PopMuse: Benefits and Pension http://popmu.se Musings of stuff en-us Copyright 2007-2019 http://creativecommons.org/licenses/by-nc-sa/3.0/ PSP Investments' Strikes a Few Deals http://pensionpulse.blogspot.com/2019/11/psp-investments-strikes-few-deals.html http://pensionpulse.blogspot.com/2019/11/psp-investments-strikes-few-deals.html Tue, 12 Nov 2019 14:32:56 UTC at Pension Pulse IPE Real Assets reports that Aviva Investors and Public Sector Pension Investment Board (PSP Investments) just extended their partnership with an agreement to invest up to �250m in commercial property in eastern England:The companies said the new venture will acquire a mix of ground-up and standing assets located in the CB1 Estate in Cambridge, a master-planned development covering 26 acres.The acquired assets include 50/60 Station Road, a fully-let 167,000sqft development completed in April 2019 and 30 Station Road, a pre-let 81,500sqft scheme.Construction commenced in September, with completion scheduled for the third quarter of 2021.Aviva Investors will act as development manager and asset management partner, working alongside Brookgate as the developer.Aviva Investors and Canadian pension investment manager PSP Investments in 2015 invested in a portfolio of commercial properties in central London, currently worth over �400m.Daniel McHugh, managing director, real estate, Aviva Investors Real Assets, said: “Station Road provides exposure to high-quality assets with a range of risk and return profiles, and we look forward to growing this strategy with PSP Investments.”St�phane Jalbert, managing director, Europe and Asia Pacific, real estate investments, PSP Investments, said: “Building on our existing partnership with Aviva, PSP is continuing its strategy of investing in key innovation markets.”Cambridge is one of the UK’s leading knowledge clusters for artificial intelligence and life sciences, and we believe the regeneration of the Station Road area will outperform in the long term.”Melanie Collett, head of real estate asset management, Aviva Investors Real Assets, said: “We continue to see high demand for space from many global firms, with cutting-edge technology and business services firms among the occupiers in our properties as we create leading locations that cater to businesses, communities and individuals.”It's Remembrance Day in Canada, Veterans Day in the United States, so I figured I'd look into what has been happening at PSP Investments since they are in charge of managing the retirement funds of the Canadian Armed Forces and the Reserve Force (see PSP's contributors here).Exactly four years ago, I discussed PSP's global expansion and referred to PSP's joint venture with Aviva Investors:[..] PSP just formed a joint venture with Aviva Investors to invest in central London real estate:Under the equal partnership, Aviva Investors’ in-house client Aviva Life & Pensions U.K. has agreed to sell 50% of its stake in a central London real estate portfolio to PSP Investments. Aviva previously owned 100% of the portfolio. The portfolio consists of 14 assets across London, made up of existing real estate or those with planning consent.Aviva Investors will manage the assets and development for the joint venture.The spokeswoman for PSP Investments said financial details of the transaction are confidential. The net asset value of PSP Investments’ real estate portfolio as of March 31, was C$14.4 billion ($11.4 billion,) she said.“This investment is consistent with PSP Investments’ real estate strategy to invest in prime and dynamic city centers that we expect will outperform in the future, and is complementary to PSP Investments’ existing portfolio in London,” said Neil Cunningham, senior vice president, global head of real estate investments at PSP Investments, in a news release from Aviva Investors. Further details were not available by press time.Aviva Investors has more than �31 billion ($47.8 billion) of real estate assets under management. PSP Investments manages C$112 billion of pension fund assets for Canadian federal public service workers, Canadian Forces, Reserve Force and the Royal Canadian Mounted Police.I don't know enough details about this deal to state my opinion but I have to wonder why Aviva Investors is looking to unload half its stake and why PSP is buying prime real estate in London at the top of the market (trust me, I know how out of whack London's real estate prices have become).But Neil isn't a dumb guy, far from it, and I have to take his word that he expects these assets to outperform in the future and that they are complementary to PSP's existing portfolio. I hope so because I'm sure PSP paid top dollar (more like pounds) to acquire these assets.Well, Neil Cunningham most certainly isn't a dumb guy, he did an outstanding job managing PSP's massive real estate portfolio for over a decade before being nominated President & CEO after Andr� Bourbonnais left PSP to join Mark Wiseman at BlackRock.PSP's joint real estate venture with Aviva Investors turned out to be another great deal for both parties. PSP invested in Aviva's real estate assets in London and Aviva raised money to start a new fund developing new properties (while maintaining 50% stake in its prized London properties).This deal in Cambridge is equally interesting because Cambridge is a well-known knowledge hub, a leading center for artificial intelligence and life sciences.Why are these two sectors so critically important? Check out the 10-year performance of the S&P 500's major sectors, courtesy of barchart:As you can see, Technology (XLK), Consumer Discretionary (XLY) and Healthcare (XLV) vastly outperformed the overall market over the last ten years (Note: Amazon makes up 22% of Consumer Discretionary ETF while biotech stocks helped boost the performance of healthcare sector).The point I am trying to make is technology and innovation in the broadest sense are critically important to the overall economy, whether it's Cambridge, England or Toronto, Canada or Boston, Massachusetts or San Francisco, California.I keep referring to this article Don Wilcox wrote earlier this year for Real Estate Exchange on how tech will likely be Canada’s savior if a recession hits. He was citing remarks that CBRE’s Paul Morassutti stated at the RealCapital conference in Toronto: Morassutti, CBRE’s vice-chairman of valuation and advisory services, said the rising interest rate environment, combined with historically high global debt, will undoubtedly lead to a reckoning. However, he said economies positioned to benefit from new technologies and lifestyle trends should weather the worst of whatever storms are coming.He noted the innovation sector extends well beyond what many people think of as traditional “technology” into virtually every aspect of Canadians’ lives.“Tech has become so ubiquitous across Canadian industries the true impact the tech sector has on Canada’s economy has been understated. CBRE research estimates that for every tech employee hired at a tech firm between 2012 and 2017, there were three more tech employees hired by non-tech firms.“Loblaws for example, a grocer, employs almost a thousand people in its AI digital division.“When you look at it this way, Canada’s tech sector is exceptionally diverse and has a multiplying effect on the economy. But even more important is the rate of growth. Over the past 10 years, tech has grown at more than 2.5 times the pace of the energy sector and three times the overall economy.”Support for innovation from both the private sector and governments has made Canada a true leader in technology and innovation — and that is driving many of the commercial real estate trends today across the country. He pointed out Canada was the first country to create a national artificial intelligence strategy, and the creation of incubators such as MARS district in Toronto opened the door for innovators to become established and grow.You can say the same thing about the tech sector in all developed economies, including the UK where some of the top minds in artificial intelligence and life sciences reside in Cambridge (the other top minds reside in Cambridge, Massachusetts and Silicon Valley).So, this is a real estate deal with an innovation theme, much like CPPIB's joint venture to develop Platform 16, an urban office campus in San Jose, California.In another major deal, in early October, PSP Investments announced it was taking over Webster Ltd., an Australian agribusiness company, for A$854 million:While the PSP already owns 19.1 per cent of Webster’s ordinary shares, its subsidiary PSP BidCo is acquiring the total remaining ordinary shares for A$2 per share, which is a 57 per cent premium on Webster’s most recent closing price. It will also buy all Webster preference shares on issue for A$2 in cash per share through a separate arrangement.The company operates walnut and almond orchards in New South Wales and Tasmania, and also owns land for cotton and other annual crops, cattle and Dorper sheep production, a water entitlements portfolio and an apiary business.Maurice Felizzi, managing director and chief executive officer at Webster, said the PSP was the logical owner of Webster’s portfolio given the fund’s focus on long-term growth. “We are encouraged by their understanding of our business and its ongoing importance to regional and rural communities in Australia,” he said in a press release. “PSP Investments has a proven track record in managing and investing in agricultural assets over the long term for sustainable value creation and therefore we believe this transaction represents a positive outcome for all stakeholders in our business.”The purchase is part of the PSP’s natural resources group, which directly invests in agriculture, timber and related opportunities around the world.If the deal is approved by shareholders, Webster will transfer certain assets to a newly created PSP group entity called KoobaCo for a value of A$267.7 million, plus the net working capital acquired with the business.Existing investors Belfort Investment Advisors Ltd. and Verolot Ltd., which own 12.5 per cent and 10.7 per cent of Webster’s ordinary shares, respectively, will be offered the opportunity to acquire a 50.1 per cent ownership stake in the new company.This is a huge deal and an interesting one. Yannick Beaudoin is the Managing Director, Natural Resources, at PSP and his team are slowly putting together great deals like this one.As an avid drinker of a morning shake which consists of frozen blueberries, almonds, walnuts, pumpkin seeds, coconut milk and water, I can attest to the health benefits of eating properly. This health trend is here to stay and will only grow larger as more and more people get informed on how to eat properly and the importance of diet, along with moderate exercise and good quality sleep.Also in early October, PSP closed the largest private construction loan in Washington, D.C. history alongside Hoffman-Madison Waterfront: The first phase of the wharf, a�waterfront neighbourhood that�includes residential, hotel, office, retail real estate and public spaces like waterfront parks and piers, opened in 2017. This latest loan is for the second phase of its development.The Goldman Sachs Group Inc. led the non-recourse transaction with syndicate members Starwood Capital Group, Mack Real Estate Group and Pentagon Federal Credit Union. “With Goldman Sachs, we’re setting a new high bar for project financing in Washington,” said Kristopher Wojtecki, managing director of real estate investments at PSP Investments, in a press release. “We are now in an even stronger position to realize the full potential of Washington, D.C.’s waterfront.”In mid October, Apax Partners together with CPPIB and PSP Investments, announced the completion of the sale of Acelity and its KCI subsidiaries to 3M for $6.725 billion (see my post on this sale here):Since 2011, Apax and its consortium partners worked to reshape Acelity from a loose collection of businesses into a focused global leader. This was achieved through a strategic M&A program which included targeted acquisitions as well as the disposals of non-core businesses. In addition, a range of activities were undertaken to accelerate organic growth, including investments in R&D, medical education, clinical studies, and the expansion of its sales force. The result of these initiatives transformed Acelity into the world’s largest wound care company focused on advanced wound care, including negative pressure wound therapy.Steven Dyson and Arthur Brothag, Partners at Apax Partners, said, “We are proud of our work with Acelity and our consortium partners. In many ways, this transaction represents what Apax seeks to achieve: namely, developing a high conviction thesis through sub-sector insights, forming a strong partnership with a talented management team, and working together to transform a business to become the global leader in its space. We wish Acelity well and look forward to watching the company continue to thrive under new ownership.”R. Andrew Eckert, CEO of Acelity during the ownership of the Apax Funds and its consortium partners, said: “It has been a pleasure to work with Apax and its consortium partners. They have demonstrated a very strong understanding of our space and helped us reshape our business and invest to capture significant growth. It’s incredibly fulfilling to reflect on the rapid expansion in innovation and new products Acelity has delivered to the marketplace in this time. I especially want to recognize the Acelity workforce for their dedication to improving patients’ lives worldwide in bringing these new therapies forward.” In late October, PSP and Alberta Teachers’ Retirement Fund announced another huge deal, the acquisition of all issued and outstanding common shares of AltaGas Canada:The Canadian company holds natural gas distribution utilities, as well as renewable power generation assets.In the transaction, the cash offering of $33.50 per common share is an approximate 31 per cent premium on AltaGas’ closing price as of Oct. 18, 2019. The deal puts the company value at around $1.7 billion.“We are very pleased to have entered into an agreement to acquire ACI in partnership with ATRF,” said Patrick Samson, managing director and head of infrastructure at PSP Investments, in a press release. “ACI’s business comprises a diversified portfolio of high-quality regulated natural gas utilities and long-dated contracted renewable power assets that are well aligned with our long-term investment strategy. We look forward to supporting the company, its management team and all of its stakeholders as ACI continues to grow and succeed.”Currently, the deal is subject to shareholder approval, as well as certain regulatory approvals by the Alberta government.Patrick Samson, Managing Director and Head of Infrastructure at PSP, has huge responsibilities and striking a deal of this magnitude is a major undertaking for him and his team (he should be an SVP).Now, I don't know how the "hijacking" of Alberta Teachers' Retirement Fund will impact this deal but whether it's ATRF or AIMCo, PSP will work with its partner in Alberta (there seems to be a lot going on in Alberta these days).Now, following my comment on the departure of Nathalie Bernier from PSP, a public sector union member in Ottawa asked my thoughts and informed me that PSP will be delivering a report to the Public Service Pension Advisory Committee (PSPAC) in Ottawa on November 19th, 2019. As I stated to this union member who contacted me, when an award winning CFO leaves at the same time as the COO (Alain Desch�nes), you'd bet I'd be asking Neil Cunningham and the senior managers there some very tough questions.But I also told him while it raises suspicion when a CFO & COO of a major pension fund depart at the same time, you have to give the CEO of PSP the benefit of the doubt and hear out his explanation. Like I stated, Neil Cunningham isn't the type of guy who takes these big decisions on a whim.Also, I was told the La Press article got it wrong and that these positions were not abolished but the article states this came straight from PSP in an email, so it's confusing to say the least.Tonight, right before posting this comment, I checked PSP's executive team on its site and David J. Scudellari remains the Senior Vice President and Global Head of Credit Investments and Interim Chief Financial Officer.Needless to say, a pension fund the size of PSP cannot survive without a dedicated CFO and COO. It's not possible and David J. Scudellari while fully qualified shouldn't carry both hats of a senior investment officer and CFO.Why not? Well, he has more important duties like focusing all his attention on PSP's global credit investments and more importantly, from a