the high fees charged by hedge funds are justified. Research, along with an experiment by legendary investor Warren Buffett, have shown that low-cost stock market index funds have generally outperformed hedge funds.

Eton Park lost 9% in 2016. Not only did Mindich's returns lag behind the S&P 500—they also underperformed the overall hedge fund industry's 5.5% return last year, according to Hedge Fund Research. Eton Park's underperformance also wasn't contained to just 2016. It beat the S&P 500 just once in the last six years, and has been relatively flat in 2017 (click on image).


It's the largest hedge fund fund closure of 2017, and points to more troubling trends for the industry now struggling to keep its customers.

In a bid to keep their clients happy, funds such as Och-Ziff Capital have hacked away at their fees, while others including Paul Tudor Jones have dealt with investor redemptions by cutting staff in recent years.

But those methods don't seem to have stymied the outflow of clients from the industry. Roughly $70.1 billion in assets were redeemed last year—the highest level since 2009.

Perhaps more alarmingly, 2016 continued on a six-year trend of fewer and fewer new hedge funds opening—and a three-year trend of more and more hedge fund closures. That's resulted in a decline in the overall number of hedge funds from their peak in 2015, with 147 fewer hedge funds in operation by the end of 2016.

In fact, 2016 had the highest level of hedge fund closures and lowest level of openings since 2008, the year of the financial crisis. And for the second year in a row, the rate of hedge fund closures outpaced that of hedge fund openings, with 1,057 hedge funds closing in 2016,while 729 hedge funds were launched, according to HFR.

So will hedge funds have another rough year in 2017? It's possible that select funds will do well, though the industry as a whole has underperformed the market every year since 2008. The rising frustration among investors over high fund fees and inconsistent returns? That's not likely to go away any time soon.
You can read more about Eton Park shutting down in Reuters, the New York Times and the Wall Street Journal. You can also read about the fund's terrible 2016 performance in Institutional Investor.

You might be thinking "so what, who cares?", it's just another hedge fund charging huge fees delivering sub-beta performance. And you're right, except in this case, Eton Park isn't just any hedge fund, it's a $7 billion well-known multi-strategy hedge fund, one of the elite hedge funds that has succumbed to an increasingly brutal market environment.

And investors are taking note. As I explained in a recent comment on No Luck in Alpha Land, fed up of paying excessive fees for mediocre returns, investors continue to squeeze hedge funds on fees or they are just abandoning them altogether.

Now, you might think it's noble of Eric Mindich to return capital to his investors realizing his fund can't deliver the goods in terms of performance but I assure you his decision is based on selfish business reasons, not altruism toward his investors.

One former hedge fund allocator put it this way:
"All these greedy guys converting to family offices so they don't have to make their investors money back... the same money that paid them all those fees they became wealthy off of. It's really sad. The only other reason is avoiding prosecution because regulators getting too close."
Got it? The number one reason a multibillion dollar hedge fund closes shop and returns money to its investors after suffering poor returns is to avoid having to make up the money it lost. The managers know their fund is so much underwater that it's extremely hard to make back the losses to surpass their high-water mark and start charging performance fees again. Without performance fees, they risk losing their top traders and it just isn't worth keeping the fund open.

For elite managers, they simply close shop, get to manage their own billions as a family office and if things go well, they can come back in a few years and open up a new fund under a new name, and start charging 2 & 20 all over again.

It's a great gig, one that most struggling hedge fund and other fund managers don't get to enjoy, but when you reach superstar status, you can pull it off.

Think about it. You're an elite hedge fund manager charging 2 & 20 on billions under management. If you don't perform well, you're still collecting a 2% management fee on billions of assets under management in good and bad years and if things go downhill, you just close up shop, convert to a family office, manage your billions and aim to open up a new fund down the road under a new name.

It's enough to drive investors crazy but most investors are stupid and they have short memories. They just look at pedigree and don't ask the tough questions that need to be asked.

Trying to capitalize on investors' frustrations, some hedge funds are taking a win-or-die approach to their fee model to lure money into their fund but I predict they will die before attaining their bogey.

Honestly, I am watching all the nonsense going in the hedge fund industry and also watching various markets closely and I'm hardly surprised that big and small hedge funds are closing shop.

No matter what you're trading, it's a very hard environment, and this is especially true if you're a huge hedge fund that needs scale to move the needle.

I just finished writing a comment on why I wouldn't read too much into the greenback's recent slide and remain long US dollars. After talking to a buddy of mine who trades currencies and manages his own hedge fund, I updated that comment to give my readers some more insights into understanding why I remain long US dollars.

But my buddy was telling me that it's increasingly harder to make money trading currencies because "ranges are tight and the algos are front-running your every move." He added: "If humans were doing what algos are doing, they'd be prosecuted, but because algos and high-frequency currency platforms supposedly add to liquidity and price discovery, nobody raises a peep."

He was even more blunt: "The only hedge funds making money in currencies in this market are those that have insider information. You see leaks going on all the time and some big funds making big bets prior to a major announcement and wonder what did they know that I don't know?"

Good point, sometimes you see major moves in currencies just prior to a major announcement and wonder who knew what and when. The F/X market is still the Wild West but regulators don't touch it because it's the number one profit center for big banks which rake retail and corporate clients on fees for each currency transaction (up to 3% for retail clients and up to 20 pips for corporate clients, and all those fees add up and go straight to banks' profits).

Anyway, whether you are a currency hedge fund, a multi-strategy hedge fund, or a Long-Short hedge fund, these are difficult times and a few well-known funds are reeling (only hedge fund quants seem to be escaping the carnage and doing relatively well, for now).

For example, Reuters reports that hedge fund Pine River Capital Management LP is losing two more partners following a difficult year that involved a restructuring and major decline in assets.

