Sovereign Wealth Fund Institute

AP1 (Första AP-fonden) is one of fiver buffer funds within the Swedish national pension system. At the end of 2010, AP1 had net assets under management of SEK 218.8 billion. AP1 has been working diligently to reduce equity volatility in its portfolio. A major segment of public investors exposed to high amounts of equity had lackluster performance in 2011. According to AP1’s annual report, its equity portfolio dropped by 9.8% in 2011. AP1 is moving towards a robust approach to increase active asset allocation and shift away from passive management.

Passive equity management, although cheaper in fees, puts portfolios at possible greater risk of volatile equity market swings.

58.6% of assets are managed internally and according to AP1 management that percentage will increase. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The California Public Employees’ Retirement System (CalPERS) Board of Administration has accepted changes in its governance policies and practices. The investment policy subcommittee was created in 1995. On Monday, the CalPERS investment committee approved dropping its investment policy subcommittee. In addition, the board meeting agenda was streamlined. The genesis of the removal of the investment policy subcommittee was to avoid redundancy.

The press release states, “CPP Investment Board (CPPIB) announced today that a consortium including CPPIB has completed the acquisition of a 24.1% stake in the Gassled Joint Venture (Gassled) from Statoil ASA. The consortium entered into an agreement to acquire this stake in June 2011.

The buyer is Solveig Gas Norway AS, a holding company that is approximately 40% owned by CPPIB, 30% by Allianz Capital Partners, a subsidiary of Allianz SE, and 30% by Infinity Investments SA, a wholly owned subsidiary of the Abu Dhabi Investment Authority. The total value of the transaction as announced on June 6, 2011 is NOK 17.35 billion or approximately C$3.18 billion.

André Bourbonnais, Senior Vice-President, Private Investments for CPPIB, said, “We are pleased to close this significant transaction alongside our consortium partners. Gassled is a good fit with CPPIB’s infrastructure portfolio and long-term investment strategy, and we look forward to becoming an important strategic partner in the future development of the Gassled network.”

Established in 2003, Gassled is an unincorporated joint venture which owns the majority of the gas transport infrastructure on the Norwegian Continental Shelf. It is a core infrastructure asset and a strategic asset in the Northwestern Europe energy landscape. Gassled is expected to benefit from the growth in European gas demand and Norway’s long term position as a key supplier of gas to Europe.”

Read more: Press Release

Venture capital is a risky asset class and has left a sour taste in the mouths of many public pension funds after the 2000 bust. With that being said, several large Canadian public investors in the East are allocating small portions of assets to venture capital, even creating dedicated venture capital teams. The California Public Employees’ Retirement System (CalPERS) has grown cautious over the years investing in venture capital. At the end of last year, the CalPERS board set the target for venture capital at 1% of its alternative investment management (AIM) program. Currently, around 7% is represented by venture capital, so it will likely be years before the pension fund commits new capital to it.

Another hurdle is that the current venture industry is too small to absorb a large amount of money from CalPERS. For large public investors, $50-70 million is the minimum they would want to commit. In addition, public investors are looking to streamline and reduce their numerous relations with fund managers.

According to the U.S. Census Bureau, total assets of the largest 100 public defined benefit retirement systems declined 8.54% in the third quarter. It was the first overall quarterly loss for the U.S. public investor group in more than 1 year. The top 100 assets are ranked at US$ 2.534 trillion, a little more than half the size of the current sovereign wealth fund investor class. At the zenith in Dec 31, 2007, the top 100 public plan assets where at US$ 2.928 trillion.

Facts about the 100 largest public plans surveyed by the Census Bureau:

• Represents 90% of Total U.S. Public Plan Assets
• 81 State Plans
• 19 Local Plans

 Dollar amounts in millions

Source: U.S. Census Bureau, Governments Division
December 16, 2011

The press release states, “GENIVAR Inc.(“GENIVAR” or the “Company”) announced today that it has completed an equity private placement (the “Private Placement”) of 6,500,000 common shares from treasury at a price of $24.57 per share for aggregate gross proceeds of $159,705,000. Participants in the Private Placement are Canada’s top two institutional investors, the Canada Pension Plan Investment Board (“CPPIB”) and the Caisse de dépôt et placement du Québec (the “Caisse”), each of whom invested a gross amount of $79,852,500.

Proceeds from the Private Placement will primarily be used to repay debt and for general corporate purposes.

“We are very happy to have received such support from Canada’s two largest institutional investors. CPPIB and the Caisse’s decision to support GENIVAR, is a sign of their commitment to our domestic and international growth strategy,” stated Pierre Shoiry, President and Chief Executive Officer of GENIVAR. “This financing will allow us to continue growing our Canadian business while moving forward on executing our international expansion plans. Our objective is to deliver on our disciplined strategy, which has proven successful in the past and will create long-term value for our shareholders.”