governance angle, you can't have the head of any major investment activity also be responsible for how they value investments (that's just wrong).Again, Neil Cunningham and David Scudellari know all this, it's common sense, and from what I heard, there is already a process to find a new CFO and COO (the longer it takes, the worse it looks).Lastly, since it is Remembrance Day in Canada and Veterans Day in the US, let me end with this story about a young man who left Crete at the age of 17, took a boat to the United States to work at a factory in Cedar Rapids, Iowa where they were making starch for shirts.During World War I, he enlisted in the US Army, survived the horror of that war and came back to the US to work right outside Chicago in Argo, Illinois where he worked as a mechanic for a big company that made sewing machines (Pressinger).After working for a few years in the US, he then moved back to Iraklio, Crete where he fell in love and married an amazing lady and settled down to have to have two children.During his golden years, he received a great pension from the US Army. When he died at the age of 83, his widow received that pension till she died.Those two people were my grandfather, Leonidas Kolivakis, after whom I was named and my grandmother, Maria (Perakis) Kolivakis after whom my sister is named.Till this day, I remember my grandmother speaking very highly of the United States saying their Army pension really helped her get by after my grandfather passed away. I even remember seeing the checks from the US Army in US dollars which when converted to Greek drachmas, turned into a very decent pension which she added to a few income properties my grandfather left behind.I share this story just to say this, behind every pension is a person who deserves to retire in dignity and security, just remember that.Below, Dawna Friesen hosts coverage of Remembrance Day ceremonies from the National War Memorial in Ottawa as Canadians pay tribute to our veterans who served and sacrificed for our country.We should always remember those who sacrificed so much so we can live free from tyranny and enjoy living in one of the greatest countries. http://creativecommons.org/licenses/by-nc-sa/3.0/ The Teachers' Battle in Alberta Heats Up http://pensionpulse.blogspot.com/2019/11/the-teachers-battle-in-alberta-heats-up.html http://pensionpulse.blogspot.com/2019/11/the-teachers-battle-in-alberta-heats-up.html Mon, 11 Nov 2019 23:34:22 UTC at Pension Pulse Danielle Walker of Pensions & Investments reports that Alberta proposes AIMCo take on management of teachers' fund:The Alberta government proposed in its recent budget that management of the C$18 billion ($13.8 billion) Alberta Teachers' Retirement Fund, Edmonton, be shifted to Alberta Investment Management Corp.AIMCo is an institutional investment manager with more than C$108.2 billion of assets from more than 30 pension, endowment and government funds in Alberta.The move is intended to "lower costs and achieve significant and necessary economies of scale" that would "protect returns to pensioners," the budget plan, published Oct. 24, said.A spokeswoman for the Alberta Treasury Board and Finance said in an email Wednesday that the transfer is a proposed change until the appropriate legislation is introduced and passed in the Legislative Assembly.As part of the budget proposal, the Alberta government also recommended that assets from the C$10.3 billion Workers' Compensation Board and the C$2.3 billion Alberta Health Services, both in Edmonton, also be transferred to AIMCo for management. A spokeswoman for health agency declined to comment on the matter; and a spokesman for the compensation board did not immediately respond.AIMCo already manages a small portion of the Workers' Compensation Board's assets, the treasury spokeswoman said.The Alberta fund in a statement on its website said that fund personnel were only informed of the proposed change when the budget proposal was released. "The ATRF Board and Management have a number of questions and are in the process of seeking information and answers to those questions," the statement said."What we do know is that our commitment to plan members and employees is our utmost priority. To this end, we'll continue to provide the superior investment management and service delivery our members have come to expect from ATRF, and we will endeavor to share any and all updates as soon as they become available. Note that the change should not immediately affect pension benefits or contributions," the statement says.Over the weekend, Jason Schilling, president of the Alberta Teachers' Association, Edmonton, said in a statement published on the association's website that the decision without the input of teachers made the move "feel like a hijacking.""Why didn't they talk to us? Individual teachers contribute half of the money that funds the plan and now will have no say over the management of those funds," Mr. Schilling said in the statement.I've already covered the "hijacking" of Alberta Teachers' Retirement Fund here but things are heating up in Alberta and in my opinion, degenerating very quickly.All you have to do is search the term "ATRF" on Twitter and read some of the nonsense and misinformation being spread there. Typical case in point:ATRF has sent a follow-up letter to Minister Toews. The letter provides further information on return comparisons and ATRF pension management. The ATRF Chair asks for a third-party to consider the issue. Read it here: https://t.co/bPvJRMOdmF #AbEd #Handsoffmypension pic.twitter.com/OCs7Leyn5R— Alberta Teachers Association (@albertateachers) November 7, 2019Finance Minister lied about AIMCo outperforming our ATRF. Again, hands off my pension! https://t.co/NbZpIR0s04— A Grace Martin (@AGraceMartin) November 6, 2019Print this letter. Take to your MLA. More fire from the ATRF Board. This is where the conversation started: risk adjusted returns to a common end date. Happy there will be a further meeting. Letter to Minister Toews November, https://t.co/eBKpdAs7wa via @yumpu_com— Greg Meeker (@yomeeks) November 7, 2019Now, I have the utmost respect for teachers, my soon-to-be wife is a teacher and I think they're grossly underpaid for the work they do even if they get a great defined benefit pension at the end of their career (which they pay a lot over the years to receive benefits when eligible to retire).As my fianc� keeps telling me: "Trust me, you spend a day with 19 five-year olds and your perspective on teaching will change." (I trust her, I can't even imagine what this is like on a day to day basis).But when I read nonsense from Alberta teachers and the Alberta Teachers Association which represents them, I have no qualms whatsoever calling them out. Case in point, ATRF's Board Chair, Sandra Johnston, just sent a follow-up letter to the President of Treasury Board and Minister of Finance, Travis Toews. According to the ATRF website: "The letter provides some information regarding net asset return comparisons between ATRF and AIMCo, and speaks to the benefits our members receive from ATRF as a pension manager.Take the time to read this letter here, and if you are a teacher in Alberta, I am going to test your critical thinking skills because in my opinion, it's blatantly biased, patently false in some sections and compares apples to oranges!For example, take this statement:Historically ATRF's net investment returns after all costs have been superior to AIMCo's. Over the past 5 years, ATRF's fund returns have exceeded the returns of AIMCo's primary pension clients (PSPP and LAPP) by between 0.3% and 1.5% annually, depending on the plan. Notably, ATRF's returns have significantly exceeded those of AIMCo in all major private market categories (private equity, infrastructure and real estate), which is a clear indication that larger scale is not necessarily an advantage, and may in fact be a disadvantage.Whoah! Really? Sure, in some cases bigger isn't better and smaller plans can play in the mid-market space which is too small for larger plans, but if you've been following my comments on CPPIB, Canada's $400 billion+ behemoth and in my opinion, the best pension fund in the country in terms of long-term performance, you'll quickly realize that more often than not, bigger is much better, especially when the governance is right.Also, have a look at ATRF's investment performance from page 43 of its 2018 Annual Report:An astute, critical thinker, would first notice that ATRF's fiscal year ends at the end of August, not at the end of calendar year like AIMCo's. Do you all remember what happened in Q4 of 2018? Stocks got slaughtered and came back strongly this year, giving ATRF an advantage when reporting its returns.In fact, AIMCo put out a one page backgrounder which you can all read here addressing the difference in year-end performance and discussing the benefits of scale.When adjusting performance to reflect different year-end reporting dates, it turns out AIMCo's Balanced Fund outperformed ATRF over one year (9.8% vs 9.6%) and more importantly over the last four years, it's pretty much the same (8.2% vs 8.1%) net of all fees.And this despite the fact that ATRF's Private Markets (Private Equity, Real Estate and Infrastructure) outperformed those of AIMCo over the last four years.But here too, you need to be careful as AIMCo has a lot of legacy investments it is dealing with in private markets and the mid-market space where the ATRFs of this world primarily invest in has been outperforming of late but not over the long run.The most important thing in AIMCo's one page backgrounder, however, isn't its 4-year performance edging out that of ATRF, it's the fact that it addresses scale, diversity and governance head on:When informing Alberta's teachers of the benefits of joining AIMCo, they should familiarize themselves with the mandate and roles of AIMCo as well as its diligence and governance.Moreover, Alberta's teachers can have joint governance over their pension plan, just like AIMCo's three largest clients. This should address points 3, 4 and 5 of ATRF's letter to the Minister. The main point I think is lost in all this is that AIMCo is a world-class organization investing across public and private markets all over the world.Importantly, nothing will happen to Alberta teachers' pensions if assets are managed by AIMCo. If anything, they will be bolstered over the long run because AIMCo at $150 billion+ in assets will be an even stronger force to be reckoned with.What about Ontario Teachers', OMERS, HOOPP, IMCO and OPTrust? All great organizations but in theory, Doug Ford's government can amalgamate them to to create one big Ontario pension fund just like BCI in British Columbia or the Caisse in Quebec. This will lower administrative costs significantly and improve performance over the long run. In fact, some people have privately told me it's going to eventually happen.I say in theory because in practice, there will be great pushback as these are all extremely well run, successful and mature organizations and there is no comparable Ontario fund where assets can be moved to amalgamate them.Again, as I expressed in my last comment on the hijacking of Alberta Teachers' Retirement Fund,� the Government of Alberta made a series of blunders, the biggest one not properly consulting the teachers before moving ahead with this proposal. That was a blatantly dumb and arrogant mistake.Also, ATRF is a great organization with exceptional people. I feel their angst but as I said, there's no way some people will not be absorbed into AIMCo and they too will be better off over the long run (better compensation, bigger, more stable organization).By the way, Wayne Kozun, the CIO of Forthlane Partners and former SVP at OTPP posted this on LinkedIn:Why were the assets of these funds, like Alberta Teachers, not managed by AIMCo since 2008 when AIMCo was founded? What has changed since then? I haven't seen that mentioned in the media articles that I have read about this issue in the last week.The answer is ATRF is an older organization, it had unfunded liabilities that were addressed in 1992 and at the time of AIMCo's creation in 2008, ATRF had single digit billions being managed mostly by external managers whereas AIMCo had big clients to absorb and service from the old Alberta Investment Management Division.The key thing I want to reiterate is that even though this government proposal was rammed down the throat of Alberta's teachers, it does make a lot of sense over the long run for all stakeholders, including taxpayers, the government and teachers.Yes, it's true AIMCo benefits the most from this proposal and ATRF loses everything. I'm cognizant of this fact and empathize with employees at ATRF but it doesn't change the logic and long-term benefits of moving ahead with the government's proposal.I urge Alberta's teachers to get properly informed on what this proposal entails and really understand the benefits of having AIMCo manage their pension assets over the long run.I really think everyone needs to cool down here, stop reading nonsense on Twitter or the Communist Broadcast Corporation (CBC), start getting informed by real experts who understand the pros and cons of this proposal.Sometimes I feel this battle in Alberta is like watching the old rivalry between the Calgary Flames and Edmonton Oilers when Tim Hunter and big Dave Semenko used to go at it. Cool down folks, whether it's ATRF or AIMCo, you're in great hands!Update: Wayne Kozun, CIO of Forthlane Partners, shared this with me after reading this comment:In terms of amalgamation in Ontario - I have seen both single client funds and multi-client funds and I think that there is a tangible benefit in being a single client fund. This leads to clarity of purpose for the fund and it allows them to think about managing all risks in both the assets and the liabilities. This includes making adjustments like conditional inflation protection and managing the total return of the fund, not just the alpha. That is very hard to do at entities that are asset managers managing assets for multiple provincial plans. They tend to not be able to manage the total return of the fund, they manage to a benchmark (aka strategic asset allocation) and focus solely on earning alpha on their assets. And they spend a LOT of time and resources managing the client - asset manager relationship. This benefit has to be weighed against the increased cost of not having as many economies of scale. Maybe you can get around this by not giving the individual plans much power (is this the way it is done in Quebec with the CDP?) but that may not be palatable to some stakeholders. I thank Wayne for sharing his insights with my readers.Lastly, I was dumbfounded Friday morning when I read Alberta Premier Jason Kenney says there’s a “compelling case” to be made for his province to exit the half-century-old Canada Pension Plan.Needless to say, I think this is a completely bonehead move which isn't in the best interest of Alberta's residents or the country.Below, BNN Bloomberg's Amanda Lang discusses the idea floated by Alberta Premier Jason Kenney for the province to withdraw from the Canadian Pension Plan amid a growing divide between the East and West.She's absolutely right, "the kids need to shut up and let mom and dad drive."Update: Malcolm Hamilton, a retired actuary, sent me this after reading this post:I don't want to wander into the middle of a political minefield but you are jumping to conclusions supported by opinions, not by fact or analysis.You are no doubt aware that Quebec decided in the early 1960s that it would rather have its own pension plan (the QPP) than participate in the CPP. Quebec has never changed its mind about this. To the best of my knowledge, you have never criticized Quebec for staying out of the CPP. This being the case, why would you criticize Alberta for evaluating what Quebec has already done? Why not criticize Quebec's "bonehead move"?Viewed objectively, Quebec made a mistake by opting out of the CPP. The problem isn't poor governance or lack of scale - the QPP is well run. The problem is demography. The QPP costs more than the CPP largely because Quebec's population grew more slowly than the population in the rest of Canada. Since neither the CPP nor the QPP is well funded, good investment performance cannot compensate for poor demography. By opting out of the CPP, Quebecers forced themselves to bear the burden of their own demography. Had Quebecers participated in the CPP, all Canadians would have borne this burden. There is no mystery here. Pay-as-you-go pension systems force workers to pay for pensioners. In a national pension plan, the "older provinces" (Quebec, BC and the Maritimes) will be supported by the "younger" ones (everyone else). The subsidies are never measured or disclosed. Sometimes it is best not to know what's going on. Still, the subsidies are there and there is little doubt that Alberta (the youngest province) collectively subsidizes the other provinces. I see no harm in acknowledging this. The harder question is whether to do something about it. There are many subsidies in a national pension plan. Men may subsidize women, who live longer. The poor may subsidize the rich, for the same reason. The healthy subsidize the less healthy. In the CPP and QPP, past generations had a better deal than future generations. Alberta may have subsidized other provinces in the past but that does not mean that Alberta will subsidize other provinces in the future. Its population and economy may change. DB pension plans never flourish where everyone seeks a subsidy and no one is prepared to subsidize. There needs to be some solidarity and some commitment to sharing. Otherwise the plans die... and few things are uglier than the death of a poorly funded DB plan. Bernard Dussault, Canada's former Chief Actuary, echoed similar points in his response to my post:Quebecers are paying more (about 11% vs. 9.99% for the CPP) to the QPP because Quebec is older than Canada as a whole (i.e. the % of seniors is about 15% higher than in Canada as a whole).If Alberta were to exit the CPP, they would be compelled by the CPP Act to set own their own ‘APP’, which would have to be “similar” to the CPP.Because Alberta is younger than Canada, the APP contribution rate would be smaller than 9.9%, which Is likely the main reason Alberta wants its own “APP”.If that were to happen, the CPP 9.9% contribution rate would therefore most likely have to be increased.I thank both of them for graciously providing me these insights. http://creativecommons.org/licenses/by-nc-sa/3.0/ Is the Capitalist System Really Broken? http://pensionpulse.blogspot.com/2019/11/is-capitalist-system-really-broken.html http://pensionpulse.blogspot.com/2019/11/is-capitalist-system-really-broken.html Sat, 09 Nov 2019 17:30:38 UTC at Pension Pulse Catherine Clifford of CNBC reports on how America’s capitalist system is ‘broken,’ according to billionaire financier Ray Dalio:“The world has gone mad and the system is broken.”So says Ray Dalio, the billionaire financier and founder of Bridgewater Associates, the largest hedge fund in the world with $160 billion in assets.There are several problems, including an overzealous lending market, a growing mountain of government debt and a widening divide between the rich and poor that’s becoming more tense, he says.“This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift,” Dalio wrote in a LinkedIn post published Tuesday.Dalio, 70 and worth almost $19 billion, does not elucidate what that paradigm shift will be in his post, but he has been outspoken in his criticism of the very capitalist system that made him successful. In an interview with CBS’ “60 Minutes” in July, Dalio said the U.S. economy must change or there will be a “conflict” between the rich and the poor. And in January, he said “capitalism basically is not working for the majority of people.”My below piece “The World Has Gone Mad and the System is Broken” explains some of the crazy things that are happening, why they are happening and why I believe that they are unsustainable. I’d be interested in knowing what you think about them. https://t.co/daUdsw0XLy— Ray Dalio (@RayDalio) November 5, 2019In his recent LinkedIn post, Dalio zeroed in on the way money is flowing through the economy.First, says Dalio, we are in a situation known as “pushing on a string.” That is a scenario where central banks (like the Federal Reserve in the United States) are struggling to get their monetary policies to actually stimulate increased spending, according to Dalio’s book, “Principles for Navigating Big Debt Crises,” which he references in the LinkedIn post. That in turn leads to “low growth and low returns on assets,” he says in the book and echoes in the post. ”[T]he prices of financial assets have gone way up and the future expected returns have gone way down, while economic growth and inflation remain sluggish,” Dalio writes on LinkedIn. “Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital....”In the venture capital and start-up space, this means “more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power,” Dalio says.At the same time, the U.S. government is out of money — and still spending, as deficits continue to grow. Governments need to fund obligations like pensions and healthcare, Dalio points out.“Since there isn’t enough money ... there will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money...” Dalio writes.“They are promises that have to be paid — they will either be paid by higher taxes or they’ll be not paid and defaulted on,” Dalio told CNBC at the Greenwich Economic Forum on Tuesday. “I don’t think they will be defaulted on. I think by and large, they’re going to be paid, but if they raise taxes too much, then it changes the nature of that economics.”Dalio says higher taxes and less benefits will continue to create tension between the rich and the poor.“The rich/poor battle over how much expenses should be cut and how much taxes should be raised will be much worse,” Dalio wrote on LinkedIn.“Because the ‘trickle-down’ process of having money at the top trickle down to workers and others ... is not working, the system of making capitalism work well for most people is broken,” wrote Dalio.It's Friday, I typically write about markets but I want to focus on Ray Dalio's LinkedIn post, The World Has Gone Mad and the System Is Broken (added emphasis is mine):I say these things because:Money is free for those who are creditworthy because the investors who are giving it to them are willing to get back less than they give. More specifically investors lending to those who are creditworthy will accept very low or negative interest rates and won’t require having their principal paid back for the foreseeable future. They are doing this because they have an enormous amount of money to invest that has been, and continues to be, pushed on them by central banks that are buying financial assets in their futile attempts to push economic activity and inflation up. The reason that this money that is being pushed on investors isn’t pushing growth and inflation much higher is that the investors who are getting it want to invest it rather than spend it. This dynamic is creating a “pushing on a string” dynamic that has happened many times before in history (though not in our lifetimes) and was thoroughly explained in my book Principles for Navigating Big Debt Crises. As a result of this dynamic, the prices of financial assets have gone way up and the future expected returns have gone way down while economic growth and inflation remain sluggish. Those big price rises and the resulting low expected returns are not just true for bonds; they are equally true for equities, private equity, and venture capital, though these assets’ low expected returns are not as apparent as they are for bond investments because these equity-like investments don’t have stated returns the way bonds do. As a result, their expected returns are left to investors’ imaginations. Because investors have so much money to invest and because of past success stories of stocks of revolutionary technology companies doing so well, more companies than at any time since the dot-com bubble don’t have to make profits or even have clear paths to making profits to sell their stock because they can instead sell their dreams to those investors who are flush with money and borrowing power. There is now so much money wanting to buy these dreams that in some cases venture capital investors are pushing money onto startups that don’t want more money because they already have more than enough; but the investors are threatening to harm these companies by providing enormous support to their startup competitors if they don’t take the money. This pushing of money onto investors is understandable because these investment managers, especially venture capital and private equity investment managers, now have large piles of committed and uninvested cash that they need to invest in order to meet their promises to their clients and collect their fees.At the same time, large government deficits exist and will almost certainly increase substantially, which will require huge amounts of more debt to be sold by governments—amounts that cannot naturally be absorbed without driving up interest rates at a time when an interest rate rise would be devastating for markets and economies because the world is so leveraged long. Where will the money come from to buy these bonds and fund these deficits? It will almost certainly come from central banks, which will buy the debt that is produced with freshly printed money. This whole dynamic in which sound finance is being thrown out the window will continue and probably accelerate, especially in the reserve currency countries and their currencies—i.e., in the US, Europe, and Japan, and in the dollar, euro, and yen. At the same time, pension and healthcare liability payments will increasingly be coming due while many of those who are obligated to pay them don’t have enough money to meet their obligations. Right now many pension funds that have investments that are intended to meet their pension obligations use assumed returns that are agreed to with their regulators. They are typically much higher (around 7%) than the market returns that are built into the pricing and that are likely to be produced. As a result, many of those who have the obligations to deliver the money to pay these pensions are unlikely to have enough money to meet their obligations. Those who are recipients of these benefits and expecting these commitments to be adhered to are typically teachers and other government employees who are also being squeezed by budget cuts. They are unlikely to quietly accept having their benefits cut. While pension obligations at least have some funding, most healthcare obligations are funded on a pay-as-you-go basis, and because of the shifting demographics in which fewer earners are having to support a larger population of baby boomers needing healthcare, there isn’t enough money to fund these obligations either. Since there isn’t enough money to fund these pension and healthcare obligations, there will likely be an ugly battle to determine how much of the gap will be bridged by 1) cutting benefits, 2) raising taxes, and 3) printing money (which would have to be done at the federal level and pass to those at the state level who need it). This will exacerbate the wealth gap battle. While none of these three paths are good, printing money is the easiest path because it is the most hidden way of creating a wealth transfer and it tends to make asset prices rise. After all, debt and other financial obligations that are denominated in the amount of money owed only require the debtors to deliver money; because there are no limitations made on the amounts of money that can be printed or the value of that money, it is the easiest path. The big risk of this path is that it threatens the viability of the three major world reserve currencies as viable storeholds of wealth. At the same time, if policy makers can’t monetize these obligations, then the rich/poor battle over how much expenses should be cut and how much taxes should be raised will be much worse. As a result rich capitalists will increasingly move to places in which the wealth gaps and conflicts are less severe and government officials in those losing these big tax payers will increasingly try to find ways to trap them.At the same time as money is essentially free for those who have money and creditworthiness, it is essentially unavailable to those who don’t have money and creditworthiness, which contributes to the rising wealth, opportunity, and political gaps. Also contributing to these gaps are the technological advances that investors and the entrepreneurs that I previously mentioned are excited by in the ways I described, and that also replace workers with machines. Because the “trickle-down” process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken. This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008. That is why I believe that the world is approaching a big paradigm shift.In my opinion, this is one of the best comments Ray Dalio posted in a very long time. I read it carefully and with a critical eye.You'll notice I asked a very simple question at the top, Is the Capitalist System Really Broken? Let me begin by emphatically stating "no", capitalists like Ray Dalio are still making off like bandits and rising inequality continues unabated as profits are increasingly being concentrated in fewer and fewer companies (and funds).But some of them (like Dalio) recognize the severe structural problems plaguing the current system and how inherently unfair it has become, trapping billions in poverty or working poverty while a handful of "capitalists" enjoy an increasingly larger slice of the pie (I use the term capitalists in the broadest sense to include everyone from tech innovators, to hedge fund and private equity managers to corporate barons).Before I get into my analysis of Dalio's latest post, you should all read Cullen Roche's fantastic response on Pragmatic Capitalism here. Roche critically examines important points he thinks Dalio got wrong and where he thinks he got it right.Now, let me closely examine where I agree and disagree with Dalio.First, his “pushing on a string” dynamic. No doubt, central banks are buying financial assets in their futile attempts to push economic activity and inflation up. The problem is central banks don't control inflation expectations, the only inflation they can really cause is asset inflation, which is what is happening.Two years ago, I asked whether deflation is headed to the US and cited� seven structural factors that led me to believe we are headed for a prolonged period of debt deflation:The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.Rising inequality: Hedge fund (and private equity) gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.Globalization: Capital is free to move around the world in search of better opportunities but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.These are the seven structural factors I keep referring to when I warn investors to temper their growth forecasts and to prepare for global deflation.Now, central banks know all about these structural factors. There's not much they can do about these structural factors or is there?That was my initial thinking but let me throw a curve ball your way, something I've been grappling with as I think about the end game for pensions.Again, two years ago, I wrote about the Mother of all US pension bailouts and last year I discussed how Congress gave a multibillion Thanksgiving pension bailout to solve a retirement crisis that threatened more than 1 million Americans in “multiemployer” pensions.Why is this important? Because it provides clues as to what will happen when many chronically underfunded state and local pensions hit the proverbial brick wall, they will be bailed out by Congress and the Fed and US Treasury will help them meet their obligations (by buying pension bonds or simply transferring money to them).Of course, it won't be that simple. I suspect retired members of these underfunded US public pensions will take some haircut, either partial or full removal of indexation or a more pronounced cut in benefits.This is where Dalio rightly warns there will be huge tensions because teachers and other public sector employees and retirees will fight tooth and nail against any cuts in benefits.But mark my words, the Mother of all US public pension bailouts is coming and it will likely come after the next major financial crisis hits us, whenever that is.This is why central banks are vigorously trying to reflate the bubble, they know the next crisis will lead to widespread pain and misery, mostly for the poor, working class and those a step away from pension poverty.Now, Dalio says central banks are "pushing on a string," but are they really? Central banks are forcing investors out on the risk curve (while they warn pensions reaching for yield) by continuously lowering rates and engaging in QE or quasi-QE operations. Mohamed El-Erian recently posted this chart on LinkedIn: I wryly quipped: "Wake me up when the Fed's balance sheet surpasses all other central banks combined, then the fun begins."Of course, I was joking because if the Fed is required to significantly increase its balance sheet to that degree, it won't be a pretty world economy, it will