CPP Investments Sells Stake in South Korea's Kendall Square Development Venture

SWFI reports CPP Investments gets some liquidity from Kendall Square investment:

South Korea is one of the most developed e-commerce markets in Asia with demand for quality logistics facilities. Canada Pension Plan Investment Board (CPP Investments) announced it has agreed to a restructure and sale of a 21% partial interest in the Kendall Square Development Venture (KDV I) in South Korea. Net proceeds to CPP Investments from the sale will be approximately US$ 245 million.

KDV I is a joint venture set up in 2015 among CPP Investments, APG Asset Management, and ESR Group Limited to develop modern logistics real estate assets in prime locations within major strategic logistics hubs in South Korea. CPP Investments’ initial investment in KDV I was US$ 175 million. The joint venture was subsequently upsized in 2018 and 2019.

CPP Investments will remain an investor with a 24% stake in a newly formed open-ended logistics core fund, which will house KDV I’s stabilized assets. CPP Investments is currently partnered with ESR on two other ventures focused on the Korean logistics sector.

ESR Kendall Square Open-End Core RE Fund
On February 14, 2024, ESR Group announced that its South Korean platform, ESR Kendall Square has established Korea’s first perpetual, open-ended core logistics fund. The newly-formed core fund portfolio includes seven trophy assets which are developed and managed by ESR Kendall Square. Strategically located in the Greater Seoul and Greater Busan areas, the initial seven assets, with a total Gross Floor Area of 1 million square meters, have an average occupancy of over 99%.

Earlier today, CPP Investments issued a press release stating it will sell a partial stake in Korea development venture:

Seoul/Hong Kong (February 20, 2024) – Canada Pension Plan Investment Board (CPP Investments) today announced it has agreed to a restructure and sale of a 21% partial interest in the Kendall Square Development Venture (KDV I) in South Korea. Net proceeds to CPP Investments from the sale will be approximately US$245 million.

KDV I is a joint venture set up in 2015 among CPP Investments, APG and ESR to develop modern logistics real estate assets in prime locations within major strategic logistics hubs in South Korea. CPP Investments’ initial investment in KDV I was US$175 million. The joint venture was subsequently upsized in 2018 and 2019.

CPP Investments will remain an investor with a 24% stake in a newly formed open-ended logistics core fund, which will house KDV I’s stabilized assets. CPP Investments is currently partnered with ESR on two other ventures focused on the Korean logistics sector.

Gilles Chow, Head of Real Estate North Asia, CPP Investments, said, “Korea is one of the most developed e-commerce markets in Asia with sustained demand for quality logistics facilities. Through our longstanding partnership with ESR and APG, we have been able to capture opportunities in this space. The partial sale of our stake in KDV I allows us to monetize the investment to deliver returns to the CPP Fund while remaining committed to this important sector.”

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 22 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At December 31, 2023, the Fund totalled C$590.8 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Instagram or on X @CPPInvestments.

Talk about a short press release, straight to the point!!

So why is CPP Investments selling a stake in the Kendall Square Development Venture?

Well, to realize on the investment and shore up liquidity. 

The press release states net proceeds from the sale will be approximately US$245 million.

Is CPP Investments in trouble, is that why they are selling assets?

No, that's total nonsense, it's all part of intelligent liquidity risk management. 

CPP Investments' CIO Ed Cass is very smart, he knows the cycle is turning and wants to shore up liquidity to capitalize on opportunities as they arise.

And prize assets like the Kendall Square Development Venture are easy to sell, even in this environment.

Moreover, CPP Investments will remain an investor with a 24% stake in a newly formed open-ended logistics core fund, which will house KDV I’s stabilized assets.

In other words, it's not exiting completely from this investment because it's a great long-term asset.

The best way I can describe it to ordinary investors is let's say you buy a stock at a decent price and it doubles, but you still love the company and its long-term prospects. You might sell 2/3 of your position to invest in other opportunities and lower your exposure and keep a third and ride it.

It's not exactly the same as real estate is illiquid but it's the same principle, you realize on your investment to invest elsewhere and keep a smaller position.

That's just smart portfolio management and in the Canadian pension business where over 50% of assets are illiquid, you need to manage all risks including liquidity risk very carefully.

Anyways, no use belaboring the point, it's a great logistics asset in South Korea and as Gilles Chow, Head of Real Estate North Asia, CPP Investments, said: “Korea is one of the most developed e-commerce markets in Asia with sustained demand for quality logistics facilities."

Moreover, as SWFI noted, it's strategically located in the Greater Seoul and Greater Busan areas, the initial seven assets, with a total Gross Floor Area of 1 million square meters, have an average occupancy of over 99%.

