Friday, February 17, 2012

Canadian Pension Funds Cranking Up Risk?

Lots to cover on Canadian pension funds cranking up risk. First, CBC reports that CPP invests $1.8B in U.S. malls:

The Canada Pension Plan Investment Board is making a whopping $1.8-billion investment in shopping malls in the U.S. with a new joint venture agreement with the Westfield Group in its biggest real estate deal to date.

The pension manager said Tuesday it will take a 45 per cent stake in the joint venture that will include interests in 10 regional malls and two redevelopment sites south of the border.

Most of the properties are in California.

"This is an excellent opportunity to acquire a significant interest in a portfolio comprising high quality regional shopping centres that are well positioned for long term growth," said Graeme Eadie, the board's senior vice-president for real estate investments.

"This acquisition represents our largest real estate investment to date globally and supports our retail real estate strategy of investing in dominant regional malls with best in class operators."

The deal will make the board one of the largest institutional investors in regional shopping centres in the U.S. with interests in 26 malls.

Australia's Westfield Group will serve as the managing general partner and will manage, lease and develop the properties which also include malls in Maryland and Washington state.

"This new agreement continues the group's strategy of creating value through the introduction of joint venture partners into our assets globally," Westfield Group co-chief Peter Lowy said.

Westfield has one of the world's largest portfolios of shopping centres in the world with interests in 118 shopping centres in Australia, the U.S., Britain, New Zealand and Brazil.

Real estate generates predictable cash flows

Pension plans often invest in shopping malls and other types of real estate because they can generate predictable cash flows over long periods of time, in line with the benefit obligations to retirees.

Many pension funds have tried to diversify away from volatile stocks in recent years to infrastructure, real estate, bonds and other safer assets.

The U.S. joint venture follows a deal in 2010 that saw the CPP board take a 25 per cent stake in Westfield Stratford City, a mall near where the 2012 Summer Olympic Games will be held in London.

The Canadian money manager also holds a 50 per cent stake in a Westfield fund that owns four shopping malls in Britain. In January, the CPP board invested $40 million for a 24.5 per cent stake in a beachfront shopping centre in the Brazilian city of Rio de Janeiro.

The Caisse de depot et placement du Quebec, through its Ivanhoe Cambridge real-estate arm, holds the remaining 75.5 per cent stake in the 138-store mall.

Brazil is hosting the 2016 Summer Olympics and the 2014 World Cup of soccer.

CPPIB invests money that isn't required to pay for current retirement benefits under the federally administered CPP.

The investment fund's performance is key to ensuring that future generations of Canadians have access to CPP payouts, even when the number of contributors declines in relation to pensioners.

Canada's chief actuary has reviewed the fund's health and affirmed that it remains sustainable at the current contribution rate of 9.9 per cent for at least 75 years.

Contributions are expected to exceed benefit payouts until 2021, when the CPPIB investments will help to fund pensions.

I've already covered the Caisse and CPPIB buying up the boom in Brazil, but the focus now is in the U.S. where deals abound and the economy is slowly recovering. Benefits Canada reports the Caisse just acquired Silicon Valley apartments:

Ivanhoé Cambridge, a real estate subsidiary of the Caisse de dépôt et placement du Québec, has added to its roster of rental housing units in Silicon Valley with the acquisition of three new residential buildings near San Jose, California. The Quebec-based company now owns more than 1,400 apartments in this region.

The new transaction involves the purchase of 484 rental housing units across three buildings located in Cupertino, Sunnyvale and San Jose, home to information technology companies such as Apple, Facebook, Google, IBM and Intel.

“The residential market in Silicon Valley meets several of our investment criteria and forms an essential part of our strategic business plan,” said Daniel Fournier, chairman of the board and CEO of Ivanhoé Cambridge. “Silicon Valley has quality buildings with a significant critical mass in a growing market.”

Last December, Ivanhoé Cambridge announced the purchase of The Park Kiely, a 948-unit rental apartment complex located in San Jose. The three new properties, Verandas, Woodbridge and The Reserve, have been acquired for $136 million.

“We are reinforcing our position in a region that will see remarkable growth over the next few years,” said Sylvain Fortier, president, residential, Ivanhoé Cambridge.

Market studies indicate that Silicon Valley’s population growth should increase to 5% by 2016.

Canadian pension funds are also looking at Europe. According to Dow Jones Financial News, the Caisse and Singapore's GIC are in a race to acquire Axa Private Equity:

Caisse de dépôt et placement du Québec and Government of Singapore Investment Corp are in pole position to jointly acquire highly rated European buyout firm Axa Private Equity, according to three people with knowledge of the situation.

All firms declined to comment or did not comment in time for publication.

Others in the running for Axa had included Canadian asset manager Onex and US buyout firm Kohlberg Kravis Roberts. Both entered first-round bids for the French buyout firm in October but later dropped out.

Early interest had also come from UK private equity house 3i Group and French-listed private equity house Eurazeo, according to reports, while asset manager BlackRock had requested information relating to the sale last year.

Axa Private Equity has two existing relationships with Caisse: a €2.1bn co-investment in French engineering company Spie, made last year with US buyout firm Clayton Dubilier & Rice, and it held a joint venture struck two years ago to back Quebec- and European-based businesses.