Again, these aren't your run-of-the-mill crappy hedge funds, these are well known "elite" hedge funds managing billions which are struggling and closing up shop.

And we're not even experiencing a financial crisis yet. Wait till that hits the industry and many more top players close up shop. It's a disaster and it will have knock-on effects in terms of employment on Wall Street and the Manhattan, Connecticut and London real estate markets.  

Below, CNBC's Leslie Picker reports on a letter from Eric Mindich of Eton Park Capital Management which explains why he is returning capital to investors.

Again take this letter and its contents with a shaker of salt, the decision to close up shop wasn't as difficult as it sounds. It was based on selfish business motives and I suspect over the next few years, many more 'elite' hedge fund managers will follow Mindich and close their shop. It's just that brutal for established and emerging hedge funds trying to raise assets in this environment.

Update: There were some good comments to this post on LinkedIn which you can read here.

Monday, March 27, 2017

Down Goes The Greenback?

Roger Blitz and Eric Platt of the Financial Times report, US dollar close to erasing Trumpflation gains:
The dollar index, a barometer of investors’ reflation expectations for the US economy, fell on Monday to trade at its lowest level since the presidential election, signalling that the so-called Trump trade is nearing the point of being fully unwound.

Measuring the reserve currency’s performance against a basket of its peers, the dollar index fell 0.7 per cent to 98.90, a level last seen on November 11. As the dollar waned, global equities were also under pressure while havens such as the yen, gold and government bonds attracted buyers.

In opening trading on Wall Street, the S&P 500 fell 0.9 per cent, as the KBW index of US banks dropped more than 2 per cent. Bank shares have fallen more than 10 per cent since they peaked earlier this month. Goldman Sachs and Bank of America, two of the biggest benefactors of the “Trump trade” that buoyed markets in the wake of the election, both slumped 2.5 per cent on opening, and Morgan Stanley fell 4.2 per cent.

Rodrigo Catril, forex analyst for National Australia Bank, said: “The Trump-specific boost to the US dollar and commodity prices . . . is at risk of completely unwinding.”

The dollar has come under increasing pressure since it peaked at the start of the year, and last week’s collapse of the president’s healthcare bill intensified selling of the currency on Monday.

The weakness in the currency reflects doubt over the Trump administration’s fiscal plans to boost the economy and whether the Federal Reserve will tighten policy at a faster pace in the coming year. Lower bond yields on Monday also contributed to the weaker tone for the dollar as markets reflected a sense that the Trump administration faces a challenge passing tax reform and fiscal stimulus measures through Congress (click on image).


Simon Derrick, chief market strategist at BNY Mellon, said: “Failure to pass the healthcare bill will probably prompt investors to question whether tax reform will prove any easier”. He added higher bond yields were one of the key drivers of the dollar’s post-election rise.

“As such, it is perfectly possible that the week will see yields moderate further and the dollar resume its push lower,” he said.

The dollar was particularly weak against the yen and the pound, down 1.1 per cent in both cases, and 1 per cent lower against the euro.

Emerging market currencies also benefited from the dollar sell-off, although weak commodity prices kept some parts of EM forex in check. The South Korean won was up 0.8 per cent, while the Taiwanese dollar rose 0.7 per cent.

The Swiss franc, a traditional haven when the market is risk-averse, rose 0.6 per cent, while gold was up 1.1 per cent and Asian and European equities retreated.

Markets including the dollar index had briefly risen late on Friday in the hope that the White House could begin to focus on tax reform, a key element of the Trump trade.

But Sue Trinh, Asian forex strategist at RBC Capital Markets, said this optimism “gave way to the realisation very big tax cuts were highly dependent on the savings from replacing Obamacare”.

That could raise concern among fiscally prudent conservatives, said MUFG’s Lee Hardman. “In these circumstances, the US dollar is likely to remain offered for now with no obvious trigger to reverse current negative sentiment in the week ahead,” he said.
Dion Rabouin of Reuters also reports, Dollar skids to four-month low as Trump trade deflates:
The dollar fell to its lowest since November against a basket of currencies on Monday as investors lost confidence in prospects for a U.S. fiscal spending boost under President Donald Trump after his failure to pass a major healthcare reform bill.

Trump's inability to deliver on his campaign pledge to overhaul the nation's healthcare system marked a big setback for a Republican president whose own party controls Congress, and raised doubts over whether he will be able to see through tax reforms and a proposed spike in spending.

The dollar was down 0.65 percent on the day against the basket of major currencies used to measure its broader strength. It fell as low as 98.858, the lowest since Nov. 11.

"The assumption was that if you can’t get healthcare done that some of the other things on his agenda, mainly the tax reform, would be a harder sell," said John Doyle, director of markets at Tempus Inc in Washington.

The reduced expectations for Trump's reflationary tax and spending proposals also sent equities lower, with the U.S. S&P 500 down 0.75 percent.

The dollar index had risen to a 14-year high near 104.00 in early January when expectations for inflation-boosting stimulus under the Trump presidency were at their peak, with investors betting big on the so-called "Trumpflation" trade.

Speculators increased bullish bets on the U.S. dollar in the week up to last Tuesday for the third time on the trot, pushing net longs to their highest since Jan. 31, Commodity Futures Trading Commission (CFTC) data showed on Friday.

Against the yen, the dollar fell more than one percent to 110.09, its weakest since Nov. 18. The dollar hit its lowest against the Swiss franc, another traditional safe haven for capital, since Nov. 9.

The euro reached $1.0904, its highest since Nov. 11. Sterling, the worst performer among the G10 group of major currencies against the dollar this year, hit an 8-week high of $1.2615.

