CPPIB Hitting Another Level?

Valerie Jones of Rigzone reports, Williams, CPPIB to Form $3.8B Shale Gas JV:
Williams and Canada Pension Plan Investment Board (CPPIB) have entered into an agreement to create a $3.8 billion joint venture which will expand CPPIB’s exposure in the North American natural gas market.

CPPIB will invest $1.34 billion into the joint venture, which will give it 35 percent ownership. The joint venture will include Williams’ owned Ohio Valley Midstream system and its newly fully-owned Utica East Ohio (UEO) Midstream system.

“This joint venture will provide CPPIB additional exposure to the attractive North American natural gas market, aligning with our growing focus on energy transition,” Avik Dey, managing director, Head of Energy and Resources for CPPIB,” said in a company statement. “The joint venture complements our recent investment in Encino Acquisition Partners, an anchor customer on UEO and other Williams gathering assets. Through these unique operations in highly attractive basins, we will further our strategy to establish U.S. midstream exposure alongside highly regarded and experienced operating partners such as Williams.”

Williams’ CEO Alan Armstrong believes the joint venture will advance an “already strong position in the Northeast.”

CPPIB’s investment in the joint venture is expected to occur in the second or third quarter of 2019.
JWN also reports, Williams and Canada Pension Plan Investment Board forming US$3.8B Marcellus/Utica joint venture:
The Canada Pension Plan Investment Board has formed a US$3.8-billion joint venture with Tulsa-based Williams Co. to optimize its midstream operations in the western Marcellus and Utica Basins.

CPPIB will invest approximately $1.34 billion to acquire a 35 percent stake in Williams' Ohio Valley and Utica East Ohio midstream systems.

Concurrent with signing the agreement , Williams purchased the remaining 38 percent stake in Utica East Ohio from Momentum Midstream.

Williams will retain 65 percent ownership of both systems and will operate the combined business on behalf of the joint venture with CPPIB.

The deal is expected to close in the second or third quarter of 2019.
On Monday, CPPIB put out a press release, Williams and Canada Pension Plan Investment Board to form a US$3.8 Billion Strategic Joint Venture Partnership in the Marcellus/Utica Basins:
  • Strategic partnership between Williams and CPPIB to support ongoing growth and Northeast region optimization
  • Williams consolidates 100% interest in Utica East Ohio Midstream (“UEO”) and assumes operatorship
  • Williams expects to receive approximately $1.34 billion in exchange for a 35% interest in a combined UEO-Ohio Valley Midstream (“OVM”) joint venture, providing Williams with a net of approximately $600 million, after transaction fees and paying for the UEO interest, allowing for debt reduction and funding of Williams’ attractive growth capital in the region
  • Enables synergies from common UEO-OVM operatorship
Tulsa, Okla./Toronto, Canada - March 18, 2019 - Williams (NYSE: WMB) today announced a series of transactions that will establish a new platform for the optimization of its midstream operations in the western Marcellus and Utica basins through a long-term partnership with Canada Pension Plan Investment Board (CPPIB).

Williams and CPPIB have entered into a definitive agreement to establish a US$3.8 billion joint venture that will include Williams’ 100 percent owned Ohio Valley Midstream system (“OVM”) and 100 percent of Utica East Ohio Midstream system (“UEO”). CPPIB will invest approximately $1.34 billion (subject to closing adjustments) for a 35 percent ownership stake in the joint venture. Williams will retain 65 percent ownership, will operate the combined business, and will consolidate the financial results of the joint venture in Williams’ financial statements.

Concurrent with signing the agreement with CPPIB to purchase a 35 percent interest in the joint venture, Williams purchased the remaining 38 percent stake in UEO from Momentum Midstream and will take over operatorship. The UEO acquisition was signed and closed today. UEO is involved primarily in the processing and fractionation of natural gas and natural gas liquids in the Utica Shale play in eastern Ohio.

Williams expects synergies through common ownership by combining UEO and OVM to create a more efficient platform for capital spending in the region, resulting in reduced operating and maintenance expenses and creating enhanced capabilities and benefits for producers in the area.

