CPP Investments' CEO Warns Against Meddling in UK Pensions
The head of one of the world’s biggest pension funds has said UK retirement plans should not be told where to invest their money, as the government sets out plans to funnel more cash into unlisted assets and early-stage companies.
John Graham, president and chief executive of the Canada Pension Plan Investment Board, which has C$576bn (£337bn) in assets, told the Financial Times he was opposed to “any constraint on portfolio construction” or “any influence to invest in a specific asset class or a specific part of the market”.
His comments come as the UK government tries to increase returns for long-term pension savers and unlock an additional £75bn from retirement plans for investment in high-growth businesses.
In last month’s Autumn Statement it announced it will revise guidance to the £360bn Local Government Pension Scheme (LGPS), setting a new goal to double its allocation to private equity to 10 per cent.
The government also supported an agreement announced in July — the so-called “Mansion House” compact — between nine of the UK’s largest defined contribution pension providers representing more than £400bn in assets. This committed them to allocating 5 per cent of the assets in their default funds to unlisted equities by 2030.
However, some schemes said the higher costs of investing in unlisted companies could push up their own fees and deter investors. Nest, the UK government-backed workplace pension fund, said it preferred proven business models to early-stage venture capital.
Huge pension funds in Canada and Australia have been held out as examples that UK schemes could follow to improve returns.
Graham said the key to the Canadian model has been its “governance, scale and a return-focused mandate that gives us the freedom to invest wherever we see the best chance of returns.
“There is no asset allocation or security selection being done from outside of the organisation,” he added.
CPPIB — which is independent of the Canada Pension Plan, whose assets it invests — has a large in-house investment team and operates at arm’s length from federal and provincial governments.
Since being set up in 1999 with just C$12mn (£7mn) in assets, it has grown rapidly. While it does not publish its returns since launch, over the past decade it has delivered annualised returns of 9.6 per cent. Graham said its size had been “a tremendous advantage”, adding: “Scale provides access to the world’s best managers, opportunities and talent.”
CPPIB is one of the world’s largest investors in private equity, which has been an important driver of returns. It invests with external managers and also invests directly in private companies in North America and Europe.
Among CPPIB’s holdings are large investments in the funds of US firms Blackstone and Apollo among others. It is also invested in assets such as German media company Axel Springer and Merlin Entertainment, the owner of sites including Legoland and Madame Tussauds.
“People invest in private markets because of returns, they don’t need to be mandated if they have the right governance,” said Graham.
He added that the UK government needed to promote a stable environment for investors in order to encourage foreign flows into the country.
This week UK Prime Minister Rishi Sunak hosted more than 200 executives at the Global Investment Summit in London, including Blackstone boss Stephen Schwarzman, Goldman Sachs chief executive David Solomon and JPMorgan’s Jamie Dimon. Sunak highlighted nearly £30bn of long-term investment pledges by international companies.
Graham said: “If you want more private investment, you need stability. We like to see governments around the world creating a stable regulatory and tax regime that facilitates long-term investment.”
Interesting comments from CPP Investments' CEO John Graham highlighting the governance model which has led to success at the organization.
It's basically John telling the UK to stay out of how pensions manage their assets and do not mandate anything, including private equity.
I've said this before and I'll say it again, investing in private equity funds isn't the best way to capture great returns over the long run. Why? Because the high fees eat away at the returns.
But investing in private equity funds is necessary if you want to gain access to co-investments with top funds where you pay no fees on larger transactions.
Co-investments are a form of direct investments and they require competent staff that can quickly and diligently analyze co-investment opportunities.
Canada's Maple 8 -- the eight largest pension funds -- have all adopted the same governance model to keep governments out of the day-to-day management of their pension assets, assets they mostly manage internally.
In order to do this properly they've also adopted very competitive compensation packages especially for their senior staff to make sure they can manage these assets in the best interest of contributors and beneficiaries.