"The British pound is still close to its weakest level in 30 years, so it has some upside especially since data out of the U.K. has been better," Doyle said. "The Japanese yen has had a great run because stocks around the globe are down. So if you start breaking it down into each individual currency there’s a good reason, but overall it’s just a dollar negative day."
Indeed, it's just a dollar negative day mostly owing to the fallout from failing to pass the healthcare bill on Friday.

What typically happens after some political bombshell in Washington is the US dollar declines, the yen gains, US stocks and other risk assets (like corporate bonds, emerging market stocks, bonds and curencies, etc.) get slammed and US Treasuries rally.

Add to this positioning of major speculators, all long risk assets and the US dollar, and it's hardly any wonder to see this negative reaction.

But it's too early to make any big calls just yet. Yes, President Trump and Speaker Paul Ryan had a major setback on Friday, no doubt about it. They underestimated the deep divide within their own party when it comes to repealing and replacing the Affordable Care Act (aka Obamacare).

Also, US politics is very messy ("it's a sausage factory"), overhauling any major bill especially healthcare is far from easy and requires major compromise from all parties involved in Congress and the Senate.

Does not passing healthcare reform jeopardize Trump's ambitious agenda to cut taxes and increase spending on infrastructure? It most certainly can and Republicans face major hurdles within their own party.

And then there is the debt limit which might throw a monkey wrench into the mix, but for now most think another debt ceiling crisis will be averted.

The last time I wrote a comment on the US dollar was in mid December where I warned of the potential of a crisis developing this year and wrote the following:
As you can see, the US dollar has been on a tear since early August when I told my readers to ignore Morgan Stanley's call that the greenback is set to tumble (my best call of the year and their worst one ever). It is basically hitting a multi-year high.

So what does the US dollar rally mean and why should you care? Well, the US dollar has rallied mostly versus the euro (close to parity which is another call I made back in March) and the yen.

The decline in the yen and euro is actually good for Euroland and Japan because it means European and Japanese exporters will benefit from the devaluation in their respective currency. This is why Japanese and European stock markets have rallied sharply. It's also good news for fighting deflation in these regions because a decline in their currency increases import prices there, raising inflation expectations in these regions.

Unfortunately, raising inflation expectations via a declining currency is not the good type of inflation. It's a temporary reprieve to a long-term structural problem. The good type of inflation comes from rising wages when the labor force is expanding because that increases aggregate demand and shows a strong, vibrant economy.

Now, what does the rising US dollar mean for the United States? It's the opposite effect, meaning it will hurt US exporters and lower inflation expectations in the US. In effect, the US is taking on the rest of the world's deflation demons trying to stave off a global deflationary calamity.

Will it work? That is the multi-trillion dollar question which is why I began talking about global deflation and currencies because as Bridgewater's Bob Prince noted in his presentation in Montreal, with interest rates at historic lows and central banks pushing on a string, currency volatility will pick up. I would add this is where the epic battle versus global deflation will take place.

But again, currency devaluation is only a temporary reprieve to a long-term structural problem fueling global deflation. The six structural factors that I keep referring to are:

  1. High structural unemployment in the developed world (too many people are chronically unemployed and we risk seeing a lost generation if trend continues)
  2. Rising and unsustainable inequality (negatively impacts aggregate demand)
  3. Aging demographics, especially in Europe and Japan (older people get, the less they spend, especially if they succumb to pension poverty)
  4. The global pension crisis (shift from DB to DC pensions leads to more pension poverty and exacerbates rising inequality which is deflationary)
  5. High and unsustainable debt (governments with high debt are constrained by how much they can borrow and spend)
  6. Massive technological disruptions (Amazon, Priceline, and robots taking over everything!)
These six structural factors are why I'm convinced that global deflation is gaining steam and why we have yet to see the secular lows in global and US bond yields.

But now we have a newly elected US president who has promised a lot of things, including spending one trillion in infrastructure and cutting personal and corporate tax rates.

What will this fiscal thrust do? Hopefully it will help create more jobs and fight some of the chronic problems plaguing the US labor market. But if you really think about it, this too is a temporary boost to economic activity because once it's all said and done, those infrastructure jobs will disappear and US debt will explode up, which effectively means higher debt servicing costs (especially if interest rates keep rising), and less money to stimulate the economy via fiscal policy down the road.

This is why some people think Donald Trump's new Treasury secretary, Steven Mnuchin, is just kicking the can down the road if he goes ahead and issues Treasurys with longer maturities in an effort to cushion the US economy from rising interest rates.
Now, fast forward to March. The Federal Reserve recently came out with a somewhat dovish statement as it raised interest rates, sending the US dollar lower.

And with US leading economic indicators reaching their highest level in a decade, the big worry going forward is the US economy will start slowing, especially if the Republicans don't deliver on tax cuts and infrastructure spending (both of these are priced into the market).

What happens if the US economy starts slowing? Well, that's not good news for the rest of the world because the US economy leads the rest of the world by roughly six months. So, once the US economy starts slowing, initially you might see the US dollar decline relative to other major currencies, but this trend won't continue for long.

The biggest threat is that Federal Reserve continues to tighten as leading indicators start to roll over. The Fed might do this because a) it will base its decision on coincident or lagging indicators (like employment and inflation) or b) it just needs more ammunition to confront the next crisis so it can lower rates in case something bad happens.

But raising rates will only propel the US dollar higher and intensify global deflationary headwinds, which will only make the next crisis that much harder to deal with.

In an zero interest rate world, this constant battle between global deflation and inflation is increasingly playing itself out in the currency arena. Either the US dollar will resume its uptrend, importing global deflation to the US, or the yen and euro will rise, reinforcing deflation in these regions.

All I know is we are at an important inflection point where I see US and global leading indicators rolling over in the near term and this will crush risk assets all over the world.

And if a full blown crisis develops, in such a Risk Off environment, everybody will be seeking refuge in US Treasuries and the US dollar.