“Acquiring the remaining interest in UEO and forming a partnership with CPPIB continues to advance our already strong position in the Northeast,” said Alan Armstrong, president and chief executive officer of Williams. “These transactions create a platform for continued optimization and growth, provide deleveraging, reduce capital spending on processing and fractionation capacity for OVM, and unlock further synergies through combined operatorship of the systems.”

“This joint venture will provide CPPIB additional exposure to the attractive North American natural gas market, aligning with our growing focus on energy transition,” said Avik Dey, Managing Director, Head of Energy & Resources, CPPIB. “The joint venture complements our recent investment in Encino Acquisition Partners, an anchor customer on UEO and other Williams gathering assets. Through these unique operations in highly attractive basins, we will further our strategy to establish U.S. midstream exposure alongside highly regarded and experienced operating partners such as Williams. We look forward to expanding this new joint venture over time.”

“We’ve seen first-hand the focus of the UEO employees on delivering safe, environmentally compliant and reliable results, and we are excited to welcome these employees to Williams,” said Micheal Dunn, chief operating officer of Williams. “Williams looks forward to helping Encino and CPPIB maximize their important investment in the basin through safe, reliable and cost-efficient services.”

The cash proceeds to Williams from the purchase by CPPIB of its 35 percent interest in the joint venture will be used to offset the purchase price of the UEO acquisition, with the balance of proceeds used to fund Williams’ extensive portfolio of attractive growth capital and for debt reduction.

Closing of CPPIB’s investment in the joint venture, which is expected to occur in the second or third quarter of 2019, is subject only to customary closing conditions, including regulatory approvals.

Williams plans to provide updated 2019 financial guidance with its first-quarter 2019 earnings release.

The joint venture excludes Williams’ ownership interests in Flint Gathering, Cardinal Gathering, Marcellus South Gathering, Laurel Mountain Midstream and Blue Racer Midstream.

For the combined transactions, Morgan Stanley and CIBC Capital Markets acted as financial advisors to Williams. Gibson Dunn served as legal counsel to Williams.

About Williams

Williams (NYSE: WMB) is a premier provider of large-scale infrastructure connecting U.S. natural gas and natural gas products to growing demand for cleaner fuel and feedstocks. Headquartered in Tulsa, Oklahoma, Williams is an industry-leading, investment grade C-Corp with operations across the natural gas value chain including gathering, processing, interstate transportation and storage of natural gas and natural gas liquids. With major positions in top U.S. supply basins, Williams owns and operates more than 30,000 miles of pipelines system wide – including Transco, the nation’s largest volume and fastest growing pipeline – providing natural gas for clean-power generation, heating and industrial use. Williams’ operations handle approximately 30 percent of U.S. natural gas. www.williams.com.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits in the best interests of 20 million contributors and beneficiaries. In order to build a diversified portfolio, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At December 31, 2018, the CPP Fund totalled C$368.5 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedInFacebook or Twitter.
This is a huge deal even by CPPIB's standards, one that will provide it with more exposure to the North American natural gas market.

CPPIB will invest approximately $1.34 billion to acquire a 35 percent stake in Williams' Ohio Valley and Utica East Ohio midstream systems. Williams will retain 65 percent ownership, will operate the combined business, and will consolidate the financial results of the joint venture in Williams’ financial statements.

When doing a deal of this size, you want to first find the right partner, second take a minority stake in the joint venture and third have the partner own the majority stake and continue to operate the business.

Avik Dey, Managing Director, Head of Energy & Resources at CPPIB and his team structured this deal and they should be commended for this mammoth undertaking. I can't begin to imagine the amount of due diligence required to enter into this joint venture.

For its part, Williams (WMB) gets a nice infusion of cash to expand its operations and a great long-term partner with an extensive global network which comes in handy should it decide to eventually sell these assets down the road.

Judging by its stock performance, investors like this deal a lot and if the stock price breaks above $30 a share, it could be headed for a new high (click on image):

Alright, I'm being optimistic and it will help if natural gas prices pick up from here like they did in Q4 2018 (click on image):

Anyway, this is a long-term deal, one that will benefit CPPIB and Williams.

