Canadian Pensions Cross ESG Threshold?

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Aaron Kirchfeld and Alastair Marsh of Bloomberg News report, Al Gore's Generation, Caisse de dépôt teamed up to acquire fintech FNZ:
Al Gore’s Generation Investment Management LLP and Canadian pension fund Caisse de dépôt et placement du Québec teamed up to acquire control of wealth-management services provider FNZ in one of the year’s largest fintech deals.

The acquisition of a two-thirds stake held by the private equity firms General Atlantic and HIG Capital values FNZ at around $2.2 billion U.S., according to a statement from the companies Tuesday that confirmed an earlier report by Bloomberg News.

The deal is the first investment to be made by a new partnership formed by Canada’s second-largest pension fund and the investment firm co-founded by former U.S. vice-president Gore and former Goldman Sachs Group Inc. partner David Blood. The duo plan to deploy $3 billion initially for investments with an 8-to-15-year duration, taking a longer view than the typical private equity deal.

The FNZ agreement adds to a surge in fintech transactions, which totaled more than $39 billion in the first half amid investments in payment processing, financial data and machine learning, according to a report from advisory firm Hampleton Partners.

FNZ, founded in New Zealand in 2003 by Adrian Durham, provides services to asset managers, banks and insurers including behemoths such as Aviva Plc, Barclays Plc and Vanguard Group Inc. The capital infusion will help FNZ tap a bigger share of the $30 trillion global market, according to Durham.

 “The deal will help us grow share in the wealth-management platform market to trillions versus hundreds of billions,” said Durham. “You have to be a scale player.”

Durham and the firm’s 400 employees plan to retain about a third of the company following the transaction. FNZ joined in a 2009 management buyout with HIG Capital, while General Atlantic provided an additional investment in 2012.

HIG, which initially injected less than 10 million pounds in FNZ’s equity, is now selling its stake for about 450 million pounds, according to a person familiar with the matter, who asked not to be identified because the transaction was private.

JPMorgan Chase & Co. advised the sellers.
The Caisse put out a press release, CDPQ and Generation Investment Management make long-term investment in FNZ:
La Caisse de dépôt et placement du Québec (“CDPQ”) and Generation Investment Management LLP (“Generation”) have today announced the acquisition, subject to regulatory approval, of General Atlantic and H.I.G. Capital’s investment in FNZ, in a deal valuing the company at £1.65 billion. The acquisition, which is one of the world’s largest FinTech transactions this year, represents the first investment by CDPQ-Generation, the unique, sustainable equity partnership announced today by CDPQ and Generation.

FNZ is a global FinTech firm, transforming the way financial institutions serve their wealth management customers. It partners with banks, insurers and asset managers to help consumers better achieve their financial goals.

The business has grown rapidly in recent years, as its institutional customers have used FNZ’s platform to improve transparency, choice and drive down long-term costs for consumers of wealth management products across all segments: from mass-market workplace pensions to mass-affluent and high-net-worth clients.

Today, FNZ is responsible for over £330 billion in assets under administration (AuA) held by around 5 million customers of some of the world’s largest financial institutions, including Standard Life Aberdeen, Santander, Lloyds Bank, Vanguard, Generali, Barclays, Quilter, UOB, Aviva, Zurich, UBS, BNZ, Findex and FNZC. In total, FNZ partners with over 60 financial institutions across the UK, Europe, Australia, New Zealand and South-East Asia.

FNZ was founded in New Zealand in 2003 by Adrian Durham and FNZC, New Zealand’s leading investment bank and wealth manager. To accelerate growth, the company partnered in a management buy-out with H.I.G. Capital in 2009. General Atlantic provided additional investment in 2012. Today, the company has over 1,400 employees in the UK, Czech Republic, Shanghai, Singapore, Australia and New Zealand. Around 400 employees are shareholders, who will continue to own about one third of the equity of the company following this transaction.

FNZ expanded from New Zealand to the UK in 2005, initially partnering with Standard Life Aberdeen and basing its UK operations & technology in Edinburgh. The company was a significant beneficiary of the UK’s global leadership in the consumer regulation of financial advice. The 2013 retail distribution review (RDR) improved fairness, transparency and costs for consumers of financial advice and has been followed around the world, including recently in Europe with the introduction of MiFID2.

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Adrian Durham, CEO and founder of FNZ said: “We started FNZ by asking: how can technology solve the problems faced by consumers of long-term savings products? We saw investors being charged so much that their retirement income was halved by charges alone. They were no better off than a bank deposit, despite taking risk and investing in managed funds for over 30 years. Choice was non-existent and the entire value chain was managed using paper.

Our approach has entirely digitised the value chain, reducing cost and complexity for financial institutions and consumers alike. Our clients have all moved to Platform-as-a-Service (PaaS) combining cloud-based software with transaction and custody services. This frees them to focus purely on their customer proposition, transferring all the technology, transaction & asset servicing to FNZ.