Caisse was founded in 1965 to manage the funds of the Quebec pension plan, a public pension plan created by the Quebec government. In 2010 total net assets were $151.7bn, according to its website.

GIC was incorporated in 1981 and is owned by the government of Singapore. In April, it was one of the buyers of a near 5% stake in US buyout firm TPG Capital with the Kuwait Investment Authority. The deal valued TPG at about $11bn.

Why Axa Private Equity? Michael Sabia, President and CEO of the Caisse, recently stated the Caisse was looking hard at opportunities in Europe. They are not alone. CPPIB is eying fresh buys in Europe and along with OMERS and Ontario Teachers', they have all set up London offices in the past five years, in order to source more European deal opportunities.

And they're not just looking at Europe. CPPIB recently hired ex Goldman Sachs veteran Mark Machin to head its Asia-Pacific unit as it seeks to increase investments in the region:

Mark Machin, who stepped down as Goldman Sachs Group Inc. (GS)’s vice-chairman for Asia-Pacific excluding Japan in December, will become president of CPPIB Asia Inc. effective March 19, the company said in an e-mailed statement today.

Machin, 45, joins Toronto-based Canada Pension as the retirement plan is expanding its reach into emerging markets with a focus on Asia and Latin America. The fund had less than 9 percent of its C$152.8 billion in total assets invested in Asia at the end of December, according to the statement.

“Our expectation is that our investments in Asia-Pacific will grow disproportionate to the upside of the total fund,” said Mark Wiseman, executive vice president at Canada Pension, in an interview in Hong Kong today. “We have to be here. I think we’re actually behind where we need to be.”

Canada Pension’s current level of investment in Asia is “arguably underweight,” relative to size of the region’s economies, Wiseman said.

Machin, who spent 20 years at Goldman Sachs and ran the New York-based bank’s investment bank for six years, will be based in Hong Kong in his new role, according to the statement.

Wonder how much compensation Mr. Machin is receiving to accept this position. Also, while it's true most Canadian pensions are "arguably underweight" relative to the size of the region's economies, they're extremely exposed to China in many ways, including Canadian resource stocks.

Paul Wells of MacLean's recently commented that Quebec’s pension fund is a proud Enbridge shareholder:

This is the most entertaining story I read in any of four newspapers this morning. Le Devoir brings us a report from a left-leaning think tank Jacques Parizeau launched (as a retired private citizen) in 1999, which asserts that Quebec’s Caisse de dépôt et placement holds $5.4 billion in investments in oil-sands companies, including $2.7 billion of Enbridge stock.

That’s a lot.

The Caisse holds and invests the assets of 25 provincial funds, including the Quebec Pension Plan. It used to try to be all “strategic” and invest in ways that would build Quebec — the whole thing was born at the height of the Quiet Revolution in 1965 — but one of the first things Jean Charest did when he came to power was to change its mandate to make it seek high return on investment as a first priority.

The report’s two authors say the Caisse’s holdings in three oil-sands companies — Enbridge, Suncor and Canadian Natural Resources — is nearly double the value of its holdings in the 45 Quebec companies in the Caisse’s portfolio.

The rest of the tale is told in tones of mounting terror. “The ‘wool sock’ [a familiar folkloric term to describe the place where savings would be stashed] of Quebec’s men and women is put to use developing fossil fuels in Western Canada,” the authors write. This “goes against the values and public policies of [the Caisse's investors'] own society.”

The Caisse disputes the authors’ figures, and offers Le Devoir a set of numbers at the lower end of the billions-of-dollars scale, but whichever side is right, it’s pretty clear Quebec’s public pension fund is into the oil sands big time.

This is one of those stories that makes you realize the world isn’t wired the way everyone tells you the world is wired. Jack Layton approved election ads in Quebec in 2008 suggesting the federal Conservatives would “make us slaves to the oil men.” If anyone’s a slave, it turns out it has been accomplished directly from Quebec City, with no federal middleman. And if, on the other hand, anyone’s a beneficiary, Quebec retirees will get to share the wealth.

In a display of Quebec nationalism, the Caisse and the National Bank recently launched a Quebec Index ETF:

The XTF Morningstar National Bank Quebec Index ETF, was developed in association with National Bank of Canada, and will reflect the performance of equities with issuers headquartered in Quebec, and is weighted according to the market capitalization of the companies.

When I read this, my eyes rolled. If you're absolutely gung- ho about investing in Quebec companies, stay the hell away from this 'Quebec ETF' and just buy companies like SNC Lavalin and CAE Inc., two of my favorites, directly. I even mentioned some smaller resource companies in a previous post on Canada's next potash and another one that recently came to my attention is Osisko Mining Corporation (OSK.TO).

[Disclosure: Not invested in any Canadian stock now but cranked up my risk on Chinese solars, which I swing trade ...not for the feint of heart, especially if you're prone to puking!]

Back to Canadian pension funds cranking up risk. The Globe and Mail reports that Canadian Private equity activity soared in 2011, eclipsing year-ago figures amid blockbuster deals like the $2.1-billion acquisition of Husky International by the OMERS pension fund and Berkshire Partners.