be a depression.But if the Fed is to replenish US public pensions by buying pension bonds or just lending them money at zero or negative rates, you will see its balance sheet mushroom.At that point, we might see a crisis of confidence, the US reserve currency status might be challenged. I say might because the truth is the global pension crisis is global, it's affecting everyone and if everyone is using its central bank to prop up public pensions, the greenback will be no better or worse than other currencies.I guess at that point -- or way before we reach that point -- gold prices will skyrocket but it's too early to make these forecasts, a lot can happen before we reach that point.Still, I take Dalio's comments on central banks "pushing on a string"with a grain of salt. It remains to be seen just how high the Fed can go in terms of its balance sheet and nobody has provided me with a good analysis as why it can't quintuple or more from these levels.The problem with "omnipotent central banks" is they create huge distortions across the capital market spectrum and are making the job of investing for the long run a lot more challenging. David Long, HOOPP's former co-CIO, alluded to this earlier this week when I went over the 2019 Power 100 List.We actually see some of these distortions in the making, most recently with the rise and fall of WeWork. SoftBank, which I consider to be the world's largest Ponzi scheme, created the WeWork monster and is ultimately responsible for this spectacular blowup.Dalio is right, there's too much money "chasing dreams" (more like hype and hope) and as long as we see this gross misallocation of resources, the wealth divide will only grow and cause a wider social rift.He ends by stating the “trickle-down” process of having money at the top trickle down to workers and others by improving their earnings and creditworthiness is not working, the system of making capitalism work well for most people is broken.I first chuckled reading this because it reminded me of an exchange between William F. Buckley Jr. and John Kenneth Galbraith on Firing Line where referring to "trickle down" economics, Galbraith stated his famous quote: “If you feed enough oats to the horse, some will pass through to feed the sparrows.”But I also read Dalio's last sentence as a warning not only to his fellow capitalists, the prosperous few, but also to the rest of us mere mortals, the restless many: "This set of circumstances is unsustainable and certainly can no longer be pushed as it has been pushed since 2008.�That is why I believe that the world is approaching a big paradigm shift."What is this big paradigm shift Dalio is warning of? I suspect he hasn't got a clue (or is too scared to say it), nobody really knows but somewhere out there, Karl Marx is rolling over in his grave and having a good laugh. This as we celebrate the 30th anniversary of the fall of the Berlin Wall.All I know is even the IMF is warning of the financial system's instability (which is probably good because it means the crisis isn't coming any time soon): IMF fears the world's financial system is even more destructive than in 2008 https://t.co/p0aEB8MVCK— Gratke Wealth, LLC (@GratkeWealth) November 8, 2019As always, hope you enjoyed this comment even if it's not my regular market comment.Below, Meb Faber recently spoke with GMO’s Ben Inkler on the problem of good returns in the near term. Take the time to listen to this podcast here, it's excellent, especially the part on monopolies/ monosponies and how profits are increasingly being concentrated in a handful of large corporations. I also embedded it below.Also, if you haven't read Jonathan Tepper's book, The Myth of Capitalism, make sure you read it, it is the best economics book I've read in a very long time even if my friend Jonathan Nitzan thinks otherwise.Second, Bridgewater Associates founder and billionaire investor Ray Dalio sits down with CNBC's Leslie Picker to discuss the state of monetary policy in the US, income inequality and more. Great interview, take the time to watch it.Third, Yahoo Finance's Julia LaRoche reports from the Greenwich Economic Forum 2019 on the comments made by Paul Tudor Jones and Ray Dalio regarding politics, the economy, and the market. Fourth, Omega Advisors' Leon Cooperman gets emotional in talking about the current state of the United States. He and Bill Gates got berated by many leftist organizations for being "whining billionaires." Fifth, I embedded an older clip where Stephanie Pomboy, founder and president of Macro Mavens, sat down with Real Vision's Grant Williams to discuss her global outlook after the Fed’s course-reversal late last year. Pomboy and Williams take a deep dive into the significance of the gaps between various economic indicators, and discuss the implications for capital markets. They also touch on associated topics such as pensions, China, cryptocurrencies, and gold. Filmed on April 18, 2019 in New York. Make sure you listen to her comments on pensions starting at minute 10.Lastly, Ronald Reagan's famous Berlin Wall speech where he implored Mikhail Gorbachev to "tear down this wall." That speech led to one of the most important moments in history. http://creativecommons.org/licenses/by-nc-sa/3.0/ Stock Market Crash Near? http://pensionpulse.blogspot.com/2019/10/stock-market-crash-near.html http://pensionpulse.blogspot.com/2019/10/stock-market-crash-near.html Sat, 09 Nov 2019 02:52:58 UTC at Pension Pulse Matt Krantz of Investor's Business Daily reports that Nobel Laureate and "Irrational Exuberance" author Robert Shiller says he sees 'bubbles everywhere':When Nobel Laureate and "Irrational Exuberance" author Robert Shiller says he sees bubbles in the financial markets�— you'd better listen up. He literally wrote the book on stock market crashes and bubbles after all."I see bubbles everywhere," Shiller, economics professor at Yale University and author of just-published "Narrative Economics" told investors gathered in Los Angeles Wednesday. "There's no place to go. You just have to ride it out. You invest even though you expect the price to decline." Shiller famously predicted the 2000 stock market crash and the 2007� The timing of Shiller's ominous warning comes at a scary time. This is the month of the 90th anniversary of Black Monday. That day on Oct. 28, 1929, the Dow Jones Industrial Average fell 13%. That still stands as the second-worst drop in history and, combined with the pounding the stock market took in early days of the depression, took 25 years for investors to recover from.Shiller sees bubbles in the stock market, bond market and the housing market. "You get ... in a situation where you know it's going to decline, but you still saved enough to hold you over; you have no choice."Shiller Expects Lackluster Future U.S. Stock ReturnsShiller, who won the Nobel Prize in economics in 2013, told Investor's Business Daily he expects just 4.4% average annual returns in U.S. stocks over the next 30 years. That's a disappointing return expectation�— less than half the market's long-term return and well short of what pensions are calling for. The S&P 500's long-term return is 9.84%, says Index Fund Advisors.The problem? The stock market is richly valued as prices have run up so much the past few years. The stock market is up 348% since the March 9, 2009 low, putting nearly $29 trillion into investors' portfolios.High valuations rob future gains, Shiller says. He says the so-called CAPE Ratio on U.S. stocks is at an elevated level of 29. The CAPE Ratio, or Cyclically Adjusted Price-To-Earnings Ratio, looks at how much investors are paying for inflation-adjusted earnings averaged over a 10-year period. This indicator shows how expensive the market is, factoring out short-term distortions. What's a high CAPE ratio, mean? "With a CAPE Ratio of 29 (currently), it's only happened a few times in history," Shiller says. "We got to the mid 30s in 1929. So that was a record." Markets subsequently crashed in 1929 and set off the Great Depression.He adds, though, the CAPE ratio can still go higher until an irrational exuberance bubble is deflated. "(The CAPE Ratio) went up to 45 in the year 2000 (prior to the 49% bear market decline from 2000 to 2002)," he said. But the CAPE Ratio is slightly higher now than it was in 1987, before the market's biggest one-day drop of 23% on Oct. 19, 1987.What about more recently, ahead of the crushing 57% bear market from 2007 to 2009? "In 2007 (the CAPE Ratio) was around this level, just before the other crash," he said. So "history shows that (the market's valuation) could go up to 45, just what it did 20 years ago, or ... lose half its value."That's comforting.Shiller: The 'Bond Market Boom Is Unsustainable'Shiller is as nervous about bonds as he is about U.S. stocks. Bonds continue to be one of the hottest asset classes going as investors seek the safety of income. The SPDR Portfolio Aggregate Bond ETF (SPAB) delivered a stock-like total return this year of 8.31%. That's more than twice its average annual return of 3.7% over the past 10 years. Investors are pouring money into bond ETFs, hoping to hide from stock-market volatility and get at least some return."It (the bond bubble) seems to be related to people not paying enough attention thinking through the simple logic ... this can't keep going and it's going to end badly," he said. "These things may sink at some point."Investors outside the U.S. are buying bonds with negative interest rates, simply betting they can sell to someone else when interest rates go even more negative. Holding the bonds until they mature locks in a negative return.Shiller On Housing Bubble: "It's Just Like 2005 Again"Shiller says the housing market is in a bubble phase, not unlike 2005. That was the point the housing bubble was inflated, but yet to go parabolic. "It's like 2005 again," Shiller said. "San Francisco and L.A. are already slowing down." That's a "bad indicator," he said, as those markets have been going up for years.Real-estate stocks are on fire, too. The Real Estate Select Sector ETF (XLRE) is up nearly 29% just this year, blowing away the S&P 500's 20% gain. And that doesn't even include the Real Estate Select Sector's market-beating yield of 2.8%. Real-estate stocks are just narrowly behind the Technology Select Sector SPDR ETF (XLK) as the top-performing sector of the year.Yet, given the housing bubble isn't as "excited as it was" in the early 2000s, Shiller has been reluctant to publicly call it a bubble until now. And he thinks enough people remember the 2000's housing bubble so they recall "home prices really do fall." We're not "as exuberant now, so I'm not sure it's a repeat performance," he said.One Bright Spot: InternationalShiller says one spot in the world dodges such irrational exuberance: Europe. Developed-world international stocks are largely left out of the global boom. He sees European stocks being almost a third cheaper than U.S. stocks.The Vanguard FTSE Developed Markets ETF (VEA) delivered just a 5.07% average annual return over the past 10 years. That's roughly half of international stocks' long-term expected return. But investors are already pouring in. The Vanguard FTSE Developed Markets ETF is up 14% this year."I have higher expectations for Europe than the U.S.," he said.Escape The Bubble? Largest International ETFsSources: ETF.com, S&P Global Market IntelligenceAny time you read a comment on Investor's Business Daily asking if a stock market crash is near, I can pretty much guarantee you it's not near.And professor Shiller isn't telling us anything new. There are bubbles everywhere, including private equity where performance is deteriorating, secondaries are no longer selling at a discount and volatility is often underestimated even if the alpha is there over the long run.I think where Shiller's analysis is interesting is he expects just 4.4% average annual returns in US stocks over the next 30 years. That's a disappointing return expectation�— less than half the market's long-term return and well short of what pensions are calling for.Go back to read my comment on CalPERS where CIO Ben Meng said private equity is the key to achieving the 7% target rate-of-return. It most certainly is but as I stated above, there is a bubble in private equity too and return expectations are coming down there as trillions pour into that asset class.This is why large investors like CPPIB are betting big on unlisted real estate and private debt to capture the returns they need over the long run to achieve their target rate-of-return.Still, I have been around long enough to know when trillions pour into any asset class, including real estate and private debt, future returns decline.Real estate is a function of interest rates and employment. With US rates and the unemployment rate at record low levels, it's no wonder real estate has outperformed this year.If rates start creeping back up and employment growth starts decelerating fast, you will see real estate get hit.But there is another channel where real estate (and private debt) can get hit very hard, the deflationary channel. If we see rates continue to plunge to record lows, going negative and the economy decelerating because people have too much debt on their books, a debt deflation spiral can easily develop and that will clobber real estate, private debt and pretty much all public and private assets.This is why central banks are forcing investors out on the risk curve (while they warn pensions reaching for yield) by continuously lowering rates and engaging in QE or quasi-QE operations. Earlier this week, Mohamed El-Erian posted this chart on LinkedIn: I wryly quipped: "Wake me up when the Fed's balance sheet surpasses all other central banks combined, then the fun begins."Of course, I was joking because if the Fed is required to significantly increase its balance sheet to that degree, it won't be a pretty world economy, it will be a depression.What about Shiller's thoughts on the bond market? He's not the only one worried about a bond bubble. Louis-Vincent Gave, CEO and co-founder of Gavekal Research, thinks the bond market is the biggest bubble of our lifetime, and BCA Research's Chief Global Investment Strategist, Peter Berezin, is warning investors that "owning bonds will be quite painful".I used to work at BCA Research and back then there were some pretty smart guys working on fixed income analysis including Robert Scott, Mark McClellan, Gerard MacDonell and Brian Romanchuk who is now the publisher of the Bond Economics blog.Brian and I later worked together at CDPQ and he always found it amusing when people were warning of the big bad bubble in bonds. He would tell me: "In 90s, there were legions of hedge funds shorting Japanese JGBs and they all got annihilated."Still, there are reasons to carefully track US inflation as it creeps up and even though I am in the deflation camp, back in August, I stated that bond market jitters are overdone and absent real deflation, it was hard to justify rates on the 10-year US Treasury note near 1%.Moreover, earlier this week, HOOPP's CEO Jim Keohane told me he thinks "deflation is already priced in" and if something changes, many investors will be caught off guard. He also said "inflation expectations are way off the mark" and he thinks breakevens on real return bonds (RRBs) are quite good right now and it's a good time to buy.He talked about how Ray Dalio wrote a paper on paradigm shifts going on every ten years and he thinks Trump's tariffs are already inflationary and if labor unions start gaining more power, real wages will rise and you can easily see a spike in inflation (and rates).But some pretty smart bond gurus think bond yields are headed lower. You should all read Lacy Hunt and Van Hoisington's latest Quarterly Economic Review and Outlook here to see why long bond yields are likely headed lower.Have a look at the 5-year weekly chart of US long bond prices (TLT), the index is right on its 20-week moving average:Prices might go lower and yields higher but for that to happen, we need to see a pickup in global PMIs and I'm not seeing that just yet.True, central banks have been easing but there is a lot of debt out there constraining growth. That's why I expect a muddle through economy.As far as stocks, my thoughts haven't changed from last week, the S&P 500 did cross above 3000 but there's a lot of nervousness out there:Still, if it can hold these levels and finish the year up close to 20%, I'd say that's a great year for stocks. Like I said last week, I don't expect a year-end rally or meltdown and think it's best to focus on stock picking than the overall index here.Below, Nobel-prize winning economist Robert Shiller recently stated a recession may be years away due to a