In another major deal, Reuters reports, CPPIB, Ontario Teachers’ join $3.3 bln offer for Inmarsat:
Inmarsat Plc said on Tuesday it has received a cash takeover offer from a private equity-led consortium, a deal that would value the British satellite company at about US$3.3 billion and take it private.

The consortium, which includes U.K.-based Apax Partners, U.S.-based Warburg Pincus and Canada Pension Plan Investment Board (CPPIB), offered US$7.21 per share on January 31 and the proposal remains under discussion, Inmarsat said in a statement.

The US$7.21 (543 pence) per share offer is at a premium of about 24 percent to Inmarsat’s Tuesday close of 437.8 pence on the London Stock Exchange. The offer price represented a premium of about 47 percent when the proposal was made on January. 31.

The company said it is not certain the discussions will lead to a formal offer.

Ontario Teachers’ Pension Plan Board would also be supporting the proposal as part of the consortium, Inmarsat said.

The group is required to make a formal offer by April 16, the FTSE 250 company said. The offer values Inmarsat at US$3.3 billion, according to Refinitiv Eikon data.

An external representative for Warburg Pincus declined to comment. Apax and CPPIB did not respond to requests for comment.

Last year, U.S. satellite group EchoStar Corp walked away from discussions to acquire Inmarsat after it rejected a US$3.25 billion cash and stock offer.

A takeover of the company could be closely scrutinized by the British government because of the satellite company’s position as a strategic asset.

Founded in 1979, Inmarsat was set up by the International Maritime Organization as a way for ships to stay in communication with shore and make emergency calls.

The company sees a growing opportunity to supply in-flight broadband services to commercial aircraft, having partnered with Japan’s Panasonic Avionics in September last year.
If it passes regulatory approval, this will be one of the biggest PIPE deals since CPPIB and GIG took Ultimate Software private in a deal led by Hellman & Friedman.

What else? Greg Zochodne of the National Post reports, How CPPIB is tapping ‘alternative data’ to refine its investment processes:
There was a time when the Canada Pension Plan Investment Board didn’t even make “alternative” investments. Now, Canada’s biggest pension fund says it is sifting through “alternative” forms of data to try to improve its investment decisions.

CPPIB has assembled what it calls a “data-driven edge” team, a small group of investors and data scientists that are experimenting with different kinds of information in making longer-term investment decisions, says Deborah Orida, senior managing director and global head of active equities at CPPIB.

“As we look to enhance that decision-making, one of the things that we’ve been focused on for the last couple of years is being able to use not only the traditional financial data that we get from the traditional sources like Bloomberg in making our investment decisions, but also the increasing volume of alternative data that is available,” Orida told the Financial Post in a phone interview from Hong Kong.

One example of how it is already putting alternative data to use that Orida provided was the fund’s recent analysis of a pair of real-estate companies, one public and one private, for which CPPIB used a public registry of realtors in the U.S. to study their movements between firms. The data would be one piece of a bigger puzzle that the fund would be trying to solve in order to make its investment decisions.

“But by looking at this additional source of data, and being able to analyze that trend, we could gain insights about what was attracting agents to different companies,” Orida said.

It’s unlikely CPPIB is the only Canadian pension fund tapping into emerging forms of data either.

The Ontario Teachers’ Pension Plan recently posted a job opening for a director of analytics platforms, the duties for which include maintaining “industry knowledge on data science, machine learning, data engineering, alternative data, data visualization and other relevant Advanced Analytics topics.”

Teachers’ posting said the director would be leading a team of five to 15 employees.

CPPIB, which invests the funds of the Canada Pension Plan, is also diving deeper into new innovation-related ideas and technologies.

The fund recently advertised that it was looking to hire a director of innovation to help test out “emerging concepts and ideas” and expand CPPIB’s advanced analytics capabilities.

Along the same lines, CPPIB said recently that it was seeking a head of data and advanced analytics, billed as “a transformative role.”

CPPIB says the two jobs are new ones, as the fund tries to ensure that its talent and technology keep pace with its growth.

The price for all this remains to be seen; CPPIB will reveal its costs in an upcoming annual report.

But while CPPIB already has certain advantages over other investors — such as the steady flow of contributions and a much longer-term outlook — it’s always looking to make decisions on the basis of the best-available information, Orida said.