These type of logistics assets are in great demand and CPP Investments was right to unlock some liquidity here.

In other related news, CPP Investments ended its third quarter of fiscal 2024 on December 31, 2023 with net assets of $590.8 billion compared to $576.1 billion at the end of the previous quarter:

The $14.6 billion increase in net assets for the quarter consisted of $19.3 billion in net income less $4.7 billion in net Canada Pension Plan (CPP) outflows. CPP Investments routinely receives more CPP contributions than required to pay benefits during the first part of the calendar year, partially offset by benefit payments exceeding contributions in the final months of the year.

The Fund, which includes the combination of the base CPP and additional CPP accounts, achieved a 10-year annualized net return of 9.3%. For the quarter, the Fund’s net return was 3.4%. In the 10-year period up to and including the third quarter of fiscal 2024, CPP Investments has contributed $319.4 billion in cumulative net income to the Fund.

For the nine-month fiscal year-to-date period, the Fund increased by $20.7 billion consisting of $15.3 billion in net income and $5.4 billion in net CPP contributions. The Fund’s net return was 2.6% for that same period.

“Strong performance of global equity and fixed income markets during the final months of calendar 2023 contributed to the Fund’s continued growth,” said John Graham, President & CEO. “We remain focused on applying our investment capabilities to prudently manage the Fund to deliver long-term value for CPP contributors and beneficiaries.”

Gains in public equity, fixed income, credit, private equity, energy and infrastructure assets contributed positively to results, partially offset by the impact of foreign exchange losses due to a stronger Canadian dollar relative to the U.S. dollar.

Performance of the Base and Additional CPP Accounts

The base CPP account ended its third quarter of fiscal 2024 on December 31, 2023, with net assets of $557.7 billion, compared to $546.3 billion at the end of the previous quarter. The $11.4 billion increase in assets consisted of $17.8 billion in net income, less $6.4 billion in net base CPP outflows. The base CPP account achieved a 3.3% net return for the quarter, and a five-year annualized net return of 7.7%.

The additional CPP account ended its third quarter of fiscal 2024 on December 31, 2023, with net assets of $33.1 billion, compared to $29.8 billion at the end of the previous quarter. The $3.3 billion increase in assets consisted of $1.6 billion in net income and $1.7 billion in net additional CPP contributions. The additional CPP account achieved a 5.0% net return for the quarter, and a five-year annualized net return of 5.3%.

The additional CPP was designed with a different legislative funding profile and contribution rate compared to the base CPP. Given the differences in their design, the additional CPP has had a different market risk target and investment profile since its inception in 2019. As a result of these differences, we expect the performance of the additional CPP to generally differ from that of the base CPP.

Furthermore, due to the differences in their net contribution profiles, the assets in the additional CPP account are also expected to grow at a much faster rate than those in the base CPP account.

Long-Term Financial Sustainability

Every three years, the Office of the Chief Actuary of Canada (OCA), an independent federal body that provides checks and balances on the future costs of the CPP, evaluates the financial sustainability of the CPP over a long period. In the most recent triennial review published in December 2022, the Chief Actuary reaffirmed that, as at December 31, 2021, both the base and additional CPP continue to be sustainable over the long term at the legislated contribution rates.

The Chief Actuary’s projections are based on the assumption that, over the 75 years following 2021, the base CPP account will earn an average annual rate of return of 3.69% above the rate of Canadian consumer price inflation. The corresponding assumption is that the additional CPP account will earn an average annual real rate of return of 3.27%.

 

CPP Investments continues to build a portfolio designed to achieve a maximum rate of return without undue risk of loss, while considering the factors that may affect the funding of the CPP and its ability to pay current benefits. The CPP is designed to serve today’s contributors and beneficiaries while looking ahead to future decades and across multiple generations. Accordingly, long-term results are a more appropriate measure of CPP Investments’ performance and plan sustainability.

Operational Highlights

Corporate developments

• Ranked first among the world’s leading public pension funds by Global SWF when measuring annualized returns between fiscal years 2013 and 2022 (Global SWF Data Platform, December 2023).

• Completed a review of our business activities in Europe resulting in the planned closure of our Luxembourg office in fiscal 2025. This decision was a result of thorough analysis of business activities that best serve our global operations. Established in January 2015, the Luxembourg office has supported our investment activities in Europe.

• Received the Australian-market Kangaroo Issuer of the Year award by Sydney-based KangaNews for their annual institutions and transactions awards in 2023. The KangaNews Awards consider factors such as the volume of issuance, breadth of distribution, deal performance and commitment to the Australian Dollar Bond market as an issuer. In 2023, CPP Investments issued A$3.75 billion (C$3.4 billion) of bonds in the Australian market.

