CPPIB keeping stakes in U.S. prison firms amid illegal immigration controversy

The Canada Pension Plan Investment Board is holding firm on its U.S. prison investments, despite controversy over their role in immigration detention south of the border, according to a person familiar with the situation.

The Toronto-based fund, which manages about $368 billion (US$277 billion), holds small stakes of CoreCivic Inc. and Geo Group Inc., which had facilities that held people suspected of illegally entering the U.S. under a policy imposed this year by President Donald Trump.

The California State Teachers’ Retirement System voted to divest their stakes in the two companies, citing the U.S. administration’s policy of splitting up families. Leadnow, a Toronto and Vancouver-based social just group and SumOfUs, a global consumer group that says it holds companies to account, said in a release Monday more than 50,000 people have signed a petition urging CPPIB to dump their shares.

CPPIB referred to public remarks made by its CEO last week when asked about possible divestment plans.

“From time to time we, like many investors, are challenged by people who put pressure on us to divest if they disagree with the policies or actions of a company we have chosen to invest in,” Mark Machin said in a speech in Toronto Nov. 20. “Divesting achieves little for CPPIB and all of our stakeholders. There is a large supply of capital in both public and private markets that can step in if we were to exit.”

CPPIB “believe the best way to positively influence corporate behaviour is through principled, constructive and collaborative engagement,” Machin added.

CPPIB held 67,800 shares of CoreCivic and 243,500 shares of Geo Group as of Sept. 30, which would put their combined investment at about US$7 million and both stakes of less than 1 per cent, according to data compiled by Bloomberg. Shares of CoreCivic have dropped 5.5 per cent in the past 12 months while Geo Group is down 12 per cent in the same span.


Understanding the implications of disruption at the heart of CPPIB’s investment strategy, Machin says

The Canada Pension Plan Investment Board is looking to use its long investment horizon and global reach to take advantage of economically disruptive forces, from advancing technology to aging populations, chief executive Mark Machin told a business audience at the Canadian Club in Toronto on Tuesday.

“CPPIB looks through a very large telescope to discover the large structural changes and shifts happening in the world that will fundamentally change how we all work and live,” Machin said, citing an acceleration of technological change encompassing machine learning, automation and big data.

Other disruptors CPPIB is keeping a close eye on — both for the potential to profit and to mitigate risks — are climate change, aging populations and economic power shifts in North America, Europe and Asia.

“Because we are placing enormous bets, sometimes in the billions of dollars, we need to be expert at what I call the implications business: predicting the future so we can benefit from its growth and profit from it for the benefit of Canada’s millions of pensioners,” Machin said, according to a copy of his prepared remarks.

For example, the pension investment management organization, which invests funds for the Canada Pension Plan, is looking at the “value chain” that will be created by self-driving cars, “whether it’s managing fleets of trucks, electric vehicle producers and their chargers, toll road, gas stations, or insurance,” Machin said.

CPPIB has already invested in Zoox, an autonomous vehicle company headquartered in California that aims to have a fleet of robo taxis available by 2020.

In the financial services space, the fund management organization has an investment in Square Capital, a subsidiary of payment processing company Square Inc. Square uses machine learning and vast amounts of data to determine what loans to extend to small businesses.

Grappling with the disruptive implications of an aging population — some two years after Canadian seniors outnumbered Canadian children for the first time in history and when a girl born in China today has a one in two chance of living to 100 — CPPIB invested in ORPEA, a European provider of long-term care services with 800 facilities.

“These demographic shifts carry profound economic, social, health and political implications, both good and bad,” Machin said.

Another investment he says “made sense” in this era is Viking River Cruises, which caters to retirees seeking travel adventures with more than 60 cruise vessels traversing rivers and oceans around the world.

Machin, who spent 22 years in Hong Kong and Beijing, is keeping a close eye on Asia, which is expected to account for more than half the world’s GDP by 2030.

He recounted being “giggled” at in a Beijing coffee shop in September when he tried to pay for his purchase using cash.

“China has rapidly moved to a cashless society,” he said, noting that CPPIB has boosted its investments in China over the past decade to represent about eight per cent of the portfolio.

In addition to an early and profitable investment in e-commerce powerhouse Alibaba, CPPIB has what Machin called a “less known but equally promising” partnership with residential and rail developer Longfor Group in China, which has projects in Suzhou, Chongqing, Shanghai and Chengdu.

“There’s a huge demand for modern, quality rental housing for young professionals and new graduates in China,” he said. “Through this collaboration, we have the opportunity to participate in this fast-growing sector of Chinese real estate.”

To take advantage of the global shift to renewable and clean energy, CPPIB established a power and renewables group last year to expand the portfolio with investments in renewables including wind and solar power, energy storage systems, smart meters and related technologies. Recent investments have been made in India and Brazil.

CPPIB is not only looking abroad as it tracks disruption, Machin said, noting a new partnership forged with the Creative Destruction Lab (CDL) at the University of Toronto’s Rotman School of Management to help the pension management organization gain information about emerging technologies in the artificial intelligence and energy sectors.

CDL connects science-based ventures with serial entrepreneurs, angel investors and venture capitalists with the aim of building “massively scalable companies,” Machin said.

Machin concluded his speech by saying CPPIB will use its size and scale to be a “disruptor” in five business and social arenas: climate change, water conservation, human rights, executive compensation and board effectiveness.

