SWFI reports CPP Investments gets some liquidity from Kendall Square investment:
South Korea is one of the most developed e-commerce markets in Asia
with demand for quality logistics facilities. Canada Pension Plan
Investment Board (CPP Investments) announced it has agreed to a
restructure and sale of a 21% partial interest in the Kendall Square
Development Venture (KDV I) in South Korea. Net proceeds to CPP
Investments from the sale will be approximately US$ 245 million.
KDV
I is a joint venture set up in 2015 among CPP Investments, APG Asset
Management, and ESR Group Limited to develop modern logistics real
estate assets in prime locations within major strategic logistics hubs
in South Korea. CPP Investments’ initial investment in KDV I was US$ 175
million. The joint venture was subsequently upsized in 2018 and 2019.
CPP
Investments will remain an investor with a 24% stake in a newly formed
open-ended logistics core fund, which will house KDV I’s stabilized
assets. CPP Investments is currently partnered with ESR on two other
ventures focused on the Korean logistics sector.
ESR Kendall Square Open-End Core RE Fund
On February 14, 2024, ESR Group announced that its South Korean
platform, ESR Kendall Square has established Korea’s first perpetual,
open-ended core logistics fund. The newly-formed core fund portfolio
includes seven trophy assets which are developed and managed by ESR
Kendall Square. Strategically located in the Greater Seoul and Greater
Busan areas, the initial seven assets, with a total Gross Floor Area of 1
million square meters, have an average occupancy of over 99%.
Earlier today, CPP Investments issued a press release stating it will sell a partial stake in Korea development venture:
Seoul/Hong Kong (February 20, 2024) – Canada Pension Plan Investment Board (CPP Investments)
today announced it has agreed to a restructure and sale of a 21%
partial interest in the Kendall Square Development Venture (KDV I) in
South Korea. Net proceeds to CPP Investments from the sale will be
approximately US$245 million.
KDV I is a joint venture set up in 2015 among CPP Investments, APG
and ESR to develop modern logistics real estate assets in prime
locations within major strategic logistics hubs in South Korea. CPP
Investments’ initial investment in KDV I was US$175 million. The joint
venture was subsequently upsized in 2018 and 2019.
CPP Investments will remain an investor with a 24% stake in a newly
formed open-ended logistics core fund, which will house KDV I’s
stabilized assets. CPP Investments is currently partnered with ESR on
two other ventures focused on the Korean logistics sector.
Gilles Chow, Head of Real Estate North Asia, CPP Investments, said,
“Korea is one of the most developed e-commerce markets in Asia with
sustained demand for quality logistics facilities. Through our
longstanding partnership with ESR and APG, we have been able to capture
opportunities in this space. The partial sale of our stake in KDV I
allows us to monetize the investment to deliver returns to the CPP Fund
while remaining committed to this important sector.”
About CPP Investments
Canada Pension Plan Investment Board (CPP Investments™) is a
professional investment management organization that manages the Fund in
the best interest of the more than 22 million contributors and
beneficiaries of the Canada Pension Plan. In order to build diversified
portfolios of assets, investments are made around the world in public
equities, private equities, real estate, infrastructure and fixed
income. Headquartered in Toronto, with offices in Hong Kong, London,
Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney,
CPP Investments is governed and managed independently of the Canada
Pension Plan and at arm’s length from governments. At December 31, 2023,
the Fund totalled C$590.8 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Instagram or on X @CPPInvestments.
Talk about a short press release, straight to the point!!
So why is CPP Investments selling a stake in the Kendall Square Development Venture?
Well, to realize on the investment and shore up liquidity.
The press release states net proceeds from the sale will be approximately US$245 million.
Is CPP Investments in trouble, is that why they are selling assets?
No, that's total nonsense, it's all part of intelligent liquidity risk management.
CPP Investments' CIO Ed Cass is very smart, he knows the cycle is turning and wants to shore up liquidity to capitalize on opportunities as they arise.