There is too much exuberance priced into this Risk On market and there were too many US dollar long positions out there going into the year, which is why the greenback was set to tumble.

But if you look at the weekly chart of the US dollar ETF (UUP), you'll see despite the recent selloff, the greenback is still up since July 2015 and it will be interesting to see if it dips below its 50-week moving average and moves back up or bounces off it (click on image):


Will we see the US dollar crisis I warned of late last year? It certainly doesn't look like it right now but that depends on the Fed not making any policy errors and no negative surprises from the rest of the world.

As I end this comment midday Monday, US stocks have snapped back (led by the Nasdaq and biotech stocks), and are trading off their session lows as investors evaluate the possibility of significant tax reform coming from the White House.

The US dollar index (DXY) also snapped back after getting pummeled earlier today as global investors snap up risk assets (click on image).


We shall see if this trend continues, there are so many moving parts to the US economy and financial markets but politics remain very divisive and murky.

All I can tell you is despite the recent selloff, the big multi-billion dollar commodity trading advisors (CTAs) are definitely still long the US dollar, the global macros are probably short, but I wouldn't be surprised to see uptrend resume in the short run even if leading economic indicators start rolling over.

Below, Vasileios Gkionakis, head of global FX strategy at UniCredit, discusses the market reaction to US President Donald Trump's failed health-care bill.

And Patrick Bennett, forex strategist at CIBC, says the dollar has retraced most of the gains after last November and the market is losing confidence on the Trump Administration.

Lastly, bond king Jeff Gundlach was on CNBC recently stating it's just not true that Fed hikes are supportive of financials and the US dollar. Gundlach brings up a good point that too many dollar bulls were positioned long going into 2017.

He's also right, in a rising rate environment, when the yield curve flattens, financials underperform. However, he neglects to mention in a Risk Off environment when there is real fear, bond yields across the world decline and it's spreads that matter most for currencies. Typically in this Risk Off environment, everyone seeks refuge in King Dollar, especially if things get really bad (think back to what happened during the 2008 crisis).

Given my long-term deflation fears, I find it hard to go long the yen and euro relative the US dollar but I also understand that short-term cyclical swings are determined by interest rate policy and positioning data.

Still, I'm not certain we have averted the US dollar crisis I warned of late last year and I'd ignore any calls on the "death of the greenback". That's just rubbish.

A lot of things can happen this year which will send the US dollar higher from these levels, so I'd stay long the greenback and be very careful interpreting too much into the recent political uncertainty or dovish Fed comments which sent the dollar tumbling recently.

The recent selloff was mostly due to positioning and a crowded trade as too many dollar bulls got caught up in Trump euphoria. As I stated above, leading US and global economic indicators are at their peak and rolling over here. If another crisis develops later this year and we go from a Risk On to a Risk Off environment, global investors will seek refuge in US Treasuries and the US dollar.

Bottom line: Don't be too quick to read too much into the recent dollar selloff,  the greenback could come roaring back and this will lead to all sorts of problems in emerging markets and global markets.



Friday, March 24, 2017

All Hail The UK's State Pension Reforms?

Josephine Cumbo of the Financial times reports, Pensions review recommends later retirement age:
Millions of people should have their state pension age pushed back a year to 68 to cut the UK’s £100bn a year pension costs, according to an independent review commissioned by the government.

John Cridland was appointed to review the state pension age and has recommended it should rise from 67 to 68 by 2039, seven years earlier than currently timetabled.

Experts said this would affect about 5.4m people aged under 45. The current pensionable age is 63 for women and 65 for men, rising to 65 for both by late 2018, 66 by 2020, and age 67 by 2028.

Mr Cridland has also recommended that the “triple lock” — which raises the state pension by whichever is the highest of average earnings, prices or 2.5 per cent — be scrapped in the next parliament and replaced with a link to earnings.

“This report is going to be particularly unwelcome for anyone in their early 40s, as they’re now likely to see their state pension age pushed back another year,” said Tom McPhail, head of retirement policy at Hargreaves Lansdown.

Mr Cridland said his timetable would reduce state pension spending to 6.7 per cent of gross domestic product in 2066-67 — 0.3 per cent less than forecast by the government's fiscal watchdog the Office for Budget Responsibility — or 5.9 per cent of GDP if the triple lock is also abolished. This financial year, state pension spending was 5.2 per cent of GDP.

“My review considers the consequences of an ageing society,” said Mr Cridland, a former head of the CBI business lobby group. “The aim is to smooth the transition for tomorrow’s pensioners, and to try and make the future both fair and sustainable.”

Britain’s demographic profile is of an ageing society in which people are also living longer: the number of 100-year-olds is expected to rise from 6,000 today to 56,000 by 2050.

Along with Mr Cridland’s recommendations, ministers will also consider a report from the Government Actuary’s Department, which projected state pension age rises on the basis of everybody being in receipt of the state pension for either 32 or 33.3 per cent of their adult life.

Sir Steve Webb, a former pensions minister, said that if the government went ahead with “a more radical” timetable for pension age increases (based on 32 per cent of adult life in retirement) “they would be guilty of misleading parliament”.

“In the last parliament, MPs voted for the new arrangements on state pension age increases, on the basis that people would spend two years in work for every one year in retirement,” said Sir Steve, now director of policy at insurance company Royal London.

“On this basis, no one at work today would have a pension age of 70. But on the more aggressive schedule that the government is considering, everyone in their twenties would have a pension age of 70.”

Mr Cridland’s report does not recommend any changes before 2028.

He has rejected calls for early access to the state pension for people in poor health. But said additional means-tested support should be made available one year before state pension age — effective from when state pension age reaches 68 — for those who are unable to work longer because of ill health or caring responsibilities.