bullish Trump effect in the market. A recession is years away and yet a stock market crash is near? That's confusing!And Paul Christopher, head of global market strategy for Wells Fargo Investment Institute, and Mike Santoli, CNBC's senior markets commentator, join "Squawk Box" to discuss whether the broader stock market can move higher without the FANG stocks. http://creativecommons.org/licenses/by-nc-sa/3.0/ Hijacking Alberta Teachers' Retirement Fund? http://pensionpulse.blogspot.com/2019/10/hijacking-alberta-teachers-retirement.html http://pensionpulse.blogspot.com/2019/10/hijacking-alberta-teachers-retirement.html Fri, 08 Nov 2019 14:39:14 UTC at Pension Pulse Joel Dryden of CBC News reports that some Alberta teachers are uneasy and looking for answers after learning their pensions are on the move — without their consultation or approval:Teachers' pensions are currently managed by the independent Alberta Teachers' Retirement Fund Board, or ATRF, which was established in 1939.The corporation currently administers pensions for all teachers in school jurisdictions and charter schools in Alberta, with an option for private school teachers to join as well.But text of the budget released Thursday disclosed the ATRF was "expected to transfer funds to Alberta Investment Management Corporation (AIMCo) for management … AIMCo is expected to provide maximum returns to its clients, and processes will be expanded to support broader agency involvement."Pensions for Workers' Compensation Board and Alberta Health Services employees will also be transferred to AIMCo, according to the budget.Lee Martin, who has taught at St. Teresa of Calcutta School for seven years, said a lack of consultation was what most bothered him."You know, there are close to 40,000 teachers in the province. This pension is pretty big," Martin said. "Every teacher is putting away something close to something like a second mortgage a month. So that's a big investment that teachers need to be consulted on. It just feels like something has been taken away from us."Of course, a lot of people are taking it in the negative, but will it be better? But it's hard to think it could be better."The ATRF currently manages $18 billion in teachers' retirement funds and yielded 9.6 per cent in the 2017-18 fiscal year. Rod Matheson, CEO of the ATRF, said he was informed of the government's plans when the budget was released on Thursday. "Our reaction was very much one of surprise. At this point, we're still wanting to understand," he said. "We're trying to learn what it was that went into making this decision. What information and facts were used to come to the conclusion to drive this action?"AIMCo already administers more than $100 billion in government pensions and other funds."My concern is, not that I don't want it to be an Alberta investment, but it was pretty diverse," Martin said. "There were things overseas — good, ethical investments. Will it still be that way?"In a statement posted on Twitter Saturday, the Alberta Teachers' Association called the move a "hijacking.""Making this decision without consulting the ATA is extremely disrespectful [to those] who are plan members and owners," ATA president Jason Schilling wrote.Move was about efficiency, gov't saysIn a statement provided to CBC News, a spokesperson for Alberta's Treasury Board and Finance, Jerrica Goodwin, wrote that details around the specific timing of the change would be available when legislation is tabled."It is not a requirement to notify the ATRF of this change, and it is proposed until the legislation is tabled and passed," Goodwin wrote.Goodwin wrote the move of the funds to AIMCo was part of a commitment to make government more efficient."[ATRF] assets will be moved under AIMCo so ATRF will have reduced investment management costs and, therefore, higher expected investment returns," she wrote. "Making this change eliminates duplication and reduces the cost of investment services. The ATRF board will remain in place to oversee the pension."Matheson said the ATRF had not yet received that information from the government."To be fair, I have not personally spoken with anyone at the Alberta government myself. I've reached out, and we're going to set up a call and have a discussion," he said. "The focus for us is not about duplication or costs, because we strive for low costs, but much more importantly what we strive for is the best possible net investment returns."What we earn on the investments, net of all costs, is really the most important thing. It's not just about costs, it's about the net returns that we earn."I learned about this yesterday perusing pension news and wasn't surprised Alberta Premier Jason Kenney and his Conservative government are looking to cut costs and have AIMCo manage ATRF's assets.Let me begin by stating I have nothing against this proposal and think it makes a lot of sense over the long run but the way it was handled was just terrible. This is Canada, not China, you don't rule by dictatorship and some Conservatives never learn and their arrogance will cost them political points in Alberta's next election (just like it cost Stephen Harper during the last federal elections).Lee Martin and the ATA are right to be angry, there was zero consultation with the teachers on this proposal, it was basically shoved down their throat. Jerrica Goodwin of Alberta's Treasury Board and Finance might be legally right, the government wasn't required to notify ATRF, but it was a bonehead political move not to consult Alberta's teachers first (really dumb, what were they thinking??).Here is my advice to Jason Kenney and Ms. Goodwin, you should never, ever mess around with teachers' pensions, they will annihilate you. The same thing goes for the broader public-sector, never touch people's pensions without consulting them first.But as terrible as this process was, there is definitely a lot of logic and common sense in the proposal to have Alberta teachers' pensions managed by AIMCo. Why? Because they not only benefit from economies of scale, they also benefit from investing in private markets all over the world, a huge advantage over the long run.Now, I don't want to criticize ATRF in any way as this organization has done a great job managing the assets of Alberta's teachers over the long run. Someone from ATRF sent me their 2018 Annual Report which is well worth reading and provides great information.As you can see below, ATRF's Policy Asset Mix as of August 31st, 2018 (when its fiscal year ends) has a good mix of public and private assets, very much in line with that of its larger peers:Also, as shown below, ATRF has delivered solid long-term returns, 7.4% net of fees over the last ten years versus 6.9% for its benchmark (as of August 31st, 2018):Moreover, ATRF is well governed, it's a pension plan which manages assets and liabilities, and it has implemented risk-sharing (post-1992). It manages these assets at a very low cost ($0.17 per every $100 assets).The funded status of the plans based on the most recent actuarial valuations as at August 31, 2018 is:So, ATRF has not only delivered the long-term returns, it has also maintained a fully funded status or close to it and that's what ultimately matters to Alberta's teachers.In terms of compensation, the senior managers at ATRF are compensated well as they have delivered the long-term returns:Still, they are not compensated as well as their larger Canadian peers and one can argue that they and the managers at Vestcor are underpaid relative to their larger peers.So far, I've presented a case for ATRF and again, there's a strong case to be made to maintain things as they are.Now, let me delve into AIMCo's 2018 Annual Report, just to go over some things. The table below shows asset class performance:As shown, AIMCo's 5-year total fund return is 7.2% vs 6.5% for its benchmark. These are calendar year results as opposed to fiscal year results that ATRF posts (as of end of August).Unlike ATRF, AIMCo doesn't provide 10-year total fund results relative to benchmark but the results are there over the long run which is why AIMCo's senior managers are paid extremely well, in line with their large Canadian peers:The senior managers at AIMCo are better paid than those at ATRF but they also manage more assets and that makes their job easier in one sense and more complex in another.Both organizations are well governed but the biggest difference is ATRF is a pension plan, managing assets and liabilities whereas AIMCo is a pension fund managing assets on behalf of its members who are responsible for their liabilities.If ATRF's assets are transferred over to AIMCo, it will make it an $130 billion + pension fund and it will still need to manage these assets in the best interests of its members.This means big cost savings and more importantly, scale to invest directly in private markets all over the world, and that's where AIMCo has a competitive advantage over ATRF.And this is why I believe this proposal makes sense over the long run even if the government of Alberta bungled up the consultation process.Sadly, judging by the tweets on Twitter, most of Alberta's teachers don't know much about AIMCo. This isn't entirely their fault and I have spoken to senior members at AIMCo over the years to bolster their communications and do a better job at owning their brand (it's another organization and they need to be a lot more visible if they are to compete on a global scale).What else? The context of this decision. It seems like Rachel Notley's NDP government meddled way too much in AIMCo's affairs and proposed things that Jason Kenney's government is rightly scrapping (like after three years, some clients of AIMCo had the right to walk away, now they will remain captive to AIMCo which is the right decision).Let me end by stating that it's only normal that employees at ATRF are rightfully concerned about their jobs. This decision will lead to cost-cutting and duplicate jobs will likely be eliminated but all this remains to be seen because AIMCo is a great organization and I'm sure it can and will absorb many employees from ATRF if this proposal goes through.It's also worth noting this was the government's proposal, not AIMCo's, and therefore it's up to the government to clarify what it wants to be done and what that means for each organization.Lastly, I can't help thinking if Doug Ford's Ontario Conservatives are looking at this proposal and thinking of trying the same thing in Ontario, consolidating several large DB pensions. Again, my advice is don't mess with teachers' pensions or other pensions without proper consultations.I also believe if Ford's government tried the same thing in Ontario, there would be huge pushback as the plans there are larger and more entrenched.Below, CBC News reports Alberta will cut public sector jobs, end the cap on post-secondary tuition, chop municipal funding and delay infrastructure projects, all with the aim of returning to a balanced budget by 2023.The Alberta government on Monday introduced two pieces of omnibus legislation containing sweeping changes that include ending a ban on using replacement workers during labour disputes and controlling where in the province doctors can practice.And lastly, Alberta Premier Jason Kenney has declared that if the Trans Mountain Pipeline is not built by Trudeau’s government, he will hold a referendum on ending equalization payments.I believe the Trans Mountain Pipeline should be built but Jason Kenney's referendum is another bonehead idea which will backfire on his government and Alberta's citizens. Not too bright.Update: See my follow up comment on this here. http://creativecommons.org/licenses/by-nc-sa/3.0/ CalSTRS Sees a Big Drop in Carried Interest http://pensionpulse.blogspot.com/2019/11/calstrs-sees-big-drop-in-carried.html http://pensionpulse.blogspot.com/2019/11/calstrs-sees-big-drop-in-carried.html Thu, 07 Nov 2019 02:34:01 UTC at Pension Pulse Alicia McElhaney of Institutional Investor reports on why CalSTRS paid less to invest in 2018:The overall cost of investing for the California State Teachers’ Retirement System has fallen, but not because investment managers have decreased their fees. This is according to CalSTRS’s annual investment cost report, which was released ahead of the retirement system’s monthly meeting on November 6. The report showed that the total cost of managing the retirement system’s portfolio decreased by six percent year-over-year. The reason? Two words: carried interest. As the performance of investments that charge carried interest — a type of performance fee — fell year-over-year, so too did the cost of investing for CalSTRS. According to the report, the overall costs of investing for CalSTRS were lower in 2018 because carried interest paid by the pension fell by 36 percent in absolute dollars from the previous year. CalSTRS paid nearly $1.72 billion in investment costs in 2018, the report said. This is compared with $1.83 billion the previous year. “The reduction in carried interest indicates a slowdown in realized profits from private investments made over the last several years,” the report said. But according to the report, which included details on fees charged between 2015 and 2018, CalSTRS’s total portfolio costs when excluding carried interest increased 14 percent from the previous year. The increase, the report said, is the result of net asset value growth, new investment strategies, and asset allocation changes. The plan’s net assets increased three percent in 2018, which contributed to the increase, the report said. What’s more is that new investment strategies, including a shift within the global equity asset class from a home-country bias to a global structure, accounted for a five percent increase in costs because of higher fees charged by the new strategies, the report showed. The remaining increase of six percent resulted from a continued effort on the part of CalSTRS to increase its allocation to private assets, it said. What’s more, the cost of investing for the retirement system was lower than its peers. According to an analysis of 48 U.S. public funds and 15 global peer funds with five or more consecutive years of data, CalSTRS paid, on average, at least five basis points fewer than its peers in total investment costs between 2015 and 2018. As of September, the retirement system had an estimated $238.3 billion in assets under management, its chief investment officer report for November showed. It returned 6.8 percent for the fiscal year ending on June 30. A spokesperson for CalSTRS did not respond to an email seeking comment.Take the time to skim through CalSTRS's 2018 Annual Investment Cost Report here and the presentation here. The slide below is the critical one showing total portfolio costs and carried interest (click on image):And below, you can see the investment costs in dollars (click on image):As you can see, there was a 36% drop in carried interest in 2018 which is why total investment costs dropped 6% in 2018.The plan's assets grew approximately 3% in 2018, driving up costs in absolute dollar terms. In terms of the attribution of where costs increased, see the chart below:In terms of total external versus internal and private versus public market costs, the slides below give you a nice breakdown:Not surprisingly, the externally managed private funds make up a bigger cost percentage of NAV (1.76% vs 0.36%).The report states: “The reduction in carried interest indicates a slowdown in realized profits from private investments made over the last several years.”That isn't good, it means private market fund managers are having harder time delivering the alpha they used to deliver.I recently discussed how there are bubbles everywhere, including private equity where performance is deteriorating, secondaries are no longer selling at a discount and volatility is often underestimated even if the alpha is there over the long run.I also discussed how private equity titans are looking to cash out, although not because they think it's the top of the market as most of them are plowing the bulk of the money they receive from funds right back in their business.Still, the reduction in carried interest at CalSTRS is alarming and in my opinion, it's a harbinger of things to come for CalSTRS, CalPERS and most other US pensions which primarily rely on their fund investments in private markets to generate their required target rate-of-return.In Canada, our large pensions have mature, developed private equity co-investment programs where they can scale into the asset class and pay no fees. In fact, in most Canadian pensions, the co-investment portfolio is much larger than the fund investment portfolio which is how they are able to maintain their 12-15% allocation to private