And prize assets like the Kendall Square Development Venture are easy to sell, even in this environment.
Moreover, CPP Investments will remain an investor with a 24% stake in a newly
formed open-ended logistics core fund, which will house KDV I’s
stabilized assets.
In other words, it's not exiting completely from this investment because it's a great long-term asset.
The best way I can describe it to ordinary investors is let's say you buy a stock at a decent price and it doubles, but you still love the company and its long-term prospects. You might sell 2/3 of your position to invest in other opportunities and lower your exposure and keep a third and ride it.
It's not exactly the same as real estate is illiquid but it's the same principle, you realize on your investment to invest elsewhere and keep a smaller position.
That's just smart portfolio management and in the Canadian pension business where over 50% of assets are illiquid, you need to manage all risks including liquidity risk very carefully.
Anyways, no use belaboring the point, it's a great logistics asset in South Korea and as Gilles Chow, Head of Real Estate North Asia, CPP Investments, said:
“Korea is one of the most developed e-commerce markets in Asia with
sustained demand for quality logistics facilities."
Moreover, as SWFI noted, it's strategically located in the Greater Seoul and Greater
Busan areas, the initial seven assets, with a total Gross Floor Area of 1
million square meters, have an average occupancy of over 99%.
These type of logistics assets are in great demand and CPP Investments was right to unlock some liquidity here.
In other related news, CPP Investments ended its third quarter of fiscal 2024 on December 31, 2023 with net assets of $590.8 billion compared to $576.1 billion at the end of the previous quarter:
The $14.6 billion increase in net assets for the quarter consisted of
$19.3 billion in net income less $4.7 billion in net Canada Pension
Plan (CPP) outflows. CPP Investments routinely receives more CPP
contributions than required to pay benefits during the first part of the
calendar year, partially offset by benefit payments exceeding
contributions in the final months of the year.
The Fund, which includes the combination of the base CPP and
additional CPP accounts, achieved a 10-year annualized net return of
9.3%. For the quarter, the Fund’s net return was 3.4%. In the 10-year
period up to and including the third quarter of fiscal 2024, CPP
Investments has contributed $319.4 billion in cumulative net income to
the Fund.
For the nine-month fiscal year-to-date period, the Fund increased by
$20.7 billion consisting of $15.3 billion in net income and $5.4 billion
in net CPP contributions. The Fund’s net return was 2.6% for that same
period.
“Strong performance of global equity and fixed income markets during
the final months of calendar 2023 contributed to the Fund’s continued
growth,” said John Graham, President & CEO. “We remain focused on
applying our investment capabilities to prudently manage the Fund to
deliver long-term value for CPP contributors and beneficiaries.”
Gains in public equity, fixed income, credit, private equity, energy
and infrastructure assets contributed positively to results, partially
offset by the impact of foreign exchange losses due to a stronger
Canadian dollar relative to the U.S. dollar.
Performance of the Base and Additional CPP Accounts
The base CPP account ended its third quarter of fiscal 2024 on
December 31, 2023, with net assets of $557.7 billion, compared to $546.3
billion at the end of the previous quarter. The $11.4 billion increase
in assets consisted of $17.8 billion in net income, less $6.4 billion in
net base CPP outflows. The base CPP account achieved a 3.3% net return
for the quarter, and a five-year annualized net return of 7.7%.
The additional CPP account ended its third quarter of fiscal 2024 on
December 31, 2023, with net assets of $33.1 billion, compared to $29.8
billion at the end of the previous quarter. The $3.3 billion increase in
assets consisted of $1.6 billion in net income and $1.7 billion in net
additional CPP contributions. The additional CPP account achieved a 5.0%
net return for the quarter, and a five-year annualized net return of
5.3%.
The additional CPP was designed with a different legislative funding
profile and contribution rate compared to the base CPP. Given the
differences in their design, the additional CPP has had a different
market risk target and investment profile since its inception in 2019.