Third-Quarter Investment Highlights

Credit Investments

• Participated in the financing of a subsidiary of Pattern Energy Group, a U.S.-based renewable energy and transmission company, through a US$83 million investment in a holding company debt facility, which will support initial equity capital for the construction of SunZia Transmission and SunZia Wind, a clean energy infrastructure project in the U.S.

• Agreed to invest up to €118 million in a forward-flow mezzanine loan facility for Enpal. Based in Germany, the company offers financing solutions for solar panels, electric vehicle chargers, heat pumps and batteries as well as installation and maintenance services.

• Entered into a newly formed venture with Blackstone Real Estate Debt Strategies, Blackstone Real Estate Income Trust, Inc., and funds affiliated with Rialto Capital and acquired a 20% equity stake for US$1.2 billion in a venture that holds a US$16.8 billion senior commercial mortgage loan portfolio, primarily located in the New York metropolitan area.

• Invested A$300 million (C$268 million) in a first-lien term loan to TEG, a leading integrated live entertainment and ticketing service provider in Australia.

• Invested €75 million in a senior secured loan to Curtis Biomass Plant, a 49-megawatt woody biomass plant using certified forestry waste located in northwest Spain.

• Invested in the financing package to support New Mountain Capital’s investment in the merger of HealthComp, a U.S.-based benefits and analytics platform, with Virgin Pulse, a global digital-first health, wellbeing and navigation company.

• Committed to invest C$197 million in financing to support CapVest Partners in its acquisition of Recochem. Headquartered in Canada, Recochem is a global manufacturer and distributor of aftermarket transportation and household fluids.

• Agreed to provide financing to support a consortium of investors led by Sixth Street in its acquisition of the GreenSky platform and its associated loan assets. GreenSky is a leader in point-of-sale home improvement financing based in the U.S.

• Committed up to US$90 million in junior financing to fund up to US$820 million of loans originated by Service Finance Company, a U.S. home improvement financial services company.

Private Equity

• Invested €398 million to acquire interests in three funds managed by Hayfin Capital Management. The transaction represents a diversified portfolio of European mid-market, single- company secondary investments, direct co-investments and funds.

• Invested US$50 million in the carve-out of Forcepoint’s Global Governments and Critical Infrastructure (G2CI) cybersecurity business, alongside TPG. Based in the U.S., Forcepoint G2CI is a leading provider of cybersecurity solutions.

• Committed US$175 million to MBK Partners Fund VI, which focuses on control buyouts investments in South Korea, Japan and Greater China.

• Committed US$240 million to TPG Partners IX, L.P., which focuses primarily on healthcare, software and digital media & communications, and US$60 million to TPG Healthcare Partners II, L.P., which focuses solely on healthcare. The funds target upper middle-market and large growth buyouts in North America and Western Europe.

• Committed US$90 million to acquire ownership interests in a diversified portfolio of 25 private equity funds with investments distributed across Europe, North America and Australia.

• Agreed to the partial realization of our investment in Visma, a leading provider of mission-critical cloud software in Europe, retaining an approximate 2% stake in the company. Net proceeds from the sale are expected to be approximately C$700 million. Our original investment was made in 2019.

• Completed the sale of a diversified portfolio of 20 limited partnership fund interests in mostly North American and European buyout funds. Net proceeds from the sale were approximately C$2 billion. The portfolio of fund interests represents various commitments made over the course of approximately 20 years.

Real Assets

• Completed a follow-on investment of US$905 million into Pattern Energy Group to support the company’s ongoing development projects and future growth opportunities. Pattern Energy is a leading U.S.-based renewable energy and transmission company. We completed our initial investment in 2020.

• Committed an additional £300 million to Octopus Energy to support the company’s continued global growth. Octopus Energy is a global clean energy technology pioneer based in the U.K. Our partnership was established in 2021.

• Sold the Midland Gate Shopping Centre in Perth, Australia, held through the Vicinity Retail Partnership (VRP). Gross proceeds from the sale total A$97 million (C$85 million). The transaction marks the final asset disposition from VRP, a joint venture vehicle established in 2010 to invest in shopping centres across Australia.

• Sold our 24.5% stake in two operating German offshore wind projects, Hohe See and Albatros, which have been fully operational for nearly three years and produce a combined 2.5-million-megawatt hours of electricity. Net proceeds from the sale were C$374 million. Our initial investment was made in 2018 while the projects were still under construction.

Transaction Highlights Following the Quarter

• Signed a definitive agreement in support of the proposed merger between Aera Energy, one of California’s major energy producers, and California Resources Corporation, an independent energy and carbon management company in the U.S. Through this transaction, we will receive newly issued shares of common stock upon close of the transaction, expected to represent approximately 11.2% of the combined company.

