Canadian Pensions on the Global Prowl?

Jacqueline Nelson of the Globe and Mail reports, Going global: Pension funds on the prowl:
The calls rang in from all corners of the globe. Corporate giants and investment firms with assets to unload wondered whether Canada’s largest pension plans might want to take a look. And they did much more than that.

The country’s largest pension plans poured more than $60-billion (U.S.) into assets such as student housing, toll roads and public companies last year. They teamed up with other international heavyweight investors to increase exposure to infrastructure, real estate and private equity at a time when competition for real assets is stiff. And investment banks are paying close attention.

“Part of it is it’s a systematic strategic focus of the organization, and part of it is the market conditions right now are very favourable,” Mark Wiseman, chief executive officer of Canada Pension Plan Investment Board, said of the increasingly important role private-market assets play in the fund’s portfolio.

As commodity woes and concerns about global growth churn markets and put strain on some large competitors, Mr. Wiseman said the fund is even better positioned to make deals in the coming year.

“As we move into these volatile times … if we were farmers, this is planting season for CPPIB,” he said.

A decade ago, pension funds were on the fringes as a flood of mining and private-equity deals took centre stage, leading to a then-record $230-billion in mergers and acquisitions in 2006. That year, pension funds were responsible for just three of the top 20 deals, worth a combined $7.73-billion.

But many plans have swelled since then – the largest 10 plans now have nearly $1.2-trillion (Canadian) in assets under management. And in 2015, pension funds were a part of seven of the top 20 deals valued at $41.2-billion (U.S.) in total.

Years of swift growth has meant that pension funds are being treated differently on the world’s stage, and at home.

“When I think about when I started my own career, I think about the pillars of what we described as ‘industry’ at the time,” Michael Latimer, chief executive officer of Ontario Municipal Employees Retirement System, said in a recent panel discussion. “They were the banks, the trusts, the investment banks, the lifecos – but frankly, the pension community really wasn’t something you were familiar with.”

Now, many of those players have consolidated, and Mr. Latimer said it’s easier to see the role that major pension plans play as part of the financial community.

“The size of the pools of capital that we are today, the things we do, how we employ people, how we invest – it’s been quite a significant change,” he said.

Canadian investment banks have made adjustments to better serve these deal makers as they have grown and shifted focus internationally.

“The pension plans have really changed the game here,” said Paul Farrell, head of Canadian investment banking at CIBC World Markets. One example is real estate, where 20 years ago, properties were in private hands and bank-financed, but now pension plans own many of the best assets in the country, he said.

Mr. Farrell is currently eyeing opportunities to work with the pension funds on their “relationship investments” – minority equity interests taken in public companies with the goal to transform the businesses. When that transformation comes in the form of a major acquisition, banks can step up with backing from the capital markets.

Many investment bankers are calling for a more active M&A environment as strong and weak companies in the natural-resource sector merge. At the same time, some large pension funds have expressed interest in looking to the oil patch for deals. “And if the cheques are large,” Mr. Farrell said, there may need to be a combination of the capital markets and cornerstone pension investors. “That’s a pretty powerful duo,” Mr. Farrell said.

Lucky Seven Largest Pension Plan Deals in 2015*:


Pension Plan: Canada Pension Plan Investment Board

Total Deal Value: $12-billion, including a $3.85-billion equity stake

What they got: General Electric Co.’s private-equity lending business, which targets smaller companies in several industries. The pension plan had been watching for business opportunities in this space for several years, and seized on the chance to avoid having to build operations from scratch.

TRANSGRID (99-year lease)

Pension Plan: Caisse de dépôt et placement du Québec

Total Deal Value: $7.4-billion

What they got: Long-term control of about 13,000 km of the electricity transmission network of the state of New South Wales in Australia, along with investment partners. These high-voltage power lines reach economic and political capitals in the country and help diversify the pension plan’s assets by geography.


Pension Plan: Ontario Municipal Employees Retirement System

Total Deal Value: $7-billion

What they got: A 50-per-cent stake in the second-largest electricity distribution business in Sweden, alongside some local pension plans.The solid regulatory environment and OMERS’ goal to increase its exposure to infrastructure were driving forces behind the deal, along with the relative scarcity of big, desirable electricity assets. The business has since been renamed Ellevio.


Pension Plans: Canada Pension Plan Investment Board and the Caisse de dépôt et placement du Québec

Deal Value: $4.8-billion

What they got: A slice of a major U.K. telecom business. Hong Kong billionaire Li Ka-shing’s firm Hutchison Whampoa Ltd. bought U.K. telco O2 for £9.25-billion to merge it with his existing telecom operator Three UK, but he needed some investment partners to get the deal done. Two Canadian funds stepped in, along with some other investors, to acquire one-third of the merged company. The deal was a chance to cozy up to a new investment partner with a global network.


Pension Plan: Canada Pension Plan Investment Board

Deal Value: $4.7-billion

What they got: To privatize a growing big data company alongside a partner. The deal saved Informatica from a fight with an activist investor. The California-based software developer helps other companies make their data more useful.


Pension Plans: Canada Pension Plan Investment Board, Ontario Municipal Employees Retirement System and Ontario Teachers’ Pension Plan

Deal Value: $2.8-billion

What they got: The Chicago Skyway Toll Bridge System, split three ways. The pension plans jointly acquired a 88-year lease of the well-established system that connects downtown Chicago and its southeastern suburbs.