“As government goes about making its decision on the future state pension age in May of this year, these contributions and recommendations will provide important insight,” said Damian Green, secretary of state for work and pensions.
Sarah O of the Express reports the new proposals to reform UK's state pension isn't going well with retirees furious over planned cuts:
A review of the age at which people can receive their state pensions also recommended the axing of the ‘triple lock’ which guarantees that pensions rise by the same as average earnings, the consumer price index, or 2.5 per cent, whichever is the highest.

But the UK’s biggest pensioner organisation, the National Pensioners Convention described the Cridland Review as “asking all the right questions, but coming up with the wrong answers”.

Jan Shortt, the new general secretary of the NPC, said: “It seems strange that in his first report, John Cridland went a long way to dispel the myth of generational unfairness, showing that the majority of baby boomers, and those from generations X, born in the 60s and 70s, will get the bulk of their income in retirement from the state pension.

"But he bizarrely ends up recommending that everyone should see the value of their state pension fall by axing the triple lock."

"He has clearly asked the right questions, but come up with the wrong answers."

“There can be little doubt that the future of the triple lock will now become a key election issue in 2020 for all generations.”

Caroline Abrahams, charity director at Age UK agreed, saying: “We are firmly of the view that the triple lock needs to stay in place, because it is not yet ‘job done’ when it comes to eradicating pensioner poverty.

“Sixteen per cent of older people are still poor and figures published just last week suggest a rise in pensioner poverty."

"Looking ahead to 2039 and beyond, we think it is crucial that the state pension continues to retain its value so that the people who retire then can look forward to their later lives with confidence, not fear."

“Research has shown that abandoning the triple lock would reduce the chance that someone with low earnings retires with an adequate retirement income. The same older people who also stand to lose the most from any rise in the state pension age.”

However the triple lock should be abandoned in order to reduce the impact on future government finances, argued Mr Cridland, the former CBI director general who was appointed as the Government’s independent reviewer of state pension age last year,According to the review’s estimates, the UK - which currently spends £100bn a year on pensions - would spend the equivalent of 6.7 per cent of its GDP on the state pension in the 2066-67 financial year if it adopts the review’s age increase.

Abandoning the triple lock and just linking pension increases to earnings data would reduce this figure to an estimated 5.9 per cent of GDP.

Many pension experts broadly agreed with his recommendation. Former pension minister Baroness Altmann said there was “no economic or social rationale” for the triple lock, adding the 2.5 per cent increase was “not related to any economic variables and is politically motivated.”

“The longer the triple lock stays in place, the more disadvantaged those who are not covered will become and the greater the pressure to increase state pension age even further,” she said.

The government has promised to keep the triple lock in place until 2020, but has not revealed its intentions beyond that.Mr Cridland also recommended raising the state pension age to 68 between 2037 and 2039 - seven years earlier than currently planned.

His review coincided with an independent Government Actuary’s Department report, which pointed to a possible state pension age of 70 for anyone currently aged 30 or under.
And it's not just retirees that are furious. Zlata Rodinova of the Independent reports, Millenials could have to wait until they are 70 until they get a state pension, says Government review:
Millions of young people could face having to work an extra year before being able to draw a state pension, according to two separate reports.

Under projections drawn up by the Government Actuary’s Department (GAD), people aged under 30, face working until the age of 70 to qualify for a state pension compared to the age of 68 under current legislation.

A separate official review published by John Cridland, former director-general of the Confederation of British Industry (CBI), proposed that state pension age should rise to from 67 to 68 between 2037 and 2039, seven years earlier than originally planned.

The current state pension age – the earliest age that a person can start receiving their state pension - is 63 for women and 65 for men. It is due to rise to 65 for both by late 2018, 66 by 2020, and 67 by 2028.

However, experts said if the new recommendations were adopted , people in their 40s would face their state pension age being pushed back by an extra year. They warned those in their 30s and younger may eventually face the possibility of having to wait until they are 70 before being able to draw their pension.

The Government is under pressure to address the spiralling cost of the £100bn-a-year state pension, which is expected to increased further as a result of rising life expectancy and therefore the increasing ratio of pensioners to workers.

In Thursday’s report, Mr Cridland said the change is necessary to keep the State Pension “fair and sustainable”.

“My review considers the consequences of an ageing society[…]. The aim is to smooth the transition for tomorrow’s pensioners, and to try and make the future both fair and sustainable.”

Vince Smith-Hughes, retirement expert at Prudential, said that as a result of the proposed changes younger people will need to plan ahead.

They are likely to find their state pension age is significantly higher than they currently assume,” he said.

Steven Cameron, pensions director at Aegon said requiring everyone to wait until an “ever increasing age” to draw a state pension is “inflexible and increasingly outdated”.

“This is a missed opportunity to meet the needs of those who through health concerns, job pressures or lack of employment opportunity simply can’t keep working into their late 60s. We call on the Government to keep the door open to future change,” Mr Cameron said.

Prudential research earlier this week found that at least one in seven people retiring last this year made no financial provision for their retirement. The survey found that many rely heavily on the State Pension to provide an income when they stop working.
My advice to those thirty something workers in the UK and everywhere, start planning for your retirement early on so you can deal with unexpected policy shifts like this one where the state pension age is gradually pushed up and benefits are potentially cut.

Last week I discussed how collapsing US pensions might fuel the next crisis, beginning my analysis by noting the following:
"Please repeat after me: The global (not just American) pension crisis is deflationary because it exacerbates income inequality and will condemn hundreds of millions of workers to pension poverty."
The thing to keep in mind is pensions are important, especially in an ageing population, because they allow people to live out their life after retiring on a modest fixed income. This means they can spend accordingly, allowing governments to collect more sales taxes and boosting overall economic activity in the process.

The UK is trying to slay its pension dragon and this fellow you see above, John Cridland, was appointed to review the pension system and recommended to raise the retirement age faster than previously recommended and to scrap the "triple lock" and link pensions to earnings.