As a result of these differences, we expect the performance of the
additional CPP to generally differ from that of the base CPP.
Furthermore, due to the differences in their net contribution
profiles, the assets in the additional CPP account are also expected to
grow at a much faster rate than those in the base CPP account.
Long-Term Financial Sustainability
Every three years, the Office of the Chief Actuary of Canada (OCA),
an independent federal body that provides checks and balances on the
future costs of the CPP, evaluates the financial sustainability of the
CPP over a long period. In the most recent triennial review published in
December 2022, the Chief Actuary reaffirmed that, as at December 31,
2021, both the base and additional CPP continue to be sustainable over
the long term at the legislated contribution rates.
The Chief Actuary’s projections are based on the assumption that,
over the 75 years following 2021, the base CPP account will earn an
average annual rate of return of 3.69% above the rate of Canadian
consumer price inflation. The corresponding assumption is that the
additional CPP account will earn an average annual real rate of return
of 3.27%.
CPP Investments continues to build a portfolio designed to achieve a
maximum rate of return without undue risk of loss, while considering the
factors that may affect the funding of the CPP and its ability to pay
current benefits. The CPP is designed to serve today’s contributors and
beneficiaries while looking ahead to future decades and across multiple
generations. Accordingly, long-term results are a more appropriate
measure of CPP Investments’ performance and plan sustainability.
Operational Highlights
Corporate developments
Ranked first among the world’s leading public pension funds by
Global SWF when measuring annualized returns between fiscal years 2013
and 2022 (Global SWF Data Platform, December 2023).
Completed a review of our business activities in Europe resulting in
the planned closure of our Luxembourg office in fiscal 2025. This
decision was a result of thorough analysis of business activities that
best serve our global operations. Established in January 2015, the
Luxembourg office has supported our investment activities in Europe.
Received the Australian-market Kangaroo Issuer of the Year award by Sydney-based KangaNews
for their annual institutions and transactions awards in 2023. The
KangaNews Awards consider factors such as the volume of issuance,
breadth of distribution, deal performance and commitment to the
Australian Dollar Bond market as an issuer. In 2023, CPP Investments
issued A$3.75 billion (C$3.4 billion) of bonds in the Australian market.
Third-Quarter Investment Highlights
Credit Investments
Participated in the financing of a subsidiary of Pattern Energy
Group, a U.S.-based renewable energy and transmission company, through a
US$83 million investment in a holding company debt facility, which will
support initial equity capital for the construction of SunZia
Transmission and SunZia Wind, a clean energy infrastructure project in
the U.S.
Agreed to invest up to €118 million in a forward-flow mezzanine loan
facility for Enpal. Based in Germany, the company offers financing
solutions for solar panels, electric vehicle chargers, heat pumps and
batteries as well as installation and maintenance services.
Entered into a newly formed venture with Blackstone Real Estate Debt
Strategies, Blackstone Real Estate Income Trust, Inc., and funds
affiliated with Rialto Capital and acquired a 20% equity stake for
US$1.2 billion in a venture that holds a US$16.8 billion senior
commercial mortgage loan portfolio, primarily located in the New York
metropolitan area.
Invested A$300 million (C$268 million) in a first-lien term loan to
TEG, a leading integrated live entertainment and ticketing service
provider in Australia.
Invested €75 million in a senior secured loan to Curtis Biomass
Plant, a 49-megawatt woody biomass plant using certified forestry waste
located in northwest Spain.
Invested in the financing package to support New Mountain Capital’s
investment in the merger of HealthComp, a U.S.-based benefits and
analytics platform, with Virgin Pulse, a global digital-first health,
wellbeing and navigation company.
Committed to invest C$197 million in financing to support CapVest
Partners in its acquisition of Recochem. Headquartered in Canada,
Recochem is a global manufacturer and distributor of aftermarket
transportation and household fluids.