equity.To do this properly, Canada's large pensions hired an experienced team of private market professionals and compensates them appropriately so they can quickly analyze co-investment opportunities as they arise.In the US, it's hard to ramp up co-investments because most pensions are incapable of attracting and retaining a qualified staff to this activity on the scale that is needed.This is why US CIOs like Chris Ailman at CalSTRS and Ben Meng at CalPERS are worried and need to think outside the box when it comes to private equity. Both these CIOs are extremely smart, part of the 2019 Power 100 List, but they face structural issues when it comes to fully developing their private equity programs and making sure they remain competitive and deliver the requisite returns over the long run.I recently discussed how CalPERS is ramping up its in-house private equity which is now headed by Greg Ruiz, a former private equity fund manager. He's in charge of ramping up Pillars III and IV.I believe Chris Ailman and his PE team at CalSTRS are taking a closer look at BlackRock's Canucks -- Mark Wiseman and Andr� Bourbonnais -- who are shaking up private equity with their long-term private capital team, known as LTPC.In my opinion, it would make a lot of sense for many large US pensions to take a closer look at BlackRock's private equity model and really understand the advantages it offers over traditional PE models.Importantly, not only can you save on fees over the long run, you can also generate the requisite long-term returns by eliminating all the churning that typically goes on in PE Land as funds keep selling investments to each other as they focus on raising assets for their next fund.Like I said, when you see a big drop in CalSTRS's carried interest fees, it's time to start worrying because it's not only going on there, that's for sure.By the way, I've focused mostly on private equity but a recent study from the University of Chicago Booth School of Business highlights how pensions are paying billions in 'unnecessary' real estate fees:Investors would be better off adding leverage to their core real estate portfolios than paying billions of dollars in fees each year for alternative assets in the sector, a new study has found.Underfunded public pensions have shifted to riskier assets in hopes of high returns, but their reach for yield in non-core real estate funds is not paying off, according to�real estate professor Joseph Pagliari of the University of Chicago Booth School of Business and Mitchell Bollinger, an industry advisor, investor, and analyst.Investors could have collectively saved an average $7.5 billion a year in “unnecessary investment-management fees” from 2000 through 2017 by adding more leverage to less risky, core assets rather than investing in non-core funds, the researchers found. Bollinger and Pagliari published their findings in the Journal of Portfolio Management last month.Many chief investment officers at public pensions are “swinging for the fences,” seeking to repair their funding shortfalls with outsized returns from alternative investments such as non-core real estate,�Pagliari�said Friday in a phone interview. “If you adjust for fees and risk, then on average, investors have overpaid by approximately 300 basis points per year for their non-core real estate funds.”Core real estate funds typically hold fully-leased buildings that are considered investment-grade, according to Pagliari. Non-core funds in private real estate, including value-added and opportunistic, are riskier and involve more leverage.He and Bollinger found that value-added funds underperformed levered core funds by�3.26 percentage points annually, while the opportunistic funds lagged by 2.85 percentage points.“Consider the implications,” Pagliari and Bollinger wrote in their paper. “Investors could have increased the leverage on their core portfolios from approximately 22 percent to somewhere between 55 percent and 65 percent, and they would have outperformed the net returns of the value-added and opportunistic funds by approximately 300 bps per year while incurring the same level of volatility.”Value-added funds charge investors about three times more in fees than core real estate funds, according to their research. Opportunistic funds are even more expensive, raking in about four times more in fees than core real-estate funds.Joseph Azelby, head of real estate and private markets at UBS Group’s asset management unit, noted at a media briefing in June that�pensions have been shifting�a portion of their core real estate holdings to properties under development or renovation. He flagged these riskier bets as a potential concern because pension managers had similarly stretched for yield in the runup to the 2008 financial crisis.During the phone interview, Bollinger said it’s not easy to change the behavior of pensions despite “overwhelming” data showing it would make “economic sense” to add leverage to core funds instead of paying for riskier, private real estate. Having approached risk-taking in the sector in the same way for years, pension fund managers may be reluctant to venture outside their “comfort zone,” he suggested.Pagliari also finds it puzzling that investors wouldn’t want more leverage on core assets and less on riskier properties that aren’t fully leased or require development.“That’s a bit of a mystery,” he said by phone. “It’s backwards.”I've already discussed how investors are taking on riskier real estate bets and this new study confirms what I've long suspected, namely, value added and opportunistic real estate funds aren't better than core real estate once you adjust for fees and risk but I doubt anyone in Pension Land is taking notice.Below, the CalSTRS Investment Committee meetings from the September board meeting. Take the time to watch these clips, they are packed with detailed information.CalSTRS CIO, Chris Ailman, talks in the third clip below, well worth listening to his insights. http://creativecommons.org/licenses/by-nc-sa/3.0/ IRS Announces 2020 Employee Benefit Plan Limits https://www.employeebenefitsblog.com/2019/11/irs-announces-2020-employee-benefit-plan-limits/ https://www.employeebenefitsblog.com/2019/11/irs-announces-2020-employee-benefit-plan-limits/ Wed, 06 Nov 2019 22:24:32 UTC Jeffrey Holdvogt, Jacob Mattinson and Brian Tiemann at Employee Benefits Blog Recently the Internal Revenue Service (IRS) and the Social Security Administration announced the cost-of-living adjustments to the applicable dollar limits on various employer-sponsored retirement and welfare plans and the Social Security wage base for 2020. In the article linked below, we compare the applicable dollar limits for certain employee benefit programs and the Social Security... Continue Reading http://creativecommons.org/licenses/by-nc-sa/3.0/ CIO's 2019 Power 100 List http://pensionpulse.blogspot.com/2019/11/cios-2019-power-100-list.html http://pensionpulse.blogspot.com/2019/11/cios-2019-power-100-list.html Wed, 06 Nov 2019 18:39:24 UTC at Pension Pulse Chief Investment Officer recently announced its Power 100 list for 2019:For the eighth edition of the Power 100, we laud the asset owners who have distinguished themselves in navigating a changing, and often perilous, market landscape. Come 2020, the ground surely will continue to shift beneath their feet, as they balance opportunity and prudence to deliver first-rate returns.In 2019, these owners started out after the S&P 500 almost entered a bear market. Along the way this past year, they had to steer through headline-induced downdrafts that could come from anywhere, as the trade war and other exogenous events sent the stock market into turmoil. They also had to strategize how to deal with the return of falling interest rates, as the Federal Reserve reversed its policy of tightening amid signs of economic weakness. Up ahead, those headwinds will present tough challenges. Because they met the test of 2019 with such skill and grace, our Power 100 richly deserve to be honored.For the list this year, along with their ability to innovate, some CIOs moved up the list when we added influence into our formula of factors. As the industry is often shaped by the power qualities of the CIO, their ability to collaborate also continues to play an important role, as CIOs tread carefully toward continued globalization, co-investment and team development to create investment offices that will last far into the future.You can view the 2019 Power 100 List here and a few profiles here.At the top of the list is Yale's CIO David Swensen, otherwise known as "God" in the finance industry for boasting one of the longest and most successful track records and for being an innovator in portfolio management.Second came Hiromichi ("Hiro") Mizuno, the CIO of Japan's GPIF. Mizuno will lead the nearly $1.5 trillion pension behemoth for at least six more months, according to an announcement on the Tokyo-based fund’s web site:Mizuno, who will lead GPIF through March 31, has been chief investment officer of the fund since January 2015. His previous term ended on September 30. The fund owns about ten percent of the Japanese stock market and about one percent of global stock market. Since his arrival at the world’s largest pension fund, the former private equity and banking executive introduced the culture of investment banking to the institution. He has made major changes to the investment strategy, initially moving the fund’s shift away from stocks to domestic debt. On Monday, the Nikkei announced that the fund continues to move away from domestic debt, given ultra-low rates in favor of holding more foreign bonds. He also pushed for assets that reflected environmental and social concerns.The fund is a topic for a Harvard Business School case study. On a recent podcast, Harvard Business School professors Rebecca Henderson and George Serafeim noted that Mizuno has improved corporate governance, increased gender diversity and addressed climate change, radically re-thinking institutional investing. Mizuno’s approach to the fund, which has influenced other firms, was unusual because his strategy incorporated these factors into investment decisions simultaneously.“The radical part was thinking about all three. Many Japanese asset managers and investors were worried about governance,” said Henderson. “It was the idea that you should focus on E and S as well when everyone was, like, ‘Whoa, why are you doing that?’ I mean, that was very countercultural…We have a protagonist who’s absolutely trying to change the world.”Mizuno is aware that investors can’t diversify away from risks to the whole economy. “For Hiro, the risk of climate change is not some abstract thing that might happen to some other firm,” said Henderson. “He believes that the whole economy is at risk–and the Japanese economy is at risk from these issues.” Mizuno has embraced change in other ways. He hired a consultant to help the fund adapt to alternative investments, as its regulatory framework was set up only for investments in public equities and fixed income rather than Japanese government bonds.The co-chair of the Milken Institute’s Global Capital Markets Advisory Council even turned to technology. In November 2017, GPIF collaborated with Sony Computer Science Laboratories to study the impact of AI on asset management. Specifically, Mizuno sought to apply the technology for evaluating and monitoring fund managers. The effort culminated in a study that addresses how AI could be used to help each manager execute, depending on investment styles.“We’re just trying to prove [that] even boring organizations like the GPIF can benefit from AI,” he said.Mr. Mizuno and Yngve Slyngstad, Noway's $1 trillion man who came in number 10 on the list, have a giant beta problem on their hands which works in their fund's favor as long as global stocks and bonds keep rallying.Bloomberg recently reported that Yngve Slyngstad is stepping down after spending the past 12 years building a $1.1 trillion behemoth. He did a great job navigating that giant Norwegian super tanker and has decided it's time to step down and focus on other things.At the third spot comes Chris Ailman, CalSTRS' CIO, who has his very own Twitter account but doesn't abuse it like the Twitter in Chief in the Oval Office.Ailman makes regular appearances on CNBC and Bloomberg and he's a great communicator. He takes diversity very seriously and is one of the top pension CIOs in the world.Ailman's counterpart at CalPERS, Ben Meng, came in number 36, which was a bit surprising to me as I think Meng is attempting to do some of the most innovative things at CalPERS like leveraging up its portfolio and ramping up its in-house private equity program.Looking at the entire list, I paid close attention to the Canadian power brokers.Ziad Hindo, OTPP's fairly new CIO, came in number 7 on the list, which is a huge and well-deserved achievement: Our Chief Investment Officer Ziad Hindo has ranked #7 on @ChiefInvOfficer's 2019 Power 100 List. Congratulations! https://t.co/JpCRsISVpd— OTPP (@OtppInfo) October 31, 2019Last month, Hindo was interviewed by Zane Schwartz the National Post, discussing how the $200-billion plan will survive the trade war:Ziad Hindo has had an intense six months.The chief investment officer of the Ontario Teachers’ Pension Plan (OTPP) has overseen the launch of a new tech-investing division, surpassed $200 billion in assets under management and inked partnerships with Google’s sister company Sidewalk Labs and Boston Consulting Group (BCG) Digital Ventures. He also launched the Teachers’ Innovation Platform (TIP), which invested in SpaceX in June.Teachers’ is going all in on tech: the fund is overhauling its operations and those of its portfolio companies as it gears itself up for an economic downturn and a global trade war.But it isn’t the only pension fund with a new tech focus. The Caisse de d�p�t et placement du Qu�bec and the Canada Pension Plan Investment Board (CPPIB) have new billion-dollar tech funds and plans to overhaul their investing strategies. CPPIB and the Ontario Municipal Employees Retirement System (OMERS) announced new tech-focused divisions coupled with San Francisco offices this year.In an interview shortly after The Logic reported that the fund was planning a new incubator, Koru, he discussed why he wants to expand in India, why OTPP is focusing on private equity and infrastructure investments and his plan for diversifying Teachers’ $200-billion portfolio.This interview has been edited for length and clarity.How does Koru fit into Teachers’ overall strategy of increasing exposure in the tech space?In private equity, infrastructure and natural resources, we have more than 90 private holdings across three diverse sets of sectors and geographies. The idea behind Koru is to help them do venture and to help them think about new businesses and new possibilities that heavily leverage technology to drive exceptional growth in revenue.It will tackle early-stage venture in traditional economic sectors, which, frankly, will sooner or later be disrupted one way or the other through external forces. We’re trying to inculcate that entrepreneurial mindset, so we get to disrupt our own businesses before external forces disrupt us.CPPIB and the Caisse recently launched internal reviews to look at the potential for disruption among their own companies. Teachers’ is partnering with an outside group to do the same. What’s the benefit of having BCG involved?BCG Digital Ventures has entrepreneurs, software engineers, startup guys, a lot of data analysts. BCG Digital Ventures, we’ve gotten to know very well over the last couple of years. They’ve already stood up 90 startups or ventures by working with companies, and are doing it very successfully.We always say one of our core values is partnering, and I believe we picked the right horse here. They’re a perfect partner for us, to help us inculcate that venture, that startup mentality, that entrepreneurial spirit inside our portfolio companies. I can’t really comment on what the other pension plans are doing.Koru is early-stage venture, focusing on our holdings or private investments. TIP is late-stage venture and growth equity, but for new external investments.When we put both of them together, they really cover the entire venture-risk spectrum. We have early-stage venture, but focusing on our own businesses — that’s where our edge is.We really don’t have that much of an edge going in Silicon Valley, targeting Series A early-stage venture types. A, they’re not scalable. B, I’m not sure we’ve got the network to actually find out who are the entrepreneurs in their basement that are about to launch Series A. That’s not where we believe we can compete.Both OMERS and CPPIB