“In a time of great market volatility, our strong balance sheet and financial position will firstly allow us to execute our growth strategy, and secondly, ensure the sustainability of our firm in the long run with two strong partners alongside GENIVAR,” commented Alexandre L’Heureux, Chief Financial Officer of GENIVAR. “Both institutions have clearly signaled their long-term commitment to GENIVAR, in part by agreeing to have portions of their acquired common shares locked-up for up to 18 months before such common shares can be freely tradable. The institutions are also subject to certain other investment restrictions. Additionally, in keeping with their interest in supporting our international expansion plans, CPPIB and the Caisse have each been granted a pre-emptive right to participate pro rata in future offerings of the Company.”

“We believe that GENIVAR’s strong and experienced management team combined with its future growth opportunities, both in Canada and globally, make this a compelling investment for CPPIB,” said Scott Lawrence, Vice-President and Head of Relationship Investments, CPPIB. “This investment builds on our Relationship Investments strategy to be a cornerstone minority shareholder in public companies where CPPIB can participate in, and contribute to, their future success.”

“The Caisse is proud to invest in this Quebec company that has become a Canadian leader in the engineering consulting industry,” explained Normand Provost, Executive Vice-President Private Equity and Chief Operations Officer at the Caisse. “By supporting GENIVAR in its international development projects and its continued growth in Canada, we once again combine returns with economic development in Quebec.”

GENIVAR has also agreed to provide CPPIB and the Caisse with the right to nominate one individual each to GENIVAR’s board of directors so long as CPPIB and the Caisse each own greater than 9.5% of GENIVAR’s outstanding common shares.

Pursuant to this Private Placement, the number of common shares of GENIVAR issued to CPPIB and the Caisse represents 19.92% of the outstanding common shares of the Company. The number of GENIVAR’s common shares held by CPPIB now is 3,257,700 or 9.98% of common shares outstanding, while the Caisse owns 3,250,000 or 9.96% of GENIVAR’s common shares outstanding.
This Private Placement, which does not require shareholders’ approval, has been approved by the Toronto Stock Exchange.”

Read more: Press Release

According to the press release, “The California Public Employees’ Retirement System (CalPERS) announced today that it has agreed to acquire a stake in a 65-mile submarine electric power transmission line that runs from Sayreville, New Jersey, to Hicksville, Long Island, New York.

The agreement to purchase an interest in the Neptune Regional Transmission System from Arclight Capital marks CalPERS second direct infrastructure investment, following the 2010 purchase of a 12.7 percent equity stake in London’s Gatwick Airport.

“This agreement is a good fit for our growing infrastructure program,” said Joseph Dear, CalPERS Chief Investment Officer. “It’s an income-generating investment with stable revenues located in the United States, very much in line with the type of investment we said we would be looking to make when we described our vision for infrastructure in September.”

Over the next three years, CalPERS plans to invest up to $5 billion in infrastructure projects, including up to $4 billion in the United States and up to $800 million in California. CalPERS plans call for investments in both public and private infrastructure, including, but not limited to, transportation, energy, natural resources, utilities, water, communications and other social support services.

The deal for the transmission line is expected to close in the first quarter of 2012. Terms of the agreement were not disclosed.”

Read more: CalPERS Press Release

The New Jersey Division of Investment manages the public pension fund which has around US$66 billion in assets. They have committed up to $1.8 billion in funds to be managed by the Blackstone Group. Up to US$ 1.5 billion will be placed in accounts managed exclusively for New Jersey by the Blackstone Group. Over the last twelve months, the pension fund has committed a total of US$2.5 billion to the Blackstone Group.

According to the State of New Jersey, the deal terms are expected to generate more than US$ 120 million in fee savings over the lifetime of the relationship.

The China Investment Corporation (CIC) is an investor in the Blackstone Group.

The press release states, “the Ontario Teachers’ Pension Plan (Teachers’) today announced it has reached an agreement to sell its 79.53% ownership share in Maple Leaf Sports and Entertainment (MLSE) to Bell and Rogers Communications Inc.

The purchase price for Teachers’ interest is $1.32 billion, based on an enterprise value of just over $2 billion.

Although Teachers’ announced on November 25 that it would retain its MLSE ownership position, it subsequently was approached by Bell and Rogers with an unsolicited offer that meets all of its original terms and conditions for sale. The sale agreement follows an eight-month review process of numerous expressions of interest in MLSE.

