Tackling the 'Disconnect' as Governments Target Institutional Capital
A group of senior-level executives from major pension funds across the world have developed a guide to help governments understand how they can successfully attract domestic institutional capital to help achieve their policy goals.
The guide is the output of a working group of the International Centre for Pension Management (ICPM), a global network of more than 50 pension funds and related organisations that together manage more than $8trn (€6.9trn) of assets.
Sebastien Betermier (featured above), ICPM executive director and a lead author of the new paper alongside Onno Steenbeek, from APG Asset Management, told IPE: “We launched this working group because there is a real disconnect between what governments expect from private capital and what institutional investors expect from their investments.
“This report develops a comprehensive and practical framework – the ‘investible window’ – that is extremely useful for understanding how domestic institutional capital can align to public goals and priorities.
“Our hope is that this paper will provide clarity and facilitate constructive discussions on what institutional investors consider attractive and credible investment structures.”
Other pension fund executives on the working group, in addition to Betermier and Steenbeek, include Mark Lyon, deputy chief investment officer at Border to Coast Pensions Partnership; Chris Rule and Richard Tomlinson, CEO and CIO of Local Pensions Partnership Investments (LPPI), respectively; Jeffrey Hodgson, managing director, global stakeholder affairs, and Derek Walker, head of portfolio design and construction, at CPP Investments, and Ali Parker, head of investment research and strategy at TCorp in Australia.
‘Structures that money can trust’
The report – Unlocking domestic investment opportunities: Aligning public goals with pension fund realities – describes how governments will not mobilise domestic institutional capital via “patriotic appeals and mandates” but by “creating structures that money can trust”. It defines the ‘investible window’ as “the specific set of legal, financial and governance conditions that must simultaneously exist for institutional capital to flow into domestic projects while meeting fiduciary duty”.
“While the exact contours of the investible window may vary across institutions […], there is broad consistency in how institutional investors assess investment readiness,” the paper continued.
“Understanding and designing around this investible window is essential for governments and development partners seeking to attract private capital to domestic priorities.”
Last week, the Mercer CFA Institute Global Pension Index report highlighted how calls for pension funds to channel capital into national priorities have intensified, with the issue particularly central in the UK, where debates on investment mandates and economic growth are reshaping pension policy.
This morning, the UK government unveiled ‘Sterling 20’, a new partnership between 20 of the UK’s largest pension funds and insurers that will work with the government and City of London Corporation “to channel the nation’s savings into key infrastructure and fast-growing businesses in key modern industrial strategy sectors like AI and fintech”.
In a recent opinion piece for IPE Magnus Billing, the former CEO of Swedish pension fund Alecta, said policymakers’ productive finance push made sense, but that “[w]hen policymakers push pension funds towards higher-cost alternatives, they’re asking retirees to gamble their financial security on uncertain outcomes”.
Founded in 2004 by Keith Ambachtsheer at the Rotman School of Management, University of Toronto, ICPM is now a network of 54 pension funds, having last week welcomed GIC, Singapore’s sovereign wealth fund, as a new member.
You can download ICPM's report, Unlocking Domestic Investment Opportunities here.
Below, the executive summary and the working group:
Among Canadians in the working group you have Sebastien Betermier (ICPM and McGill University, lead author), Eric de Roos of OTPP, Alison Loat of OPTrust, James Kwon of UPP, Bernard Morency who was formerly at La Caisse, Denes Nemeth of AIMCo, Harpinder Sandhu of BC Municipal Pension Board of Trustees and Derek Walker of CPP Investments.
Canadian representation is strong and for good reason. Prime Minister Mark Carney and his government are working on getting major projects off the ground and they want Canada's large pension funds to invest in these projects.
At the heart of this report lies "The Investible Window" which provides the winning conditions for pension funds to invest more domestically:
Basically, in a nutshell, pension funds want to invest in highly scalable projects that provide competitive risk-adjusted returns, they want good governance rights and they prefer brownfield over greenfield assets, meaning an asset that is already operational and has know cash flows.
The report also explicitly states: "Benchmarking against global peers is the norm. The fact that a project is domestic is not sufficient justification for sub-commercial returns."
What does this mean in practice? It means Canada's large pension funds aren't averse to investing in large domestic projects where they have no currency risk as long as these projects are scalable and offer competitive returns relative to what they can get elsewhere.
The report offers a lot more details and provides more context but I'm boiling it down to what is critically important.
Anyway, take the time to read the entire report here, well worth it and I certainly hope it helps bridging the disconnect between policy and practical pension investments.
If it were up to me, I'd be a bulldozer privatizing every major infrastructure asset the federal government owns and building pipelines east to west and west to east and taking anyone who opposes me to court.
Privatize airports, ports, toll roads, and a lot more and create major energy projects and invite domestic and foreign pools of capital to invest in these projects.
But first get the winning conditions right or else forget it, you're never going to go anywhere and it will be another wasted opportunity.
If I sound old and cynical, good, that's what I'm aiming for, tired of slogans and patriotic puff, actions mean a lot more than words to me.
Below, Prime Minister Carney holds a media availability during his recent visit to the United Kingdom where he met with several heads of government and business leaders and attended the Global Progress Action Summit.
Also, speaking with reporters from Canada House in London, Energy and Natural Resources Minister Tim Hodgson recaps his three-day trip to the United Kingdom. He faces questions about the Trump administration’s recent investments in two Canadian mining companies, Chinese demand for Canadian oil, and Alberta’s push for a pipeline to British Columbia’s north coast.
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