Reams of data can also be used to feed various artificial intelligence technologies, and Orida said that CPPIB does employ machine-learning in its research. The example she gave for this was their thematic investing group researching automobility, such as trends around consumers moving from buying cars to buying rides off an app instead, or the evolution towards electric and autonomous vehicles.

Orida said the existing research had taken a more regional approach, but CPPIB, a global investor, had wondered if it made more sense to analyze the adoption trends based on certain characteristics, such as density or wealth. The fund used a machine-learning algorithm to group cities around the various attributes, which is insight it could also apply across its portfolio.

“So for example,” Orida said, “when you think about that evolution of moving from buying a car as a capital investment to consuming rides as a service, that’s going to impact how we think about long-term projections for toll roads, for airports that make a lot of their money from parking revenue, in our infrastructure team.”

Again, however, alternative data is not the be-all-end-all for CPPIB, as Orida noted when it came to their research of real-estate companies. The fund was not using the analysis alone to make an investment decision; rather, it was trying to respond to a question humans were asking and supplementing its other work.

“Ultimately, our investment decisions are still captured in making a financial forecast about a company and then discounting the cash flows back to figure out what price we would pay for it,” Orida said. “But when you’re forecasting those cash flows, the more information you could have about the industry trends and how they might impact the future of that company, my own view is that the better investment decision that you’ll make.”
Indeed, I agree with Deborah Orida, when making significant investment decisions, it's best to use all the available data including alternative data sources.

A former colleague of mine, Derek Hulley, who is now the Director, Data Science at Sun Life, went back to school in his forties to complete a Masters of Science in Predictive Analytics (Data Analytics) from Northwestern University while he was working (he already had a CFA and Masters of Science in Finance/ Economics).

Derek is a big-time data geek and one of the smartest and nicest modelers and data scientists I know. He has incredible experience in finance and shared this with me:
"All organizations have silos and it's up to data scientists like me to work to connect the dots. The problem is if you don't get executive sponsorship, you get a lot of pushback from IT and others who perceive you as a threat, not as an asset. It's incredibly frustrating and this is why many talented data scientists leave an organization because they don't have the upper level support they need to carry out their functions."
Well said from a guy who has seen a lot in his career. Here he is proudly displaying his certificate from Sun Life after winning some predict modeling competition in 2017:

When it comes to making money in markets, everyone wants "edge", hedge funds pay big bucks for "edge" and they will go at lengths to buy the best and most expensive alternative and traditional data for this edge so why shouldn't CPPIB, OTPP and others do the exact same thing?

I'm a big believer in data but my intellectual mentor at McGill University was a political philosopher, Charles Taylor, and my philosophy is simple: you can have access to all the data in the world but if you can't connect the dots across geographies, sectors, asset classes, etc., your data is pretty much useless and your investment decisions will suffer the consequences. That's why I'm more of a macro guy.

An example? I don't know, how about this, how will tight monetary and fiscal policy in China and a crackdown on capital flight impact the residential real estate markets in developed nations? This is just an example, not what is going on right now, but you need people at these large pension shops who can sit down with the guys and gals in Public and Private Equities, Fixed Income, Infrastructure, Real Estate and other teams to connect the dots.

And trust me, having worked at these large pensions, there is a lot of work that needs to be done to share information across business lines (some are much better at it than others but nobody has perfected it).

Another example? Well, the 2008 financial crisis. A lot of people couldn't believe it but some of us were very worried about the record issuance of CDO-squared and cubed and the rise and fall of esoteric credit structures and all that counterparty risk. Nobody could have predicted the scale of that crisis but some of us were definitely warning about the system reaching an important inflection point long before 2008 came around.

I'm bringing this up because data sources are all about managing risks and here I'm referring to downside risks. There are a lot of moving parts at these huge pension funds and it typically falls on the Risk groups to manage the risks of these moving parts, hopefully warning senior managers long before something blows up and contagion spreads across all asset classes.