“MLSE is one of Teachers’ longest standing and most successful investments,” said Jane Rowe, Senior Vice-President, Teachers’ Private Capital. “We are proud of this iconic company, in which we first invested in 1994. It is second to none in the industry and has a very bright future. We believe that Bell and Rogers, with their MLSE partner Kilmer Sports, will deliver on the company’s potential.”

The transaction is expected to close in mid-2012 and is subject to regulatory and league approvals. Larry Tanenbaum will continue to serve as Chair of MLSE and as a Governor of the NHL, the NBA and Major League Soccer.”

Read more: OTPP Press Release

Some countries have multiple sovereign wealth funds. Some states have multiple public pension funds. Does it make sense to consolidate these governmental investment authorities to achieve greater economies of scale and be more cost effective? Due to its vast size in terms of geography and population, California is a state that has many different public pension funds and systems. Some public pensions are managed by CalPERS, while others remain independent, like LACERA. There is also CalSTRS, the public teachers’ pension fund. Yes, one can already make the argument that CalPERS is in effect the mega authority fund since it manages a significant portion of public employees’ pensions, but what if it combined with the other major pensions in California? Imagine if all the key pension authorities in California merged into one public mega authority.

In Canada, the Alberta Investment Management Corp and Caisse de dépôt et placement du Québec (CDPQ) are examples of consolidating or offshoring fund management to a central governmental authority. Ontario is one of the exceptions with five major governmental investment authorities. In Australia, there are organizations like the Queensland Investment Corporation (QIC) and Victorian Funds Management Corporation (VFMC) that were created to provide investment management services in a commercially effective and efficient manner.

Sources: Latest public available sources

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Japan’s Government Pension Investment Fund (GPIF) had a rate of return of -3.32% from July to September, posting a 3.7326 trillion yen investment loss.  The worst performing asset class was international stocks which carried a -21.36% rate of return; follow by domestic stocks at -9.75%. The huge loss stems from mostly a major decline in overseas and domestic equity share prices.

Japan’s largest public pension has total assets remaining at 108.854 trillion yen. Just as sovereign wealth funds and other long-term governmental investors increase their allocations to equities, the scale of loss is expected to make Japanese institutional investors more cautious about taking risks.

Source: Government Pension Investment Fund, Japan
Total investments = (market investments + FILP bonds)

According to the press release, “the Caisse de dépôt et placement du Québec has announced that it has entered into definitive agreements with ConocoPhillips to purchase its 16.55% interest in Colonial Pipeline Company and Colonial Ventures LLC (“Colonial”) for US$850 million.

Colonial Pipeline is the largest refined petroleum products pipeline in the United States. It extends more than 8,800 kilometres between the Gulf of Mexico and the Northeastern U.S. and transports the equivalent of 2.3 million barrels per day.

Prior to being finalized, the transaction will be subject to a right of first refusal (ROFR) by the shareholders of Colonial Pipeline. Based on the outcome of the ROFR exercise, the Caisse could close the transaction during the first quarter of 2012.

“The Caisse is always interested in quality assets that yield stable, long-term returns,” said Normand Provost, Executive Vice-President, Private Equity and Chief Operations Officer at the Caisse de dépôt et placement du Québec. “This particular investment targets an infrastructure project in a regulated industry that we know well through our investments in Gaz Métro, Interconnector, Enbridge and Fluxys.”‘

Read more: Press Release

Hedge funds have been a growing part of governmental investors’ investment portfolios, especially public pension funds. U.S. public pensions are under stress to reach targeted annual returns. Due to a low-yield environment in fixed income and other global economic factors, public pensions have had to take on more risk and increase illiquid investments to target these returns.

News today reveals that California Public Employees’ Retirement System (CalPERS) may increase or maintain current allocation to hedge fund investments next year. This was confirmed by CalPERS CIO Joseph Dear; however, the CalPERS Board will have final say which is due in late spring of 2012.

CalPERS has about a 2% allocation to hedge funds. Hedge funds have been reclassified and put under their absolute-return strategy program. Nearly 60% of its hedge fund investments are made directly through allocation to large hedge fund managers. The other portion is allocated to fund of funds for more geographically focused managers, smaller hedge funds, or emerging managers.

Richard Ingram, Executive Director

American public pension fund investors are under tremendous strain to find higher yields and higher returns. We continue to see inflows into alternative investments. Illinois Teachers’ Retirement System is making a significant push toward hedge fund investments. [Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The Ontario Municipal Employees Retirement System (OMERS) is one of Canada’s largest public pension funds. OMERS plans to open an office in New York City as it moves further into the American private market investment sector. About 30 investment analysts specializing in private equity, real estate, and infrastructure will be staffed there.

Earlier, the China Investment Corporation (CIC) chose their North American office to be based in Ontario.