Along with other private equity funds, OMERS has been busy rescuing the shipping industry:

Private equity could be the unlikely saviour of shipping, and is expected to fill a funding gap in the shipping industry over the next two years, according to a survey by UK law firm Norton Rose.

The law firm, which surveyed 1100 transport executives across the shipping, aviation and rail industries, found the shipping industry was both hardest hit by the economic downturn and most amenable to private equity investment.

A total of 31% of shipping executives expected private equity investment to be the main source of funding over the next few years.

Almost half, or 44%, of shipping respondents said business volumes had fallen by over 5% since 2008, compared with 24% of rail respondents and a fifth of aviation respondents.

Alongside the fall in business volumes, the prices shipping firms charge for transporting products in container ships started falling in July last year, according to The NewContex index – a key indicator of prices for shipping commodities.

Norton Rose’s report also found that 57% of all respondents believe a merger or joint venture will form a key part of their strategy over the next 12 months.

In 2011, private equity firms showed some interest in investing in the shipping industry.

US buyout firms Carlyle Group and Blackstone Group each partnered up with industry specialists to expand into the shipping sector due to increased demand in 2011.

They both expanded their platforms in shipping as they forecast increased restructuring and investment activity in the sector, particularly from China.

In May, Blackstone formed an agreement with boutique investment bank Dahlman Rose & Co to jointly provide financial advisory services to maritime clients seeking to recapitalise or restructure their balance sheets.

Also in May, Carlyle formed a new company to acquire more than $5bn (€3.6bn) in container, dry bulk, tanker vessels and other assets to capitalise on increasing demand in the shipping sector.

Notable private equity investments in shipping last year included Omers Private Equity’s acquisition of ship management firm V Group from Exponent Private Equity for $520m in July.

Harry Theochari, global head of transport, Norton Rose Group said: "Shipping is facing a number of challenges, reflected in the fact that business volumes are felt to have dropped more significantly than aviation or rail in this survey. The key findings of this survey...are that cash and availability of cash is fundamental, and keeping operational costs down is imperative."

Others are going into shipping via public markets. Shipping stocks have been on a tear lately, led by DryShips (DRYS), which the Caisse owns a large chunk of shares (Deutsche Bank is top holder and others include Renaissance Technologies and Citadel, two top funds I track closely).

Finally, an article that caught my attention. Three days ago, Barry Critchley of the Financial Post reported that PSP Capital Inc. raises $1.25B:

It’s a rare day that a AAA-rated issuer comes to the domestic market — but Monday was such a day.

PSP Capital Inc., a wholly-owned subsidiary of the Public Sector Pension Investment Board, raised $1.25-billion via a two part issue. The entity that was formed in 2005 to raise financing for investment activities through short-term and long-term borrowing for the PSPIB garnered $900-million of five-year fixed rate notes (at a yield of 2.266%) and $350-million of three year floating rate debt.

Both tranches were upsized: the initial plan was to raise $600-million of fixed rate debt and $300-million of floating rate debt.

According to a pre-sale ratings report by DBRS, the notes to be issued “will be unconditionally and irrevocably guaranteed by PSPIB and will rank pari passu with all other unsecured and unsubordinated indebtedness of PSP.” The net proceeds from the issue will be used “to repay approximately $700-million in outstanding commercial paper and to finance additional investment activities.”

According to Bloomberg, the deal is the third fixed-rate deal by the issuer: In December 2008 it raised $1-billion of five year money at a coupon of 4.57%; in December 2010, it raised $750-million of five year fixed rate debt at 2.94%.

In its report, DBRS said that after Monday’s two deals, so-called “recourse debt will still remain below the Fund’s limit of 7.5% of net assets, and is comfortably within DBRS’s requirements for the assigned rating category.”

PSPIB invests for the pension plans of the Public Service, the Canadian Forces, the Royal Canadian Mounted Police, and the Reserve Force Pension Plan. According to its last annual report, it is home to net assets of $58-billion.

PSPIB is one of a number of public sector pension plans that have raised external debt capital. In the past, units of the Caisse de depot, Ontario Teachers and OMERS have all raised debt capital.

It's strange that PSPIB, which enjoys a net inflow of roughly $4 billion a year, is raising external debt capital to “to repay approximately $700-million in outstanding commercial paper and to finance additional investment activities.” Which commercial paper and financing what other investment activities?

PSPIB should publicly disclose this information. Not saying they're wrong as they could be refinancing at lower rates and others have also raised external debt (less so after the financial crisis), but still strange and not really part of their mandate as it looks like they're levering up their balance sheet once more.

Below, Bloomberg's Scarlet Fu, Stephanie Ruhle and Sara Eisen discuss the affect of threatened bank downgrades on investors and the markets. They speak on Bloomberg Television's "Inside Track."

And the European Central Bank is swapping its Greek bonds for new ones to ensure it isn’t forced to take losses in a debt restructuring, three euro-area officials said late yesterday on condition of anonymity. Bloomberg's Michael McKee reports on Bloomberg Television's "InsideTrack."

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