This unique PaaS approach, combined with regulatory change, has reduced total consumer costs in long-term savings by around 40% over the last decade. It has transformed the accessibility, choice and transparency of a consumer’s long-term savings.

We see a unique opportunity to create a global-scale platform for wealth management. This requires a willingness to invest for the long-term. The firm’s 400 employee shareholders are firmly committed to this outcome and CDPQ-Generation is the perfect partner, given its unique 8-15 year time horizon and focus on sustainable investments.”

Stephane Etroy, Executive Vice-President and Head of Private Equity at CDPQ, said: “We have researched the best global financial services technology businesses with a focus on companies that have long term, truly global-scale potential. We are extremely excited to partner with FNZ management team to build a business over a time period which is not typical for either private equity or public equity businesses. Through our newly announced partnership with Generation, we are creating a new model of sustainable equity investing which reflects the ethos of both companies, and is ideally suited to the objectives of long term sustainable value creation.”

David Blood, Senior Partner and Co-Founder at Generation, said: “FNZ represents an outstanding first investment for our new partnership. It is an exceptional company with a management team that has demonstrated its ability to innovate and grow in the fast-moving FinTech sector. We believe our long-term approach will suit the company and allow it to continue to invest in its technology and service proposition to the benefit of savers and pensioners, as well its employees, customers and investors”.

About FNZ

FNZ is a global FinTech firm, transforming the way financial institutions serve their wealth management customers. It partners with banks, insurers and asset managers to help consumers better achieve their financial goals.

FNZ's technology, transaction and custody services enable their clients to provide best-in-class wealth management solutions to financial advisers, end-investors and the workplace that are efficient, flexible, transparent and scalable, supporting market, demographic and regulatory trends worldwide.

Today, FNZ is responsible for over £330 billion in assets under administration (AuA) held by around 5 million customers of some of the world’s largest financial institutions, including Standard Life Aberdeen, Barclays, Lloyds Bank, Vanguard, Generali, Quilter, Santander, Aviva, Zurich, UOB, UBS, Findex and BNZ.

In total, FNZ partners with over 60 financial institutions globally and employs over 1,400 in London, Edinburgh, Bristol, Basingstoke, Sydney, Melbourne, Wellington, Hong Kong, Singapore, Shanghai and Brno.

ABOUT CDPQ

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at June 30, 2018, it held CA$308.3 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.
About Generation Investment Management

Generation is a sustainability-focused investment management firm, founded in 2004. It is an independent, private, owner-managed partnership with offices in London and San Francisco. Its approach to active investment management is focused on long-term performance and based on an investment process that fully integrates sustainability analysis into decision-making. It is dedicated to generating long-term success by investing in sustainable businesses that provide goods and services for a low-carbon, prosperous, equitable, healthy and safe society. As of June 30, 2018, Generation managed appx US$20 billion of assets on behalf of professional investors globally.

This was a huge deal that was brought to my attention last week by Geoffrey Briant, President and CEO of G2 Alternatives Advisory Corp.

Geoff shared this with me:
It's definitely different. 8-15 year hold for PE instead of the usual 10 years. So-called "sustainable equity" investments. A partnership...not a fund. GIM invests in public and private investments.

In the CDPQ 2017 Stewardship Investing Report - its first ever - CDPQ states they want to take "concrete action" on the "international stage". If that is what as intended, this Impact Investment may qualify for meeting that commendable and profitable objective.
You will recall Michael Sabia, the Caisse's CEO, came out recently to sound the alarm on climate change. His message was simple, climate change is real and it's not just a risk but also an economic opportunity and pensions need to invest in these opportunities.

Anyway, Geoff Briant invited me to the CAIP conference being held in Montreal today. You can view the agenda here.

I typically avoid these conferences like the plague (they're dreadfully boring) but I wanted to hear the panel on ESG as well as listen to Pierre Lavallée, the CEO of the Canada Infrastructure Bank.

Pierre gave an excellent overview of the CIB, its mandate to invest $35 billion over the next ten years in revenue generating infrastructure projects.

He talked about the $1.28 billion, 15-year loan to the Caisse's REM project and how they learned a lot from that deal to help them with other greenfield infrastructure projects.

He said they will invest across the capital structure and are not always looking for market rates of return but to facilitate infrastructure projects they will identify on their website (data will be public).

Importantly, the CIB is not looking to displace private investors but to co-invest alongside them and the federal and provincial governments. Obviously, priority will be given to projects that are aligned with governments' infrastructure priorities ('or else we won't get permits to build").

I wish they put that presentation up on their website or YouTube, he did a great job and admitted it's still early innings for this organization which is growing fast.

He also said CIB is open for business with large and small Canadian and global investors (the big deals aren't only going to go to Canada's large pensions but it's obvious they will be in on them).