The adoption of Islamic finance as a viable asset class is gaining traction among SE Asian sovereign institutional investors.  Malaysia’s Employees Provident Fund (EPF) is boosting fund allocation in Islamic bonds.  In October 2010, the fund held $650 million in sukuks.  They want to have a total allocation of $1.75 billion towards Islamic finance instruments.  Most of EPF’s Islamic finance allocation is managed by external managers.

In order for the sukuk market to be an effective hedge, the industry must grow.

California Governor Jerry Brown signed key legislation that gives CalPERS the authority to establish an official Chief Financial Officer position. Other bills signed and related to CalPERS include prohibiting CalPERS board members and executive employees from representing another entity before CalPERS and CalSTRS to influence specified actions for a 4-year period. A big piece includes a 10-year moratorium for former board members and executives from receiving compensation for providing services as a placement agent.

The Ontario Municipal Employees Retirement System (OMERS) is planning to launch a venture capital arm. It will be called OMERS Ventures. Already the group has made their initial venture capital investment in WaveAccounting.com, a Toronto-based firm that offers online accounting applications for small business.

According to the OMERS press release, “As a lifecycle investor, OMERS Ventures investments could range anywhere from an initial seed round investment ($500,000 to $2 million), to a larger growth capital round (up to $30 million).”

OMERS plans to invest $180 million over the next three years through this VC group. Being a long-term governmental investor OMERS could possibly outdo traditional venture capital investors by being patient and tolerant with tech companies through product lifecycles.

According to the press release, “The California Public Employees’ Retirement System (CalPERS) has invested $100 million in seed money with Breton Hill Capital, a Toronto-based global macro hedge fund with investments in equities, commodity and financial futures, and currencies.

The investment, part of the CalPERS Absolute Return Strategies program, is CalPERS first seed investment with a hedge fund manager. The pension fund also has approximately $500 million invested with customized funds of hedge funds focusing on emerging managers.

“The Breton Hill investment continues our efforts to source best-in-class investment talent,” said Joseph Dear, CalPERS Chief Investment Officer. “Our agreement creates a strong alignment of interests between CalPERS and Breton Hill, and our seed investment will add value to our portfolio as Breton Hill successfully executes its strategy.”

Breton Hill’s investment approach is based on using momentum to earn risk-adjusted returns not just in equities but in a variety of asset classes. The firm employs tactical capital allocation, security selection and an active approach to portfolio risk management to improve risk-adjusted returns.”

Read more: Press Release

According to the press release, “The California Public Employees’ Retirement System (CalPERS) Board of Administration today earmarked up to $800 million for investments in California infrastructure over the next three years.

CalPERS plan calls for investments in both public and private infrastructure including, but not limited to, transportation, energy, natural resources, utilities, water, communications and other social support services.

“We remain committed to California’s future and the investment opportunities that run deep between our coastline, mountains and valleys,” said Rob Feckner, President of the CalPERS Board of Administration. “We are prepared to increase our investments in infrastructure with our first and foremost goal being on investment returns, and a secondary goal of supporting essential community services that are crucial to continued economic development, a safe environment, and healthy schools and communities.”

Currently, CalPERS has $203 million invested in a combination of physical infrastructure investments and infrastructure-targeted private equity funds around the state. The Pension Fund has also lent its “AAA” rating to California cities and counties for credit enhancement of more than $326 million in infrastructure bonds.

Under its California allocation, CalPERS plans to target individual investments equal to or greater than $150 million. It will look for a number of key qualities in the investment that CalPERS calls “defensive,” including minimal competition, stable revenues and returns, low operating risk and strong credit.

“Infrastructure is an integral part of the CalPERS investment portfolio,” said George Diehr, Chair of the CalPERS Investment Committee. “We’re looking for long-term economic value by providing safe, reliable, efficient and high quality services that are vital to California that not only meet our risk-return objectives, but that we believe have the extra benefit of creating jobs and ultimately improving the economic climate.””

Read more: Press Release

By Alexia Wai-Chun Tye

Guest Contributor

During a visit of a high level presidential delegation in Paris on 27 October 2010, Samruk-Kazyna, Kazakhstan’s Sovereign Wealth Fund signed a master contract with France’s Caisse des Dépôts. Caisse des Dépôts, the 51% controlling shareholder of the French sovereign wealth fund FSI, was represented by its CEO Augustin de Romanet, concurrently President of the Board of FSI. The cooperation contract covers infrastructure, financing of SMEs, innovation, sustainable cities, and more generally, long term investment strategies.[Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view site content.]

The views, opinions, positions or strategies expressed by guest contributors and those providing comments are theirs alone, and do not necessarily reflect the views, opinions, positions or strategies of the Sovereign Wealth Fund Institute or any employee thereof.