Pension Plan: Ontario Teachers’ Pension Plan

Deal Value: $2.6-billion

What they got: A portfolio of land and oil and gas royalties in Western Canada, sold by Cenovus Energy Inc. for some badly needed cash. Teachers said its “opportunistic” deal had secured a steady stream of the company’s future revenues.

*All deal values in U.S. dollars.
There is no doubt about it, Canadian pension funds are increasingly looking around the world for big deals to capitalize on their competitive advantages: liquidity, scale and a very long investment horizon.

And some of Canada's large pension behemoths -- namely CPPIB and PSP Investments -- have more of an advantage than others because they're cash flow positive, meaning they're still collecting more in contributions than they're paying out in benefits (CPPIB calls this certainty of assets).

As Mark Wiseman states in the article above, these are the markets that CPPIB loves. Why? Because they're volatile and there are many dislocations, providing fertile ground for a large, well capitalized Canadian pension fund with a long investment horizon to move in and make long-term strategic investments.

In fact, all of Canada's Top Ten have gone global and they've opened up offices all around the world. Following CPPIB, the Caisse recently announced it will open its first Indian office in New Delhi to scout for investments in South Asia:
The Caisse also announced the appointment of Anita Marangoly George as managing director for South Asia. Based in New Delhi, George will head up the new CDPQ India unit to seek investment opportunities across all asset classes.

Canadian pension funds are expanding into new territories and investing directly in assets such as infrastructure and real estate as they seek alternatives to volatile global equity markets and low-yielding government bonds.

India is viewed as a prime investment opportunity, given its rapid economic growth and burgeoning middle class. The Canadian Pension Plan Investment Board, Canada's biggest public pension fund, set up an office in Mumbai last year to scout for opportunities.

Caisse Chief Executive Officer Michael Sabia in a statement cited India's "scope and quality of investment opportunities, the potential for strategic partnerships with leading Indian entrepreneurs, and the current government's intention to pursue essential economic reforms."

The Caisse also announced a commitment to invest $150 million in renewable energy in India.
Ontario Teachers' Pension Plan recently invested $200 million in Indian online marketplace Snapdeal:
The latest fund-raising follows $500 million raised last August in a round led by Alibaba Group Holding, SoftBank Group Corp and Foxconn.

The e-commerce market in India is expected to grow to $220 billion in the value of goods sold by 2025, from an expected $11 billion this year, Bank of America Merrill Lynch said in a recent report.
You might be asking why are Canadian pension funds going global? Because they know the ugly truth: they need to prepare for lower returns in a world where ultra low rates are here to stay as deflation sets in and the new negative normal takes hold. As such, they need to find deals in countries (like India) where the demographics support long-term growth.

But investing in India, China, Brazil or anywhere in else in the world carries its own set of risks and these Canadian pension funds need to find the right partners to work with on these direct deals, much like Warren Buffett found Brazil's 3G Capital to work on his private equity deals. And there aren't many 3G Capitals in this world (there's only one and it's arguably one of the best cutthroat PE funds in the world).

And going global doesn't always pan out great for Canadian funds. Ontario Teachers' Pension Plan stepped on a German land mine when it bought a stake in Maple Financial Group, getting embroiled in a tax evasion/ fraud scheme that shut down its German affiliate (I've spoken to a few people who told me that this may look worse than it really is but it still looks bad).

I also recently questioned the nosebleed valuations that Teachers, AIMCo, OMERS and Kuwait Investment Authority ("the Consortium") paid to buy London's City Airport. One senior Canadian pension executive told me his fund didn't bid on this asset but he added: "I've seen infrastructure deals that initially look great based on valuations and turn out to be duds and others that look outrageously expensive and turn out to be great investments. It all depends on their strategic plan for this asset."

In its global expansion, PSP Investments recently bet big on U.S. private credit and debt at a time when the CLO business on Wall Street is showing a big slowdown and loan covenants remain categorically weak for a fourth straight year. Admittedly, this could present great opportunities for PSP but there's no doubt the private debt market in the U.S. is very challenging and it could get a lot worse if the U.S. economy buckles.

What else? Canadian pension funds have been snapping up U.S. real estate but there are now big cracks in this market and that too will present big challenges and big opportunities to Canada's Top Ten who are among the biggest and best real estate investors in the world.

Still, there's no denying Canada's large public pensions are increasingly carving out their global presence and hiring the right people to source direct deals across the world. They can do this because they have the right governance model that allows them to pay their senior pension fund managers big bucks to attract and retain talent and do deals that their U.S. counterparts can only do via private equity funds, paying huge fees in the process.

Lastly, Canada's Top Ten aren't just looking at global deals. They're also looking at domestic deals, especially in infrastructure where the federal government is courting them to invest in new projects.

The best way I can describe Canada's Top Ten is opportunistic long-term investors with very deep pockets looking to capitalize on large scalable investments at home and abroad.

Below, some highlights and interviews from the 23rd Annual CCPPP National Conference on Public-Private Partnerships held in back November, featuring Michael Sabia, president and CEO of the Caisse de dépôt et placement du Québec.

In his address, Sabia outlined an approach that would allow governments to deliver high-quality public infrastructure on budget, on time and with value for taxpayers. You can listen to his entire presentation here (CCPPP should post all presentations on its YouTube channel and the Caisse and others need to follow HOOPP and post presentations and interviews on their own YouTube channel).

Listen carefully to Sabia's comments here because I agree with him, the world desperately needs to massively invest in infrastructure to
develop long-term sustainable growth and help countries grow out of the economic morass that is threatening their future.