Anyway, CPPIB, OTPP and others are right to focus on data. Today I read another interesting article on how OPTrust is staying ahead of the curve on artificial intelligence:
At a time when making money in the markets is increasingly difficult, technology can provide an edge, says James Davis, chief investment officer at the OPSEU Pension Trust.

“You need to have an edge, and the edge historically has been relationships and information asymmetry,” Davis says. “Now you’re going to need an edge in the technology space to be able to identify the kinds of themes or the kinds of relationships that you, before this technology existed, would never have been able to identify.”

The OPTrust’s focus on innovation allowed it to beat stiff international competition to take home an award for innovation in institutional investments at the 2019 volatility and risk premia awards.
I will let you read the rest of the article here and I'm lookng forward to seeing James Davis in Toronto next week where he will take part in a panel discussion with Marlene Puffer, President and CEO of CN Investment Division, Jean Michel, CIO of IMCO and Francois Bourdon, CIO of Fiera Capital. They will be discussing the top challenges and opportunities facing pension investors in 2019 and beyond (see details here).

Lastly, Vinicy Chan of Bloomberg reports, Canada's biggest pension fund considers opening its first office in China:
Canada Pension Plan Investment Board, which manages around $368.5 billion (US$277 billion), is considering opening its first office in China as it seeks greater exposure to the world’s second-largest economy.

Canada’s largest pension fund investor could open an office in Beijing as soon as next year, Hong Kong-based head of Asia Pacific Suyi Kim said in an interview this month. Staff there would then work closely with CPPIB’s 130 employees in Hong Kong, which have helped to invest $42 billion in Greater China so far, she said.

“As we’re also growing our portfolio in China, which is around 10 per cent of our total fund, it makes a lot of sense for us to consider expanding our footprint there,” said Kim, adding that one of the firm’s key investment themes is China’s rising middle class and its burgeoning consumer consumption story.

CPPIB has already invested US$4 billion in a China logistics venture with Australia’s Goodman Group as e-commerce rises, creating the need for more large-scale storage facilities. It also owns shares in Alibaba Group Holding Ltd., Meituan Dianping, Midea Group Co. and Tencent Holdings Ltd., plus it has invested in funds run by Citic Capital, FountainVest and Hillhouse Capital.

CPPIB can invest in those private-equity firms’ buyout funds, giving it the opportunity to look at deals alongside them, or make direct investments in its own right, Kim said. The pension fund expects its total net assets will grow to $800 billion by 2030.

Kim, 46, who built CPPIB’s Hong Kong office from scratch, is “mindful” of the growing competition from buyout firms and deep-pocketed tech companies in pursuing deals. “Having a lot of capital isn’t our competitive advantage here, our competitive advantage is having high quality talent and strong partnerships,” she said.

The fund’s China push comes as CPPIB aims to improve its track record of gender diversity globally. It made a commitment to hire equally by gender by 2020 and 47 per cent of new hires last year were women, Kim said.

The Toronto-based company’s senior management team is currently 35 per cent female, while there are seven women on its 11-person board. That compares with a 16.4 per cent female board representation for companies listed on the Toronto Stock Exchange.

Prior to joining CPPIB in 2007, Kim worked at Ontario Teachers’ Pension Plan and Carlyle Group LP, where she never had a female boss. “When I started at Carlyle Asia buyout fund in 2002 at the Seoul office, I was the only female professional,” Kim said. “There was no other female working in private equity in the country at the time.”

While that’s changed in the years since, Kim says gender bias is still quite common in the region.

“When I go to a business presentation with my team, the counter party very often would look at another male, thinking he must be my boss,” the Stanford Business School graduate said. “As I start to introduce myself and talk about CPPIB’s expertise as well as what my team has done, their faces change.”
Hah! I can just picture the faces of these Asian counterparties which are mostly men when they realize she's the boss and is doing a great job expanding CPPIB's imprint in China and the rest of Asia.

Below, Mark Machin, president and CEO of the Canada Pension Plan Investment Board, joins BNN Bloomberg to discuss his current market strategy and his outlook for the global economy. He also states the Fund is looking to grow China exposure despite trade uncertainty with US.

I've said this before, Mark is a great leader and he and the rest of the team at CPPIB are doing an outstanding job bringing Canada's pension fund to another level altogether.