Now, moving on to the ESG panel which started at 2:30:
2:30 PM | ESG’s STEALTHY SPREAD
How Investors will Benefit
Many institutional investors are learning that ESG is a core approach to investing — and the products which are out there are proving it. As more and more investors move into the field, discover the advantages of integrating in ESG into decision-making and hear about the approach of leading pension funds. Take away key insights on:

ESG, PRI, SDGs — demystifying the acronyms
Trends and best practices in ESG integration
The key ESG integration
ESG integration v. impact investing

Moderator:
Francois Boutin-Dufresne
Founder
Sustainable Market Strategies

Panel:
Stephanie Lachance
Vice President, Responsible Investing
PSP

Martha Tredgett
Executive Director
LGT Capital Partners

Rosalie Vendette
ESG Practice Leader
Desjardins Group
I took a picture of the panelists which you see at the top of this comment. It was a very interesting panel and they covered a lot.

Stéphanie Lachance, Vice President Responsible Investing at PSP, emphasized that ESG integration isn't just about due diligence, the focus is shifting on actively monitoring these risks once the investment is made across public and private markets (click on image):


She said PSP is focusing on some 'ESG themes' like climate change (fully support the TCFD) and diversity where they're part of the 30% club and fully support it.

On impact investing, she gave the example of renewables which used to require enormous subsidies to be profitable and now they're part of every pension's portfolio.

Interestingly, during lunch, she told me that every large Canadian pension has integrated ESG in their investment framework even if they do not all advertise it. She also told me that perceptions are changing because ESG used to (wrongly) be considered a money-losing operation but now investors see the added value and how it can enhance risk-adjusted returns.

She also put up a nice slide on ESG vs Impact Investing (click on image):


Martha Tredgett, Executive Director at LGT Capital Partners, put up a similar slide but what I found fascinating is how LGT was early to the ESG approach and they considered these risks as part of a holistic risk framework long before many investors even knew what ESG is all about.

She also put up a slide on how LGT measures the environmental impact of their portfolio (click on image):


Rosalie Vendette, Practice Leader, ESG at Desjardins Group, also had many excellent insights on ESG integration and how impact investing isn't just about measuring financial results but outcomes.

She made a good point about what good are pensions if by the time people start collecting them, they cannot breathe fresh air and drink clean water.

She also put up a nice slide on fiduciary duty featuring comments from Al Gore (click on image):


Following this panel, I stuck around to listen to Richard Burnett, Chief Sustainability Officer at the Nobel Sustainability Fund:
An Innovative Way to Integrate ESG into Global Growth Private Equity Portfolios
Sustainable investing is one of the fastest-growing segments of the asset management industry. And, used well, it can deliver attractive returns relative to risk with low correlation to both traditional and alternative investments. In this fascinating presentation, hear how the Nobel Sustainability Fund, launched in 2017 with the support of H.S.H. Prince Albert of Monaco, has developed a proprietary impact assessment tool — the Earth Dividend — giving investors a unique scorecard to develop the highest possible return on their investments — and dispelling the myth that ESG focus comes at a cost to financial performance.

Speaker:
Richard Burrett
Chief Sustainability Officer
Nobel Sustainability Fund
The Nobel Sustainability Fund is a late-stage private equity fund which gives them more control over implementing an ESG approach.

Richard works with Earth Capital Partners and I met him and Gordon Power, the CIO, the prior day with Geoffrey Briant who represents them in Canada. Richard and Gordon are very impressive, they have tremendous experience in impact investing and they really know their stuff.

I'm not going to go over Richard's entire presentation but I like their holistic approach to understanding risks using their trademark scorecard (click on images):



He also emphasized that ESG investing leads to higher returns (click on image):


This is an important point because many pensions don't start off with an ESG approach, only focus on it after they identified an attractive investment but this argues the approach is all wrong or at least needs to incorporate more ESG factors from the getgo.

Richard and Gordon gave an example of a toilet company they invested in which uses significantly less water but they saw they could add value by using recycled plastic and this way, not only do they use less water and there are less aerosol contaminants, but they are produced using a more sustainable method.

These toilets are being used in Cape Town, South Africa and are now in China where they can be scaled massively.

Alright, I thank Geoffrey Briant for inviting me as a guest to this conference, it wasn't as dreadfully boring as I feared and I got a chance to meet interesting people, including Donna Jones, Senior Manager Client Relations at BCI (give Gordon Fyfe, Jim Pittman and Mihail Garchev my regards).

One last thing, CPPIB put out a sustainability report explaining where it will invest its green bonds proceeds and pushing for more board effectiveness:


For more information on CPPIB's approach to sustainable investing or to read the 2018 Report on Sustainable Investing, please click here.

And Deborah Ng, Head of Responsible Investing at OTPP, discusses the importance of protecting human capital with Top1000 Funds:



The article is available here and I encourage you to read it.

If there is anything I need to add here, feel free to email me at LKolivakis@gmail.com.

Below, an interesting panel discussion on how to measure social impact investments featuring Case Foundation's Jean Case, Earth Capital Partners LLP's Marcelo de Andrade, Startupbootcamp's Tanja Kufner, and Bloomberg's Ed Robinson at Web Summit 2017.

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