Agreed to provide financing to support a consortium of investors led
by Sixth Street in its acquisition of the GreenSky platform and its
associated loan assets. GreenSky is a leader in point-of-sale home
improvement financing based in the U.S.
Committed up to US$90 million in junior financing to fund up to
US$820 million of loans originated by Service Finance Company, a U.S.
home improvement financial services company.
Private Equity
Invested €398 million to acquire interests in three funds managed by
Hayfin Capital Management. The transaction represents a diversified
portfolio of European mid-market, single- company secondary investments,
direct co-investments and funds.
Invested US$50 million in the carve-out of Forcepoint’s Global
Governments and Critical Infrastructure (G2CI) cybersecurity business,
alongside TPG. Based in the U.S., Forcepoint G2CI is a leading provider
of cybersecurity solutions.
Committed US$175 million to MBK Partners Fund VI, which focuses on
control buyouts investments in South Korea, Japan and Greater China.
Committed US$240 million to TPG Partners IX, L.P., which focuses
primarily on healthcare, software and digital media &
communications, and US$60 million to TPG Healthcare Partners II, L.P.,
which focuses solely on healthcare. The funds target upper middle-market
and large growth buyouts in North America and Western Europe.
Committed US$90 million to acquire ownership interests in a
diversified portfolio of 25 private equity funds with investments
distributed across Europe, North America and Australia.
Agreed to the partial realization of our investment in Visma, a
leading provider of mission-critical cloud software in Europe, retaining
an approximate 2% stake in the company. Net proceeds from the sale are
expected to be approximately C$700 million. Our original investment was
made in 2019.
Completed the sale of a diversified portfolio of 20 limited
partnership fund interests in mostly North American and European buyout
funds. Net proceeds from the sale were approximately C$2 billion. The
portfolio of fund interests represents various commitments made over the
course of approximately 20 years.
Real Assets
Completed a follow-on investment of US$905 million into Pattern
Energy Group to support the company’s ongoing development projects and
future growth opportunities. Pattern Energy is a leading U.S.-based
renewable energy and transmission company. We completed our initial
investment in 2020.
Committed an additional £300 million to Octopus Energy to support
the company’s continued global growth. Octopus Energy is a global clean
energy technology pioneer based in the U.K. Our partnership was
established in 2021.
Sold the Midland Gate Shopping Centre in Perth, Australia, held
through the Vicinity Retail Partnership (VRP). Gross proceeds from the
sale total A$97 million (C$85 million). The transaction marks the final
asset disposition from VRP, a joint venture vehicle established in 2010
to invest in shopping centres across Australia.
Sold our 24.5% stake in two operating German offshore wind projects,
Hohe See and Albatros, which have been fully operational for nearly
three years and produce a combined 2.5-million-megawatt hours of
electricity. Net proceeds from the sale were C$374 million. Our initial
investment was made in 2018 while the projects were still under
construction.
Transaction Highlights Following the Quarter
Signed a definitive agreement in support of the proposed merger
between Aera Energy, one of California’s major energy producers, and
California Resources Corporation, an independent energy and carbon
management company in the U.S. Through this transaction, we will receive
newly issued shares of common stock upon close of the transaction,
expected to represent approximately 11.2% of the combined company.
Completed a C$100M Freddie Mac-compliant preferred equity investment
in Panorama Tower, an 85-story, Class-A luxury multifamily high-rise
tower in Miami, Florida.
Committed to provide an additional US$75 million in financing to
Global Lending Services (GLS) through a term loan, bringing the total
size of the loan to US$150 million. Based in the U.S., GLS provides
automotive financing solutions offered through franchise and independent
automobile dealers.
Invested £40 million for an approximate 1% stake in Dechra
Pharmaceuticals alongside EQT. Dechra Pharmaceuticals is a U.K.-based
developer and manufacturer of specialty animal pharmaceuticals.