If you ask my opinion, this is just more tinkering at the margins. The real fundamental problem with the UK state pension system is it's grossly antiquated and needs a major overhaul to make it function more like the Canada Pension Plan - Canada Pension Plan Investment Board model.

In fact, I recommend every country in the world adopts the governance that has allowed Canada's large pensions to flourish while most of their global counterparts are witnessing their pension deficits skyrocket.

When I met Mark Machin, President and CEO of CPPIB, last fall, he told me flat out: "What Canada has achieved with the CPPIB is quite amazing, no other country in the world has this state pension system."

And Machin is a UK citizen so he knows what he's talking about. The model we have for our state pension in Canada is unique and we have a similar model for some some large provincial pensions (like the Caisse managing the assets of the Quebec Pension Plan).

There are other countries with great state pensions, like Denmark and the Netherlands, but very few can claim they have achieved a model based on what Canada has done with the CPP and CPPIB.

This is why I keep telling critics and skeptical Canadians to never bash the Canada Pension Plan and plans to enhance it. We Canadians don't realize just how good we have it over the long run with this system.

As far as UK pension reform, it's too late, all these measures to address the growing pension crisis in that country are doomed to fail. All of a sudden, the Brits are waking up to realize how unsustainable and poorly managed their state pension system truly is.

Look, fine, we can openly debate whether the state pension system is unsustainable and whether raising the retirement age makes sense since people are living longer, but at one point there needs to be a much more meaningful discussion on whether the system itself needs much deeper reforms to make it truly sustainable and equitable over the long run.

And it's not like the UK pension system is terrible, it's actually pretty decent, but it's been slipping down the global pensions rankings in the last year, mostly owing to the fact that future retirees can expect a “less generous” income from state and workplace pensions.

I will end this comment with a true story from Greece. A few years ago, before the crisis hit, a friend of mine who is a doctor was swimming at the beach and noticed and elderly man who was in "phenomenal shape."

My friend approached him and asked him how old he was, thinking the guy was around 65 years old. The elderly man told him he was 85 years old, which just floored my friend. He asked him how he has maintained his youth and strength.

The guy looked at my friend and told him flat out: "I retired at age 40 and never worked another day of my life."

And then we wonder why the Greek pension system was unsustainable.

Why am I bringing this up? Because no matter where you live, there needs to be an honest, adult discussion on state and other public sector pensions to make sure they are sustainable and to avoid rampant abuses like the one I just mentioned above. And trust me, abuses happen everywhere, not just in Greece.

Below, former pensions minister Baroness Ros Altmann tells BBC Today some people who have contributed to National insurance for fifty years might still have to wait longer to get the state pension. Smart lady, she knows what she's talking about.

And Marcus Hurd, Conduent HR Services talks to BBC Breakfast News about the planned increases to the state pension age. The discussion is pretty standard, ie. UK pensioners are living longer so they need to raise the retirement age (and possibly raise contributions and cut benefits).

Still, he gives a good overview of the problem and why something needs to be done to address the UK's ongoing pension crisis.

Unfortunately, these measures are not addressing a more fundamental problem, namely, the entire UK pension system needs a major overhaul to truly make it sustainable and equitable for future generations, one that looks more like what we have here in Canada.

Update: Bernard Dussault, Canada's former chief Actuary, shared these insights with me:
The UK government would save even more and would greatly improve inter-generational equity if in addition to increase the pensionable age by 1 from 67 to 68, it would afterwards pursue a permanent slow gradual increase based on the calendar of birth.

Indeed, as statistics generally show that longevity in the developed countries has on average steadily increased over the last few decades by about 2 months (i.e. any generation lives longer than the previous one, i.e. the higher the calendar year of birth, the higher the longevity at age 68) and is expected to pursue doing so, there is a case to keep increasing each coming calendar year the pensionable age by setting it as follows on the basis of the calendar year of birth (CYB, click on image):

I thank Bernard for sharing his thoughts with my readers.



Thursday, March 23, 2017

CPPIB, GIC Betting on US College Housing?

Komal Khettry of Reuters reports, CPPIB joint venture buys U.S. student housing portfolios for $1.6 billion:
Canada Pension Plan Investment Board (CPPIB), Singapore wealth fund GIC and property owner Scion Group LLC said on Thursday their joint venture had bought three U.S. student housing portfolios for about $1.6 billion, in its second major deal in the United States.

CPPIB, which manages Canada's national pension fund and is a major global dealmaker, had formed the student housing joint venture with GIC and Scion in January last year.

Canadian pension funds have been buying real estate assets around the world to diversify their investments.

CPPIB and GIC will each own a 45 percent stake in the three portfolios and Scion Group will own the remaining 10 percent.

The companies said on Thursday their joint venture, Scion Student Communities LP, plans to buy more student housing properties in the United States.

The parties struck a similar deal for a student housing portfolio early last year, buying University House Communities Group and its 19 properties for $1.3 billion.
Last week I discussed why the Caisse and CPPIB are investing in Asian warehouses, betting on demand from the rise of e-commerce and a burgeoning middle class in southeast Asia.

Earlier this week, I discussed why CPPIB is looking to increase its investments in China over the long run, again to better position the fund on secular trends in that country where e-commerce is just taking off and where long-term growth remains solid (even if there will be hiccups along the way).

Today I want to cover this latest joint venture with Singapore's GIC and the Scion Group which is a sizable investment in US student housing.