More recently, they have been selling stakes in PE funds in the secondary market to shore up liquidity and diversify vintage year risk.
As higher for longer rates persist, private equity and real estate are experiencing challenging times.
This however isn't deterring some large global funds from exploring an allocation to the asset class.
Victoria Klesty and Terje Solsvik of Reuters recently reported that Norway wealth fund could invest $70 bln in private equity:
Norway's $1.5 trillion sovereign wealth fund, the world's largest, should include private equity investments in its portfolio, allocating up to $70 billion, the country's central bank recommended on Tuesday.
The Norwegian finance ministry in March asked the executive board of Norges Bank, which manages the fund, to assess whether unlisted shares should be added as an asset class.
"Interest rates have gone up, which has made it more difficult for these companies to access capital... and it has become more difficult to sell the companies they own to the stock market," the fund's CEO Nicolai Tangen told Reuters.
"The IPO activity level is fairly low, and that makes me think the timing for this could be rather nice," he added.
Some 3-5% of the fund's assets could gradually be moved to private equity funds, equivalent to between $40 billion-$70 billion, the central bank said in a statement.
A final decision will be made next year by parliament. It has previously rejected requests by the fund to move assets into private equity, arguing it could be too costly and would hamper the ability to judge its performance on an ongoing basis.
The fund, which invests Norway's surplus oil and gas revenue abroad, is the world's biggest single stock market investor, owning some 1.5% of all globally listed shares, and has stakes in more than 9,200 companies.
"Norges Bank considers it a natural evolution of the investment strategy for unlisted equity investments to be permitted on a general basis," the central bank wrote in a letter to the finance ministry.
"A broader investment universe will provide more investment opportunities and help the fund benefit from a larger share of global value creation than today," it added.
The fund would invest via private equity managers who mainly focus on developed markets in Europe and North America, Norges Bank Governor Ida Wolden Bache said.
At the end of September, 70.6% of the fund's assets were invested in listed stocks, 27.1% in fixed income, 2.2% in unlisted real estate and 0.1% in unlisted renewable energy infrastructure.
By way of comparison, the ten largest investors in private equity had an average of $80 billion invested at the end of 2022, Norges Bank said.
The fund in 2018 sought permission to acquire unlisted shares via private equity funds or by investing alongside such funds, but the then-government rejected the proposal, arguing it would impede transparency and drive up asset management costs.
But in 2022, a government-appointed commission again raised the topic of private equity, arguing that this could allow the fund to invest in promising companies at an earlier stage and thus potentially earn higher returns.
The size of the unlisted stock market has grown relative to listed shares, making up 9% in 2022 against 4% in 2017, and there has also been a positive development among unlisted companies' openness and accountability, Bache said.
"The development since 2018... has strengthened the argument in favour," Bache added.
My only advice to Norway is get the approach right, if you're going to allocate 3-4% in private equity and only invest in funds and not co-invest on larger transactions, you're wasting your time.
CPP Investments allocates 32% to private equity and it runs that portfolio like a machine, investing in top funds, co-investing, using secondaries to shore up liquidity when needed, etc.
Alright, let me end on this note.
Notice John Graham hasn't made any public comments yet on investing more in Canada but you can tell from these statements, he's opposed to government interference.
Still, John is a reasonable man and he will always take part in discussions on whether pension funds need to invest more in Canada and give his honest feedback.
Below, former Air Canada CEO Calin Rovinescu is urging Canadian pension funds to invest more in Canadian businesses.
“If Canadian institutions don’t support Canadian companies, it becomes this sort of self-fulfilling prophecy of the hollowing out of corporate Canada,” Rovinescu told BNN Bloomberg in a television interview.
“The elimination of head offices here, the elimination of growth, the elimination of investment.”
Rovinescu, who now serves on the boards of Scotiabank and BCE, made the comments amid growing conversation around how much money the nation’s biggest investors are putting to work here at home.
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