Participated in the financing of BridgeBio Pharma Inc., a U.S.-based
commercial-stage biopharmaceutical company focused on genetic diseases
and cancers, through a US$200 million synthetic royalty financing
commitment and a US$150 million term loan that refinances an existing
senior secured credit facility, alongside Blue Owl Capital. The
financing will support the commercial launch of acoramidis, a
pre-approval drug candidate designed to treat a rare and potentially
fatal heart condition known as transthyretin amyloid cardiomyopathy
(ATTR-CM).
Invested US$75 million in a secured credit facility issued by Altus
Power, a commercial-scale provider of clean electric power that
develops, owns and operates locally sited solar generation, energy
storage and charging infrastructure across the U.S.
I do not cover quarterly investments as it's a long-term Fund but can't say I was surprised.
As John Graham, President & CEO states: “Strong performance of global equity and fixed income markets during
the final months of calendar 2023 contributed to the Fund’s continued
growth. We remain focused on
applying our investment capabilities to prudently manage the Fund to
deliver long-term value for CPP contributors and beneficiaries.”
Some foreign currency losses due to the strong Canadian dollar last fiscal quarter which I expect to reverse once the Bank of Canada slashes rates.
More importantly, CPP Investments ranks among the best 10-year returns:
We are living in uncertain times, but there’s one thing Canadians can be certain about: the strong and steady performance of CPP Investments.
The investment manager for Canada’s largest pension fund has been
recognized by industry experts for having among the highest returns over
the past decade when compared to global peers.
Global SWF, a New York-based pension industry specialist recently released its 2024 Annual Report,
which measured 10-year returns for sovereign wealth funds and public
pension funds. With a 10-year annualized rate of return of 10.9% from
fiscal 2013 to 2022, CPP Investments ranked first among national pension
funds, and second only to New Zealand Superannuation Fund and national
institutional investors.
The report highlights various fund
dynamics and industry trends, including how Canadian funds – such as CPP
Investments – are highly focused on investing in their home market of
North America. In addition, CPP Investments was lauded in the report for
participating in co-investments, an investment style well-known to
Canadian funds, as a way of gaining direct exposure. “CPP [Investments]
is by far the most active, but others are catching up rapidly.”
All this to say, relax, CPP Investments isn't selling top-notch real estate assets because it's in deep trouble, it's prudently managing liquidity risk to make sure it can capitalize on opportunities which will arise when the cycle turns south.
Below, CIO Ed Cass shares his thoughts on the investing landscape and portfolio construction in this on-camera interview.
Next, Ed joined CNBC's Delivering Alpha 2023 conference last fall to discuss continued market demand amid higher interest rates, where the opportunities are for investment, and more. He explains why they are looking at commodities more actively.
Third, DoubleLine CEO Jeffrey Gundlach, with CNBC's Scott Wapner and Bob Pisani live at Exchange ETF in Miami, warns of added volatility to the economic cycle and rising interest rates post-recession thanks to the fiscal response and U.S. government debt burden. Despite the recent CPI report affecting expectations for interest rate cuts, Gundlach doubts it will sway the Fed's decisions significantly.
He also highlights concerns about stock market valuations and tech company concentration risk, advocating for equal-weighted investments over passive market-weighted ones. Gundlach stresses the importance of international investing scrutiny and expresses optimism about India's economy. The conversation shifts to investment allocation, with a recommendation for a more conservative portfolio and an eye on purchasing assets at lower prices in the future.
Lastly, please take the time to watch this TED talk with Dasha Navalnaya, daughter of Alexei Navalny who died in a Russian prison over the weekend under dubious circumstances.
Sharing the story of her father's poisoning, persecution and current imprisonment, she details what it was like growing up under the watchful eye of government surveillance as her father led a decade-long investigation into the corruption of Putin's regime — and shows why paying attention to what happens in Russia matters to everyone, everywhere (incredible young lady; h/t Mathieu St-Jean).
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