CPPIB provides a lot more detail on this transaction in this press release:
Canada Pension Plan Investment Board (CPPIB), GIC and The Scion Group LLC (Scion) announced today that their student housing joint venture entity, Scion Student Communities LP (together with its subsidiaries, “the Joint Venture”), has acquired three U.S. student housing portfolios for approximately US$1.6 billion. These portfolios comprise:
  • US$385 million acquisition of six Class-A properties located primarily in the southern U.S.;
  • US$640 million acquisition of 11 Class-A properties in premier university markets across the U.S.; and
  • US$550 million in recapitalizations of 12 legacy Scion-owned and operated communities situated in leading campus markets across the U.S.
Since its inception in January 2016, the Joint Venture has completed US$2.9 billion of investments, including the previously announced US$1.3 billion acquisition of University House Communities Group and its 19 properties in June 2016. The Joint Venture has deployed over US$1 billion in equity capital. CPPIB and GIC each own a 45% interest in the three portfolios and Scion owns the remaining 10%.

“The U.S. student housing sector is an attractive investment opportunity, driven by secular strength in enrollment growth and favourable supply dynamics,” said Hilary Spann, Managing Director, Head of U.S. Real Estate Investments, CPPIB. “Achieving scale in this sector is an important global investment objective for CPPIB, and we are pleased to further this goal in the United States with our partners at GIC and Scion.”

The Joint Venture’s well-diversified national portfolio now includes 48 student housing communities in 36 top-tier university markets, comprising 32,192 beds. The average age of the properties is less than five years and over 75% of the assets are located within one mile of their respective campuses.

Adam Gallistel, Regional Head of Americas, GIC Real Estate, said, “These high-quality, revenue-generating assets are good additions to our global student housing portfolio. We remain confident in this sector’s long-term fundamentals and are pleased to continue our strong partnership with Scion and CPPIB.”

The Joint Venture will pursue additional opportunities to acquire high-quality student housing assets primarily in Tier 1 university markets in the U.S.

“We are thrilled to be partnering with two of the world’s premier real estate investors in the ongoing consolidation of the student housing sector,” said Robert Bronstein, Scion’s President. “We especially appreciate the confidence and support of GIC and CPPIB implicit in the volume of investment activity completed by the Joint Venture during its first year of operation as well as the significant commitment of additional growth capital to the partnership. We look forward to the Joint Venture’s continued growth and success.”

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 19 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At December 31, 2016, the CPP Fund totalled C$298.1 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn or Twitter.

About GIC

GIC is a leading global investment firm with well over $100 billion in assets under management. Established in 1981 to secure the financial future of Singapore, the firm manages Singapore’s foreign reserves. A disciplined long-term value investor, GIC is uniquely positioned for investments across a wide range of asset classes, including real estate, private equity, equities and fixed income. GIC has investments in over 40 countries and has been investing in emerging markets for more than two decades. Headquartered in Singapore, GIC employs over 1,300 people across 10 offices in key financial cities worldwide. For more information about GIC, please visit www.gic.com.sg.

About The Scion Group

Scion is the United States’ largest privately-held owner/operator of student housing communities in major public university markets. Scion’s current portfolio includes 67 properties comprising approximately 46,000 bedrooms, plus management of two university-affiliated communities with an additional 2,200 bedrooms. Scion has focused exclusively on the student housing sector since its inception in 1999, and has provided advisory services and/or invested in over $6 billion of student housing projects. For more information about Scion, please visit www.thesciongroup.com.
So, what are my thoughts on this deal? It's another real estate deal based on long-term secular trends and it's a great deal for all parties involved, including GIC and the Scion Group.

You might not know a lot about the US or world student housing market but it's a huge market. In fact, I urge all of you to read Savills's latest World Student Housing report to better familiarize with global trends in this market.

The key investment highlights from the latest publicly available report are:
  • 2015 was a record year for investment in student housing with $15bn invested globally in the sector. The first half of 2016 saw lower total volumes but mainland Europe continued to rise off a low base.
  • US and UK student housing REITs outperformed their all REIT indices by 19 and 16 percentage points respectively.
  • Global cross-border investment in the sector accounted for 40% of all deals in the last three years as international investors sought to diversify portfolios
Not surprisingly, US college housing REITs are on the rise:
Like bond prices, real estate investment trust (REIT) values in America continue to soar, as more savers and income investors search for ways to quench their thirst for higher yield without having to take excessive risk with their money. College housing is one category of REIT that has not only been winning the hearts of investors in recent times, but also delivering remarkable returns to its owners. (See also, REITs: How Long Can They Stay This Hot?)

Double-Digit Returns

Since the $1.9-billion acquisition of Campus Crest Communities earlier this year, American Campus Communities (ACC) and Education Realty Trust (EDR) have been the only publicly traded REITs that primarily focus on the college housing market. The two REITs have seen their stock prices increase in the last 12 months by more than 47% and 55% respectively, easily trumping both the 12% increase in the Bloomberg North American Apartment REIT Index and the S&P 500’s total return of 3% realized during the same period. (See also, REITs: Still a Viable Investment?)

Reliable, Recession-Proof Income

With political uncertainty on the rise and weak economic data being released, many investors are beginning to put their efforts into hedging their portfolios in the event that the U.S. and other global economies weaken. One of the contributing factors for such a steep rise in student housing REIT valuations could be that investors are using them as a way to hedge their bets in the market. Unlike others forms of real estate that are susceptible to changes in market conditions, such as commercial property and apartment units, student housing, and college enrollments as a whole, are generally unaffected during recessions, at least in recent history. This may be partly due to the fact that students in the United States have relatively easy access to financing to cover their college-related expenses.
And, as reported by Bloomberg last August, some landlords are making a killing on college students:
College students aren't famous for their tidiness, sober living, or financial prudence, to name three qualities landlords might look for in a tenant. But despite the beer-soaked carpets and general flakiness, renting off-campus apartments to undergrads is turning out to be a great business.

