Monday, February 13, 2012

CPPIB Eyes Europe for Fresh Asset Buys?

The CPP Fund ended the third quarter of its fiscal year on December 31, 2011 at $152.8 billion, up $520 million from $152.3 billion at the end of the second quarter on September 30, 2011. The released statement provided further details:
The $0.5 billion increase in net assets after operating expenses resulted from investment income of $3.2 billion, or a 2.1% rate of return. Seasonal cash outflows from the Fund were $2.6 billion during the quarter. The CPP Fund routinely receives more CPP contributions than are required to pay benefits during the first part of the calendar year and then returns a portion of those funds for benefit payments in the latter part of the year.

For the nine months ended December 31, 2011, the CPP Fund increased by $4.6 billion from $148.2 billion at March 31, 2011. This increase in net assets after operating expenses is comprised of $3.3 billion in investment income, representing a 2.2% rate of return, and contributions of $1.6 billion. For the 10-year period ended December 31, 2011, the Fund generated $52.7 billion of investment income reflecting an annualized investment rate of return of 5.7%.

“The CPP Fund’s return this quarter was primarily attributable to the gains realized in the public equity and bond markets, and the Fund’s overall year-to-date performance also benefitted from our active management programs,” said David Denison, President and CEO, CPP Investment Board. “This balance across our investment programs contributes to greater resilience in the Fund’s returns even in turbulent market conditions.

“One of the highlights of our investment activities during the quarter was the completion of the acquisition of Kinetic Concepts, Inc., a leading global medical technology company, by a consortium comprised of CPPIB, Apax Partners and PSP Investments for a total transaction value of approximately $6.2 billion. This represents the second largest global private equity transaction in calendar 2011 and marks the third consecutive year that CPPIB has participated in the largest or second largest private equity transaction globally.”

Long-term sustainability

The Chief Actuary of Canada conducts a financial review of the Canada Pension Plan every three years. In the latest triennial review completed in November 2010, the Chief Actuary reaffirmed that the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The report also indicates that CPP contributions are expected to exceed annual benefits paid until 2021, providing a nine-year period before a portion of the investment income from the CPP Fund will be needed to help pay pensions.

Investment Portfolio Update

We announced a number of investments during the quarter, including:
  • On December 21, 2011, entered into an agreement to form a 60/40 joint venture with Brazilian-based Aliansce Shopping Centers to jointly acquire a 22% interest in Shopping Iguatemi Salvador. At closing, CPPIB’s ownership interest in the mall will be approximately 14%. Shopping Iguatemi Salvador is one of the most dominant shopping malls in Brazil located in the fast growing northeast region of the country.
  • Completed an $80 million investment in Montreal-based GENIVAR Inc., a leading Canadian engineering consulting services firm, through a private placement on December 21, 2011.
  • On December 13, 2011, committed an additional $257 million in the Goodman China Logistics Holding joint venture. This joint venture, of which 80% is represented by CPPIB, was initially formed with Australian-based Goodman Group in 2009 to own and develop logistics facilities in China.
  • Acquired the royalty interest in prescription drug VICTRELIS™ from Dendreon Corporation for $127 million on December 6, 2011.
  • Announced an equity line commitment of up to $100 million in Teine Energy Ltd. on November 25, 2011. Teine is a private Canadian oil and gas exploration and development company based in Calgary.
  • On November 4, 2011, completed the acquisition of Kinetic Concepts, Inc. (KCI), a leading global medical technology company, by a consortium comprised of CPPIB, Apax Partners and the Public Sector Pension Investment Board for US$68.50 per common share in cash or a total value of approximately $6.2 billion including KCI’s debt.
  • On October 14, 2011, announced a 50/50 joint venture with Oxford Properties for the development of RBC WaterPark Place, a 930,000-square-foot Class AAA LEED Gold office tower in downtown Toronto. The development will add a major state-of-the-art office tower to CPPIB’s Canadian real estate portfolio and will house the head office of RBC’s Canadian banking business.
  • Entered into a definitive agreement alongside Ares Management LLC and the Gold/Schiffer family on October 11, 2011 to acquire discount retailer 99¢ Only Stores, for US$22.00 per share in cash. 99¢ Only Stores has a strong market position and attractive store economics in a growing retail sector. The transaction closed on January 13, 2012.
We also announced several significant investments following quarter end:
  • A joint venture agreement with Ivanhoé Cambridge and its Brazilian affiliate Ancar Ivanhoe Shopping Centres on January 18, 2012 to jointly acquire a 49% interest in Botafogo Praia Shopping, a prime shopping destination located in Rio de Janeiro, Brazil; CPPIB’s ownership interest in the mall is 24.5%.
  • Completed the acquisition of a 24.1% stake in the Gassled Joint Venture alongside two consortium partners. The total transaction value, as announced on June 6, 2011, is approximately $3.18 billion. Gassled owns the majority of the gas transport infrastructure on the Norwegian Continental Shelf.
As for where CPPIB is looking now, Reuters reports, Canada Pension eyes Europe for fresh asset buys:

Canada Pension Plan Investment Board, one of the world's top private equity and infrastructure investors, is well positioned to acquire European assets sold off by banks struggling to shore up their balance sheets, its chief executive said on Friday.

Speaking to Reuters after the CPPIB reported rising assets under management in the third quarter ended Dec. 31, CEO David Denison said the European debt crisis is still the big question mark hanging over the global economy.

"What we are seeing is a number of opportunities come out of the banking system in Europe as the banks are starting to address their capital issues, in part by selling assets that are on their balance sheets," said Denison. "We see them anxious to divest those."

Since the 2008-09 financial crisis, CPPIB has made massive infrastructure and private equity investments as many of its competitors retreated.

CPPIB, which invests on behalf of 17 million beneficiaries of Canada's national pension plan, participated in the second-largest private equity transaction of 2011, the C$6.2 billion ($6.2 billion) acquisition of Kinetic Concepts, a U.S. maker of medical devices used in wound care.

The joint deal with private equity firm Apax Partners and PSP Investments - which manages investments for pension funds of the Royal Canadian Mounted Police - was just one of a long list of investments announced or completed in the latest quarter. It marked the third consecutive year that CPPIB has participated in one of the world's largest deals.

The overall asset mix at CPPIB as of Dec. 31 was 50.7 percent equities, 31.6 percent fixed income - either bonds, money market securities, other debt and debt financing liabilities - and 17.7 percent inflation-sensitive assets such as real estate and infrastructure.

CPPIB has slowly boosted its exposure to private equity investments, which accounted for 16.3 percent of its holdings at the end of the third quarter.

"We expect in all likelihood to have more private equity as we look ahead to 2012, certainly more real estate and more infrastructure as well," said Denison.

SLIGHT RISE IN MANAGED ASSETS

The slim quarter-to-quarter rise in assets under management in the three months to Dec. 31 reflected gains in public equity and bond markets.

Assets under management in the quarter inched ahead to C$152.8 billion from C$152.3 billion at the end of the second quarter. The year-over-year gain was more substantial. At the end of the third quarter last year, net assets amounted to C$140.1 billion.

The fund plans to raise assets under management to about a trillion dollars by 2050.

It is important to note that CPPIB's fiscal year ends at the end of March, just like that of PSP Investments (PSPIB). The quarterly updates provide a glimpse of the CPP Fund's performance but since private markets are officially valued at the end of the fiscal year, their performance is not part of these quarterly results.

Once they incorporate the performance of private equity, the total Fund performance will be better. Neil Petroff, CIO of Ontario Teachers', told me CPPIB "hit a home run" on the Skype deal, which will bolster their private equity returns for the year. But there were many other deals like Kinetics and 99¢ Only Stores that will help their PE portfolio.

I spoke with Mark Wiseman, CIO of CPPIB, a couple of weeks ago. Mark used to run the private equity portfolio at Ontario Teachers' before moving over to the CPP Fund to run private markets and then the entire investment portfolio. He had just attended the World Economic Forum at Davos and told me the mood was "decisively somber" and that the Chinese boycotted the meetings because it fell on their New Year (in my opinion, Davos was another monumental failure).

Europe presents many opportunities for private equity, but it also presents many challenges, including complicated regulations and laws. CPPIB has some of the best investment partners to navigate this terrain, but it will be challenging. Moreover, the private equity industry is under increased scrutiny, with the SEC now looking into how PE funds value and market their portfolio.

Below, David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc., talks about Greek austerity measures approved by lawmakers and the global economy. Rosenberg, talking with Betty Liu on Bloomberg Television's "In the Loop," also discusses investment strategy.

I agree with David, the Greek bailout will not rid Europe of danger, but disagree with his bearish views on the U.S. economy and more importantly, he underestimates the risk of a liquidity driven market melt-up.

Finally, it doesn't surprise me that the euro is up because as I wrote previously, the black swan of 2012 is a milder than anticipated recession in Europe. Stay tuned, risk assets might be in for another wild ride but for now remain long and keep buying the dips.

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