• Completed a C$100M Freddie Mac-compliant preferred equity investment in Panorama Tower, an 85-story, Class-A luxury multifamily high-rise tower in Miami, Florida.

• Committed to provide an additional US$75 million in financing to Global Lending Services (GLS) through a term loan, bringing the total size of the loan to US$150 million. Based in the U.S., GLS provides automotive financing solutions offered through franchise and independent automobile dealers.

• Invested £40 million for an approximate 1% stake in Dechra Pharmaceuticals alongside EQT. Dechra Pharmaceuticals is a U.K.-based developer and manufacturer of specialty animal pharmaceuticals.

• Participated in the financing of BridgeBio Pharma Inc., a U.S.-based commercial-stage biopharmaceutical company focused on genetic diseases and cancers, through a US$200 million synthetic royalty financing commitment and a US$150 million term loan that refinances an existing senior secured credit facility, alongside Blue Owl Capital. The financing will support the commercial launch of acoramidis, a pre-approval drug candidate designed to treat a rare and potentially fatal heart condition known as transthyretin amyloid cardiomyopathy (ATTR-CM).

• Invested US$75 million in a secured credit facility issued by Altus Power, a commercial-scale provider of clean electric power that develops, owns and operates locally sited solar generation, energy storage and charging infrastructure across the U.S.

I do not cover quarterly investments as it's a long-term Fund but can't say I was surprised.

As John Graham, President & CEO states: “Strong performance of global equity and fixed income markets during the final months of calendar 2023 contributed to the Fund’s continued growth. We remain focused on applying our investment capabilities to prudently manage the Fund to deliver long-term value for CPP contributors and beneficiaries.”

Some foreign currency losses due to the strong Canadian dollar last fiscal quarter which I expect to reverse once the Bank of Canada slashes rates.

More importantly, CPP Investments ranks among the best 10-year returns:

We are living in uncertain times, but there’s one thing Canadians can be certain about: the strong and steady performance of CPP Investments. The investment manager for Canada’s largest pension fund has been recognized by industry experts for having among the highest returns over the past decade when compared to global peers.  

Global SWF, a New York-based pension industry specialist recently released its 2024 Annual Report, which measured 10-year returns for sovereign wealth funds and public pension funds. With a 10-year annualized rate of return of 10.9% from fiscal 2013 to 2022, CPP Investments ranked first among national pension funds, and second only to New Zealand Superannuation Fund and national institutional investors.  

The report highlights various fund dynamics and industry trends, including how Canadian funds – such as CPP Investments – are highly focused on investing in their home market of North America. In addition, CPP Investments was lauded in the report for participating in co-investments, an investment style well-known to Canadian funds, as a way of gaining direct exposure. “CPP [Investments] is by far the most active, but others are catching up rapidly.” 

Learn more about how CPP Investments has been recognized among leading global pension funds.  

All this to say, relax, CPP Investments isn't selling top-notch real estate assets because it's in deep trouble, it's prudently managing liquidity risk to make sure it can capitalize on opportunities which will arise when the cycle turns south.

Below, CIO Ed Cass shares his thoughts on the investing landscape and portfolio construction in this on-camera interview.

Next, Ed joined CNBC's Delivering Alpha 2023 conference last fall to discuss continued market demand amid higher interest rates, where the opportunities are for investment, and more. He explains why they are looking at commodities more actively.

Third, DoubleLine CEO Jeffrey Gundlach, with CNBC's Scott Wapner and Bob Pisani live at Exchange ETF in Miami, warns of added volatility to the economic cycle and rising interest rates post-recession thanks to the fiscal response and U.S. government debt burden. Despite the recent CPI report affecting expectations for interest rate cuts, Gundlach doubts it will sway the Fed's decisions significantly.

He also highlights concerns about stock market valuations and tech company concentration risk, advocating for equal-weighted investments over passive market-weighted ones. Gundlach stresses the importance of international investing scrutiny and expresses optimism about India's economy. The conversation shifts to investment allocation, with a recommendation for a more conservative portfolio and an eye on purchasing assets at lower prices in the future.

Lastly, please take the time to watch this TED talk with Dasha Navalnaya, daughter of Alexei Navalny who died in a Russian prison over the weekend under dubious circumstances. 

Sharing the story of her father's poisoning, persecution and current imprisonment, she details what it was like growing up under the watchful eye of government surveillance as her father led a decade-long investigation into the corruption of Putin's regime — and shows why paying attention to what happens in Russia matters to everyone, everywhere (incredible young lady; h/t Mathieu St-Jean).