Shares in Education Realty Trust, a Memphis-based landlord whose earnings report met Wall Street expectations this morning, are up 54 percent in the past year. American Campus Communities, the only other publicly traded student housing landlord, is up 44 percent. By comparison, a Bloomberg index of North American apartment landlords is up 12 percent over the same period (click on image).

Why are the student-housing landlords getting top grades?

The long-term theme is that college enrollment has boomed over the past few decades, and investment in new on-campus dorms hasn’t come close to keeping up. In the short term, the shares are likely rising because investors are looking to hedge against the possibility of a U.S. recession.

"In an environment of striking political and economic uncertainty, public investors are ascribing value to [the] certainty of cash flows in student housing," said Ryan Burke, an analyst at Green Street Advisors. "In [the] young life of purpose-built student housing, it's performed really well in good and bad times."

That's because kids keep going to college, and schools have run out of places to put them. Consider these striking data from the U.S. Department of Housing and Urban Development: 17.7 million students were enrolled in post-secondary, degree-granting institutions in 2012, up from 12 million in 1990. Over the same period, the number of students living in on-campus dorms increased by a bit more than 600,000. 

In the late 1990s, an industry grew up to absorb demand from the roughly 85 percent of students who don’t live on campus, building off-campus apartments specifically for students, offering leases by the bed, and luring renters with choice enticements. The amenities at some of the more upscale student housing complexes have drawn scorn from those who wonder: Is there a good argument for racking up student debt to watch moving screenings from your swimming pool or eat meals prepared by a James Beard-award-winning chef?

But plenty of more pedestrian complexes offer things that students want, such as barbecue pits and tanning beds, and in addition to the two publicly traded landlords, a deep roster of private property managers is getting in on the act. In March, the private equity firm Harrison Street Real Estate Capital took a publicly traded landlord private in a $1.9 billion deal.

Part of the reason to own student housing is that, in a period of low interest rates, collecting rent has looked like a good way to earn good returns, whether you're renting out a shopping mall, an office sky-rise, or a self-storage unit.

Student housing has a slightly different appeal, according to one theory. Landlords should suffer when the economy tanks, as renters lose jobs or see wages stagnate. But college enrollment has increased in recent recessions, making student housing landlords an interesting hedge against an economic downturn.

That doesn't mean developers won't eventually overbuild. College enrollment has been declining in the years since the Great Recession, even as investment in off-campus student housing has soared. At some point, there will be so many student apartments that the industry will lose its appeal as a safe haven, Burke said.

In the meantime, landlords won't mind the occasional pool party or all-night kegger, as long as the rent is in the mail.
Yeah, let the rich kids party it up in US college housing, as long as mommy and daddy are paying the rent, the landlords don't care.

As you can see, investing in student housing is a hot sector, especially if investors are worried of an economic downturn.

CPPIB and GIC are investing directly in this market alongside their partner, the Scion Group, to avoid market beta. Very smart move and it shows you how the best real estate investors are always thinking of portfolio construction and diversification, especially now that interest rates and cap rates are at historic lows and real estate valuations are at historic highs.

Are there risks investing in US student housing? Of course, most US students are not rich, they pay their college tuition and expenses via student loans. And many of them are struggling, which is why more than 1.1 million borrowers defaulted on their federal student loans last year.

Quite shockingly, a staggering number of college kids are using their student loans for wild Spring Break trips, which goes to show you we are not dealing with the wisest and most prudent segment of the population (after my recent vacation in Florida, I'm actually shocked that any of these college students can obtain a degree after seeing the way they behave on Spring Break).

But the reality is the demands of an increasingly competitive economy means these students need a college degree at a bare minimum or they risk never getting a job. So rich, poor or middle class, they have to go to college to be able to compete and get a decent job (most of them need to in order to pay off their student loans for the rest of their life).

This entire discussion  on US college housing reminds me of my good old McGill University days when I was part of the United Nations club going to Ivy League universities in the United States to take part in mock UN debates.

Back then, I saw students from all backgrounds living on and off campus. I remember the dorms at Harvard and Princeton, two universities I loved visiting, and the pictures some of the students had on their wall really opened my eyes (like pictures of them with President Clinton).

But most students weren't rich and highly connected, they were poor or middle class and they needed affordable, safe student housing near the campus. The same goes for other universities I visited like Yale, UPENN, and Columbia.

If you broaden it out to include all US colleges, you'll understand why student housing is so popular. Parents want to know their kids are safe and secure, eating and sleeping properly, exercising and living nearby so they don't miss their classes even if they've been drinking too much the night before.

Whatever, you catch my drift. As far as Canada, student housing is a relatively small but growing niche.

Last year I was introduced to Centurion Asset Management, a leader in this space up here, and even got to chat with its President and CEO, Greg Romundt. You can read all about Centurion's success here but I found Greg's background -- he was a fixed income derivatives trader for many years prior to setting up this shop -- particularly interesting. He's sharp and shared my views on inequality and long-term deflation.

For a lot of reasons -- affordability (low tuition and low loonie), great education, proximity to the US -- I expect the student housing market to blossom in Canada over the next decade, but it's still a relatively small market.

Another factor that may help the Canadian student housing and hurt US student housing demand is how foreign students perceive US immigration policy as many are now questioning whether to attend US universities. That all remains to be seen however as it's too soon to tell whether this is the start of a big trend from foreigners to shun US universities.

Below, a YouTube video on the Scion Group, CPPIB and GIC's partner in this large transaction. Also, Daniel Pianko, Co-founder & Managing Director, University Ventures and CNBC's Rick Santelli discuss consumer credit and why so many students are defaulting on their loans.

Last week, the Trump administration issued its first policy on student loans, implementing more fees for student loan borrowers defaulting on their loans.

That might put a damper on all those wild Spring Breakers in Florida but I doubt it, just like I doubt this new policy will impact the demand for student housing in the long run. Keep your eyes peeled on this hot and growing real estate sector.