have opened San Francisco offices in the past year. Is Teachers’ interested?We haven’t really landed on whether we need an office or not. I’m not sure the winning formula is only going to be in Silicon Valley. We see thriving technologies coming out of Asia and Europe, too, which is probably a market that is not as competed-out as you have in the States.In September, Ontario Teachers’ said it would switch its focus from investing via limited partners in India to making direct investments in both infrastructure and private equity. Private equity and infrastructure seem to be focuses for a lot of your new initiatives: Sidewalk Infrastructure Partners, Koru, the Teachers’ Innovation Platform. Why?They’ve always been areas of focus for us. We were one of the early adopters of going direct and internal in private assets: first in private equity, then we started infrastructure almost 17, 18 years ago.I think the emphasis on India is that it is a vibrant emerging market with huge potential. We are going to invest significantly in our employees in Asia. I will be going with a senior investment team to India later this fall. We’re going to spend the whole week meeting with businesspeople, fund investors, our partners on the GP (general partner) side there and government officials.Are there other parts of the world you’re planning trips to?We have pretty excellent capabilities in Europe, based out of the London office, with, again, a great emphasis on both private equity and infrastructure, as well as high-conviction equities. We’re going to grow our capabilities in Europe, as well.When we look 10 years out, we want to make sure we’re as global as we could be, so that we can scour the earth for the best opportunities from a risk-adjusted-return perspective and deploy capital accordingly. Canada is unfortunately too small a market for us.In August, Teachers’ announced it had crossed $200 billion in net assets, and you said, “Over the last few years, we have been transitioning the asset mix to a more balanced approach from a risk perspective and … we increased our allocation to the fixed-income asset class.” Is that in response to the trade war and global volatility? When we looked at the portfolio a few years ago, we realized that it doesn’t have enough fixed-income exposure. Why do we need fixed-income exposure? Two reasons.First: income, because you clip coupons on government bonds. Second: from a diversification perspective, because fixed income typically does well in recessions or economic downturns.We are in the 10th or 11th year of the economic expansion. It is getting a little long in the tooth in that cycle. You need fixed income. You need it because of a recession. You need it because of the trade war and tensions. By themselves, they’re having pressure on the manufacturing sector of the economy.Big picture, what does success in tech look like for you five years from now? First, we want to generate returns. And we want to make sure that from a capability perspective, we participate in the new trends that define the new economy.They both serve that purpose, Koru and TIP. But for Koru specifically, we want to have about 15 to 20 portfolio ventures established that are hopefully commercially profitable. On TIP, really, it’s about making sure that we understand technological disruption. That we’re participating in those new sectors — be it health or telecommunications or cleantech — that really define tomorrow’s economy.It’s also about inculcating that digital, technological mindset, internally but also within portfolio companies.Finally, tech is extremely important when it comes to attracting and retaining talent. Young talent want to come work for organizations that are vibrant, dynamic, thinking about technology, thinking about the future — whether it’s cleantech or sustainable investing.I've already covered OTPP's Koru here as well as TIP and Space-X here and here.Ziad Hindo took over from Bjarne Graven Larsen who in my opinion is a very smart man but didn't fit culturally at OTPP and made some huge HR blunders which will cost the organization as they lost a series of outstanding senior investment executives across public and private markets.I think extremely highly of Ron Mock, Teachers' CEO who is stepping down at the end of the year, but I don't think bringing Larsen in at Teachers was one of his best decisions. Obviously, he will disagree with me but from the outside looking in, I wasn't impressed with Larsen's HR decisions.Anyway, Ron will agree with me that Jo Taylor, OTPP's incoming CEO, has a great CIO in Ziad Hindo to lean on when the going gets tough, and it will get tough.Coming in number 8 on the 2019 Power 100 List, is CDPQ's CEO Michael Sabia who is undoubtedly one of the most innovative CEOs in Pension Land. Under Sabia's watch, the Caisse is undertaking a mammoth greenfield infrastructure project (REM) and it's fair to say that the Caisse is leagues ahead of its peers when it comes to sustainable investing (don't argue with me on that point).Sabia is going on his last year at the helm of the Caisse and already rumors are swirling about who will replace him. Will it be a man or a woman? I don't know. All I know is the Caisse's Chair of the Board, Robert Tessier, should conduct a thorough and independent search process.He has great internal candidates like Macky Tall and Kim Thomassin, and there are some great external ones too, the most high profile one being Louis Vachon, President & CEO of the National Bank who between you and me, doesn't need the headaches of being the head of the Caisse but might relish the challenge (key word: might). There are other great male and female external candidates, I just don't want to spill the beans publicly (Mr. Tessier can reach out to me if he wants some more names but I will publicly state Macky Tall should be the next CEO of the Caisse).Which other senior managers at Canadian pensions made the 2019 Power 100 List? Well, Geoffrey Rubin, Senior Managing Director and CIO at CPPIB made the list, coming in at number 12. I've heard great things about him. One CPPIB employee told me: "he's like a big, husky football linebacker who brings a lot of energy and enthusiasm to his job." I'd love to meet Rubin one day and do an extensive profile on him (not to be mistaken with CIBC's former chief economist Jeff Rubin).Other Canadian pension managers who made the list? Vincent Morin, President of Air Canada Pension came in number 15, Gordon Fyfe, the CEO/CIO of BCI came in number 37, and Dale MacMaster, CIO of AIMCo, came in number 94.RBC Global Asset Management Inc. just announced the first closing of the RBC Canadian Core Real Estate Fund, which attracted more than $1.25 billion in equity commitments from institutional and individual investors, materially exceeding subscription targets. RBC GAM announced the creation of the Fund in March 2019 together with British Columbia Investment Management Corporation (BCI) and QuadReal Property Group (QuadReal).I covered BCI's record $7 billion partnership here and think it was a great deal for all parties involved as investors get to invest in part of BCI's fantastic Canadian real estate portfolio and BCI gets liquidity to diversify its real estate holdings outside Canada.Since his days at PSP, Gordon Fyfe loves carrying both hats (CEO/CIO) because deep inside, he loves markets a lot more than the job of being CEO and needs to balance out the more high stress activities of being a CEO with his CIO duties. Dale MacMaster, CIO of AIMCo, is easily one of the smartest CIOs I've talked to and he's also a very nice guy. AIMCo is lucky to have hin as their CIO.� If you read the entire list, you'll see some less well known names but also some pretty heavy hitters, so it's impressive to make this list.I was actually surprised more CIOs and CEOs from Canada's mighty pensions didn't make the list, people like Mark Machin, CEO of CPPIB, John Graham, Senior Managing Director & Global Head of Credit Investments at CPPIB, Jean Michel, CIO of IMCO, Eduard Van Gelderen, CIO of PSP Investments, Satish Rai, CIO of OMERS, James Davis, CIO of OPTrust, Jim Keohane, CEO of HOOPP, Jeff Wendling CIO of HOOPP, and women like Julie Cayes, CIO of CAAT Pension Plan and Marlene Puffer, CEO of CN Investment Division.Anyway, I take these lists with a grain of salt but it's still nice to be recognized for all the hard work you do.I did reach out to Ziad Hindo but haven't heard back from him. However, another exceptional CIO, David Long, the former CIO of HOOPP, did call me back earlier today and we had an interesting and lengthy discussion.David recently joined Alignvest where he consulted Alignvest Acquisition II Corporation, a special purpose acquisition corporation, on the Sagicor deal.Alignvest sent out this note on leadership change: We are pleased to announce that Dr. David Long, the former Chief Investment Officer of Healthcare of Ontario Pension Plan (HOOPP) has joined AIM as Co-Managing Partner with Kerry Stirton, and with AIM Partners Cheryl Davidson and Athas Kouvaras. Simultaneously, AIM Managing Partner Donald Raymond transitions to Chair of the AIM Investment Committee. At the time of David’s departure in 2017, HOOPP was the best performing large pension plan in the world over the previous ten year period (2016 CEM World Bank Group Study). Dr. Long was instrumental in the success of HOOPP and we consider it a major achievement for David to join AIM in this leadership capacity. David will join AIM with the goal to deliver even more value from the internally managed portion of the fund; something Dr. Long did exceptionally well at HOOPP. Moreover, David will be working with Alignvest with regards to a large new client, Sagicor Financial Corporation.AIM Managing Partner Don Raymond will be transitioning out of his day-to-day Co-Managing Partner role while continuing his responsibilities as Chair of the AIM Investment Committee. Notably, AIM will continue to implement the Canada Model approach that Dr. Raymond designed for Alignvest Strategic Partners Fund. Dr. Long is very familiar with the Canada Model approach from his many years at HOOPP and will bring to bear additional capabilities for optimizing the value of client investments within the fund. For those of you who don't know, David Long is a derivatives powerhouse and a big reason as to why HOOPP achieved great long-term success and is one of the best pension plans in the world. The other reason is obviously Jim Keohane, HOOPP's smartest guy in the room and an expert in pension delivery.Anyway, David and I spoke at length but for brevity purposes, I want to list some of the main points below and will likely edit them to add things:David told me a good CIO needs to be "pretty sharp mentally" and has to have a "broad background in finance, trading, and risk management." He added : "You need to be more well rounded than just investments to deal with tech, people, the Board and to manage change in a very fast pace environment. You need to be good at planning, in terms of hiring, see the future and plan ahead."We talked at length about markets, the role of central banks and the role that politics play into the equation. David told me the "massively increased role of central banks has made investing difficult." On deflation vs inflation, he said inflation has "shown up in securities markets and the service economy" but said the "capacity of central banks to continue doing what they’re doing is limited and the end point is politics." He expanded on this stating: "The Fed’s modest sized balance sheet (relative to the ECB and BoJ) is because of US politics where too much government intervention is frowned upon. Central banks are doing whatever it takes to sustain some level of economic growth but politics is a key issue."He told me "MMT isn’t radical, it’s become more mainstream" and "as long as people believe the currency is worth as much as yesterday, that's fine" but if there is a crisis of confidence, it could degenerate quickly. He certainly doesn't believe moving consumption ahead will create real wealth.He is concerned that whatever level of prosperity is driven by "low rates and central bank intervention' and told me the big risk is if there is any change of that policy direction. "Policy is based on humans and they’re capricious."He wasn't bearish or bullish on markets and told me he doesn't see the bubbles of the past as there is a healthy amount of skepticism in the markets." But he did say record low unemployment isn't a good indicator of things to come because in this economy, a financial crisis will lead to higher unemployment (economy is more depended on financial markets).In terms of private markets, he said it depends on a lot of different factors. "Some transactions are well thought through, others are based on financial engineering."He said that all pensions are struggling with the same issue, "interest rates are not high enough to meet your future obligations" forcing pensions out on the risk curve.He said many traditional activities of banks are pushed out in the private sector. HOOPP undertook balance sheet activities. Lending activities and some balance sheet activities are migrating elsewhere now because of the post-crisis regulations on banks which is good and bad.We had an interesting exchange on the role of a CIO or co-CIO. He said staffing decisions are more complex, which is why some organizations offer two candidates "half a baby." He said "two individuals can manage all the priorities but ultimately you need direct accountability."Interestingly, he said the job of a CIO can be "quite isolating when going up against the heads of five asset classes so you need a team, strong lieutenants or a strong co-CIO."In terms of peers, he spoke highly of Ontario Teachers and said they helped him a lot when he first started but said the "golden age of pensions is over" and that right now, organizations are so big you need to rely on "third-party PowerPoint presentations to know what is going on in different units."I thank David Long for talking to me earlier today and really wish we did a podcast, he's an excellent guest to have on an investment podcast.Speaking of podcasts, Meb Faber recently spoke with GMO’s Ben Inkler on the problem of good returns in the near term. Take the time to listen to this podcast here, it's excellent, especially the part on monopolies/ monosponies and how profits are increasingly being concentrated in a handful of large corporations. I also embedded it below.Second, the chief executive officer of Norway’s sovereign wealth fund, Yngve Slyngstad, is stepping down after spending the past 12 years building a $1.1 trillion behemoth. He spoke with Bloomberg on his decision to step down.Third, Bridgewater Associates founder and billionaire investor Ray Dalio sits down with CNBC's Leslie Picker to discuss the state of monetary policy in the US, income inequality and more. Great interview, take the time to watch it.Lastly, I embedded an older clip where Stephanie Pomboy, founder and president of Macro Mavens, sat down with Real Vision's Grant Williams to discuss her global outlook after the Fed’s recent course-reversal. Pomboy and Williams take a deep dive into the significance of the gaps between various economic indicators, and discuss the implications for capital markets. They also touch on associated topics such as China, cryptocurrencies, and gold. Filmed on April 18, 2019 in New York. Update: Ziad Hindo, CIO of Ontario Teachers', did reach out to me after reading this comment:Thank you for the shout out. Apologies I was pretty tied up and couldn’t get to you in time. I would share the following:Being on the list is quite humblingPersonally, I would say our success is all about the pension promise, that’s what we need to deliver on and that’s all that matters.I can’t stress enough that any personal achievement is due to all the great people and deep talent that I have had the privilege of learning from, working with and have the support of for almost 20 years at Teachers’. It is quite unique being and working at Teachers’ with such a great and talented team.I thank Ziad for getting back to me and no need to apologize, he is a very busy CIO with huge responsibilities but as he rightly emphasizes, he has a solid and talented team backing him up. http://creativecommons.org/licenses/by-nc-sa/3.0/ CPPIB Buys Pattern Energy in Huge PIPE Deal http://pensionpulse.blogspot.com/2019/11/cppib-buys-pattern-energy-in-huge-pipe.html http://pensionpulse.blogspot.com/2019/11/cppib-buys-pattern-energy-in-huge-pipe.html Tue, 05 Nov 2019 20:36:04 UTC at Pension Pulse The Canada Pension Plan Investment Board (CPPIB) has just put out a statement stating it will acquire Pattern Energy in an all cash deal valued at approximately $6.1 billion:Pattern Energy Group Inc. (Nasdaq and TSX: PEGI) (“Pattern Energy” or “the Company”) and Canada Pension Plan Investment Board (“CPPIB”) today announced they have entered into a definitive agreement, pursuant to which CPPIB will acquire Pattern Energy in an all-cash transaction for $26.75 per share, implying an enterprise value of approximately $6.1 billion, including net debt.CPPIB and Riverstone Holdings LLC (“Riverstone”) have concurrently entered into an agreement pursuant to which, at or following the completion of the proposed acquisition of Pattern Energy by CPPIB, CPPIB and Riverstone will combine Pattern Energy and Pattern Energy Group Holdings 2 LP ("Pattern Development") under common ownership, bringing together the operating assets of Pattern Energy with the world class development projects and capabilities of Pattern Development.Under the terms of the merger agreement, Pattern Energy shareholders will receive $26.75 in cash consideration for each share of Pattern Energy, representing a premium of approximately 14.8% to Pattern Energy’s closing share price on August 9, 2019, the last trading day prior to market rumors regarding a potential acquisition of the Company. The consideration also represents a 15.1% premium to the 30-day volume weighted average price prior to that date.The Pattern Energy management team, led by Mike Garland, will lead the combined enterprise.“This agreement with CPPIB and Riverstone provides certain and significant value for Pattern Energy shareholders with an all cash transaction at a very attractive stock price,” said Mike Garland, CEO of Pattern Energy. “Over the years, Pattern Energy has been able to provide shareholders with a consistent dividend and now our shareholders can realize the value embedded in the Company. We believe the proposed transaction reflects the strength of the platform we have built.”“In reaching this transaction, the Pattern Energy Board of Directors undertook a robust process that we believe culminated in a transaction that delivers value to shareholders,” said Alan Batkin, Chairman of the Pattern Energy Board of Directors. “As part of this process, the Board formed a special committee, composed of independent directors that directed the process at all times, and retained independent legal and financial advisors to assist our review of the transaction and provide a fairness opinion. The special committee reviewed multiple bids as part of a thorough process that involved multiple parties and evaluated the transaction against the Company’s standalone prospects, performance and outlook relative to historic trading multiples and yields. Based on this review and in light of the transaction structure, the special committee unanimously determined that this transaction is in the best interest of the Company’s shareholders and recommended it to the full Pattern Energy Board, which also determined that this transaction is advisable and in the best interests of the Company’s shareholders. The transaction delivers significant, immediate and certain value to the Company’s shareholders.”“Pattern Energy is one of the most experienced renewables developers in North America and Japan with a high-quality, diversified portfolio of contracted operating assets, aligning well with CPPIB’s renewable energy investment strategy and the increasing global demand for low-carbon energy,” said Bruce Hogg, Managing Director, Head of Power and Renewables, CPPIB. “The Pattern Energy management team has a proven track record of identifying and executing development strategies with differentiated competitive advantages. We look forward to working with Pattern Energy and Riverstone to grow the company.”"We have long been believers in Pattern Energy and have had a successful partnership with the Company since we first invested in it more than 10 years ago,” said Chris Hunt and Alfredo Marti, Partners at Riverstone. “We have worked closely with Mike and the Pattern Energy team to grow the Company from a development startup into a multinational operator and supplier of low cost, renewably sourced energy. We are confident the team will continue to develop world-class wind and solar assets, which will be an important part of our transition to cleaner forms of power generation. We look forward to continuing to support them in driving the Company’s next phase of development.”Transaction DetailsThe transaction is expected to close by the second quarter of 2020, subject to Pattern Energy shareholder approval, receipt of the required regulatory approvals, and other customary closing conditions. The Pattern Energy transaction is not contingent upon the completion of the Pattern Development transaction.Upon the completion of the transaction, Pattern Energy will become a privately held company and shares of Pattern Energy’s common stock will no longer be listed on any public market. Pattern Energy will continue paying its quarterly dividend through the transaction close.AdvisorsEvercore and Goldman, Sachs & Co. LLC are acting as independent financial advisors to Pattern Energy’s special committee, and Paul, Weiss, Rifkind, Wharton & Garrison LLP is serving as independent legal counsel to the special committee.About Pattern EnergyPattern Energy Group Inc. (Pattern Energy) is an independent power company listed on the Nasdaq Global Select Market and Toronto Stock Exchange. Pattern Energy has a portfolio of 28 renewable energy projects with an operating capacity of 4.4 GW in the United States, Canada and Japan that use proven, best-in-class technology. Pattern Energy’s wind and solar power facilities generate stable long-term cash flows in attractive markets and provide a solid foundation for the continued growth of the business. For more information, visit www.patternenergy.com.About Pattern DevelopmentPattern Development is a leader in developing renewable energy and transmission assets. With a long history in wind energy, Pattern Development has developed, financed and placed into operation more than 4,000 MW of wind and solar power projects. A strong commitment to promoting environmental stewardship drives the company's dedication in working closely with communities to create renewable energy projects. Pattern Development has offices in San Francisco, San Diego, Houston, New York, Toronto, Mexico City, and Tokyo. For more information, visit www.patterndev.com.About CPPIBCanada 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 diversified portfolios of assets, 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, San Francisco, S�o Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2019, the CPP Fund totalled C$400.6 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter. About Riverstone HoldingsRiverstone is an energy and power-focused private investment firm founded in 2000 by David M. Leuschen and Pierre F. Lapeyre, Jr. with over $39 billion of equity capital raised to date. Riverstone conducts buyout and growth capital investments in the exploration & production, midstream, oilfield services, power and renewable sectors of the energy industry. With offices in New York, London, Houston and Mexico City, the firm has committed approximately $40 billion to more than 180 investments in North America, South America, Europe, Africa, Asia, and Australia. This deal, taking Pattern Energy Group (PEGI) private must be one of the biggest, if not the biggest PIPE deal of the year (PIPE = private investment in public equity). I'm basing this on 2018 data on PIPE deals but I'm pretty sure it's the biggest PIPE deal of the year.Regardless, it's a huge deal with an experienced private equity partner, Riverstone Holdings, which is a leading energy and power-focused PE fund. I like what this fund posted on its website on the big picture:Riverstone is an energy and power-focused private investment firm founded in 2000 by David M. Leuschen and Pierre F. Lapeyre, Jr. with approximately $39 billion of capital raised. We conduct buyout and growth capital investments in the exploration & production, midstream, oilfield services, power, and renewable sectors of the energy industry.With offices in New York, London, Houston, Mexico City, and Amsterdam, we have committed nearly $39 billion to nearly 180 investments in North America, South America, Europe, Africa, Asia, and Australia.Our organization is a flat, nimble structure that suits us and the management teams with which we partner. In fact, we have worked with many of our current CEOs multiple times before, and without continued mutual respect and repeat commitment from both sides we could not be as effective.Riverstone reinforces this pledge by having plenty of ‘skin in the game,’ and over $1 billion of the firm’s commitment to funds and operations comes directly from our partners, employees, management teams, and other associates.For a big global fund, it sounds like Riverstone has gotten the culture and alignment of interests right.Why is Riverstone taking Pattern Energy Group (PEGI) private and why is CPPIB financing this deal? Simple, they believe the current stock market valuation doesn't reflect the true long-term value of the company and by taking it private and combining Pattern Energy and Pattern Development under common ownership, they believe they can unlock significant value over the long run.Check out the 5-year weekly chart of Pattern Energy Group (PEGI) below:It's had a decent run up since bottoming back in March 2018 but by taking it private, it's obvious CPPIB and Riverstone think they can unlock more value and either exit through another stock listing or by selling it at multiples of what they bought it for.Moreover, Bruce Hogg, Managing Director, Head of Power and Renewables at CPPIB, nailed it on the press release: “Pattern Energy is one of the most experienced renewables developers in North America and Japan with a high-quality, diversified portfolio of contracted operating assets, aligning well with CPPIB’s renewable energy investment strategy and the increasing global demand for low-carbon energy. The Pattern Energy management team has a proven track record of identifying and executing development strategies with differentiated competitive advantages. We look forward to working with Pattern Energy and Riverstone to grow the company.”Importantly, the Pattern Energy management team, led by Mike Garland, will lead the combined enterprise. This ensures alignment of interests with CPPIB and Riverstone (CPPIB never operates companies it purchases, it teams up with management teams and its private equity partners to extract value from it).It is important to remember that a PIPE deal of this scale is significant. Shareholders of Pattern Energy Group received a decent premium but it will take time for CPPIB and Riverstone to unlock all the value it is looking for on this deal.Still, a roughly $6 billion deal is huge ($2.63 billion in equity, the rest was financed through debt), it's precisely the type of scalable long-term deal a fund like CPPIB is looking for to move the needle on a $400 billion portfolio.Bruce Hogg and his team have cemented their reputation as Canada's green team and this is yet another great long-term deal they can add to their list of many as they forge ahead beefing up CPPIB's renewable energy portfolio.In other CPPIB related news, APG will acquire a 39% stake in Interparking, one of Europe’s largest car park owners and operators. APG will buy the stake from CPP Investment Board Europe S.� r.l, a wholly owned subsidiary of Canada Pension Plan Investment Board (CPPIB). AG Real Estate and Parkimo keep their current positions in Interparking. Closing of the transaction is expected to take place over the coming months.Scott Lawrence, Managing Director, Head of Infrastructure, CPPIB said: “Interparking has been an important and integral part of our European infrastructure portfolio for a number of years. Our partnership with our co-investors – AG Real Estate and Parkimo – and the Interparking management team has been very positive, and has contributed to the company’s continued success as a leading owner and operator of high quality car parks across Europe.”� This shows you that for the right price, CPPIB is a seller of its private market assets and this was another great deal for CPPIB in Europe.Lastly, Chief Investment Officer reports that CPPIB has named Zubaid Ahmad to the newly created position of senior advisor for the US:The US market accounts for nearly one-third of the CPPIB’s entire portfolio. As of June 30, the fund had investments in the US that were worth C$126.5 billion, or just under 32% of the fund’s total asset value.“The US remains the largest investment region for CPPIB and appointing Zubaid as senior advisor will build on our presence and network of investment partners,” Alain Carrier, CPPIB’s head of international, said in a release. “Amid the competitive investment landscape, adding another dedicated resource with Zubaid’s expertise and network will help to focus our efforts and identify new opportunities.”Ahmad will be based out of New York, and the fund said he will focus on identifying and evaluating potential investment opportunities and partners to help improve the fund’s position in the US market. He will work closely with CPPIB’s investment departments to support deal origination and to contribute to the assessment of investment opportunities in various sectors and asset classes.CPPIB owns holdings in public and private companies throughout North America, including real estate developments, investment funds, private equity, and hedge funds.Ahmad has more than 35 years of experience in corporate finance and has ties to the investment banking and private equity communities. He is the founder and managing partner of Caravanserai Partners LLC, a New York-based boutique merchant banking firm that focuses on M&A, sovereign advisory, strategic capital raising and alternative investment activities.While with Caravanserai Partners, Zubaid was also a senior advisor for investment manager Muzinich & Co., and for London-based private equity firm Actis. Prior to launching Caravanserai, he was vice chairman of Citigroup’s Institutional Clients Group, and co-head of its Global Asset Managers group. He has also held senior roles at J.P. Morgan and Credit Suisse, among other firms.“I am pleased to partner with a global investment organization of CPPIB’s caliber and reputation, and to help expand its investment activities in the United States,” Ahmad said in a release. “I have had the opportunity to work with a number of the CPPIB investment teams over the years in my other roles and am looking forward to working with the organization even more closely.”Zubaid received an MBA from Harvard University and a Bachelor of Science in business administration from Georgetown University.CPPIB’s New York office was opened in 2014 and is headed by Michael Hill. CPPIB expanded its US presence in June when it opened an office in San Francisco.Sounds like Zubaid Ahmad has a big role to fill at CPPIB and he definitely has the right credentials and experience for this job.Below, at the core of Pattern are two companies “Pattern Energy” and “Pattern Development”. Watch this clip below to learn more about this great company which is now owned by over 20 million Canadians as part of the CPP Fund.Also, watch a clip where Tetsunari Iida, Executive Director of the Institute for Sustainable Energy Policies (ISEP); Sachio Ehara, Director of the Institute for Geothermal Information and a Professor Emeritus of Kyushu University and Mark Anderson, Japan Country Head, Pattern Energy Group and and executive of Green Power Investments KK in Tokyo, discuss the current state of renewable energy in Japan (2017).Third, Alfredo Marti, partner at Riverstone Holdings, discusses where he sees opportunity for oil investors in Latin America.Speaking of Latin America, take two minutes with Rodolfo Spielmann, CPPIB’s Managing Director and Head of Latin America, to read this excellent interview as he shares his insights on investing in the region. http://creativecommons.org/licenses/by-nc-sa/3.0/ Ninth Circuit Considers Rehearing in ERISA Arbitration Case https://www.employeebenefitsblog.com/2019/11/ninth-circuit-considers-rehearing-in-erisa-arbitration-case/ https://www.employeebenefitsblog.com/2019/11/ninth-circuit-considers-rehearing-in-erisa-arbitration-case/ Tue, 05 Nov 2019 16:30:25 UTC Ted Becker and Richard J. Pearl at Employee Benefits Blog The Ninth Circuit signaled that it might rehear Dorman v. The Charles Schwab Corp., where earlier this year it held that a mandatory arbitration provision required arbitration of an ERISA fiduciary-breach claim. Access the full article. Continue Reading http://creativecommons.org/licenses/by-nc-sa/3.0/