He said he believes the organization can affect more change through “engagement” than through divestment if companies in which CPPIB invests “are not operating at the standards they should be.”

He cited recent examples of the power of engagement, including joining other global investors to push for improvement in water use in agricultural supply chains, address child labour and safety concerns, and successfully encouraging 21 Canadian companies to add women to their boards of directors.

“We’ll continue to monitor improvements in the representation of women directors on the board of our investee companies and we plan to roll out this program globally,” Machin said.

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Canada Pension Plan eyes Chinese assets as trade tensions hit valuations

TORONTO — The Canada Pension Plan Investment Board (CPPIB), the country’s biggest public pension fund, could benefit from trade tensions between the United States and China by buying Chinese assets at knock-down prices, Chief Executive Mark Machin said on Friday.

The CPPIB, one of the world’s biggest investors in real estate and infrastructure, has 8 per cent of its funds invested in China and has said it expects to increase that number significantly in the next few years.

The United States and China are embroiled in a trade dispute, with both sides imposing tariffs on billions of dollars worth of the other’s imports.

Machin said that, although the trade tensions were a concern and a drag on the global economy, they could throw up opportunities if valuations of Chinese assets fall.

“The thing for us is to be patient and look for good opportunities that are arising as a result of market stress and economic stress,” he said. “I think we’ll find very interesting opportunities in China over time as this continues.”

The CPPIB, which manages Canada’s national pension fund and invests on behalf of 20 million Canadians, reported slower growth in the second quarter, hurt by the strength of the Canadian dollar.

The fund said it delivered a net investment return of 0.6 per cent in the second quarter to the end of Sept. 30, down from 1.8 per cent in the previous quarter.

Its net assets increased to $368.3 billion (US$279.2 billion) at the end of September, compared with $366.6 billion three months earlier.

Machin said foreign currency exchange-rate declines relative to the Canadian dollar were the fund’s “main headwind” during the quarter.

The CPPIB, which is also a big global investor in equities and bonds, derives the majority of its earnings from overseas. The strength of the Canadian dollar, which hit a four-month high in September, means that overseas earnings are not worth as much when they are converted back to the fund’s domestic currency.

The fund does not hedge against currency movements saying that while they may impact its results in the short-term, it does not expect them to have a significant impact on its long-term performance.

In May, CPPIB reported an 11.6 per cent return on investments in its latest fiscal year but warned that double-digit growth was not sustainable with competition for assets intensifying.

© Thomson Reuters 2018

CPPIB head says U.S. inflation a potential risk, but threat of overheated economy anything but imminent

The chief executive of the Canada Pension Plan Investment Board on Friday said U.S. inflation continues to pose a risk to the fund, but added those concerns are tempered by strong economic underpinnings south of the border.

“Am I worried about a market where 40 per cent of our money is invested? Absolutely, it’s our biggest market,” Mark Machin said.

Still, he said that risks to the U.S. economy, which would include a spillover into Canada, are likely not imminent.

“The U.S. has been well supported by economic growth,” Machin said. “It has driven earnings growth. The fundamentals in the U.S. are still incredibly strong, and the question now is: how long can that go on?”

In a written message along with CPPIB’s quarterly earnings that were released Friday, Machin said that “solid performance today cushions the fund for an inevitable future market downturn.”

The U.S. is by far CPPIB’s largest market, with $131 billion invested as of March 31, 2018. Canada is next with $54 billion, or 15 per cent of its portfolio, followed by Europe at $47 billion (13 per cent).

Some economists worry that inflationary pressures in the U.S. threaten to spur a market correction, hastened by President Donald Trump’s hefty stimulus plans and a recent tax reform aimed at encouraging business investment. Higher oil prices have also helped fuel inflation.

Rising wage growth in Canada, which observers say could push inflation higher, compounds those worries at home. A recent Bank of Canada survey found 34 per cent of businesses expected to face a labour shortage in the second half of 2018.

In a recent research note, Desjardins Group analysts said the BoC “will have to monitor this situation closely” as wage growth continues to rise while productivity loses ground, threatening to nudge inflationary pressure upward.

The U.S. Federal Reserve hiked its main interest rate in June for the second time this year, up to two per cent. The Bank of Canada in July raised its benchmark rate to 1.5 per cent.

Some market watchers, however, say the risks of the U.S. overheating are exaggerated, driven mainly by stock market volatility and rapid wage growth in a few select sectors such as oil and gas.

The CPPIB on Friday reported net assets of $366.6 billion for the quarter ended June 30, compared with $356.1 billion at the end of March. It reported net investment returns of 1.8 per cent, largely tied to its private-asset holdings.

In May, CPPIB reported an 11.6-per-cent return on investments during the last fiscal year, but warned that such double-digit growth was not sustainable as competition for assets intensifies.

That competition has been particularly visible for renewable energy assets as private equity floods into the market while previous asset holders shed their positions. That has pushed valuations sharply higher as various governments introduce stringent climate policies and offer incentives to would-be developers.

“It’s been fairly expensive for the last few years around the world, there’s a lot of capital chasing renewables,” Machin said. “We’ve found it difficult to find assets that we wanted.”

Over the quarter, the fund purchased a stake in various onshore renewable assets in North America and offshore wind projects in Germany from Enbridge Inc. for $2.25 billion. CPPIB also purchased 396 megawatts of renewable capacity from its subsidiary, Cordelio Power, for $740 million.

Large investment funds have flocked to renewables as they become increasingly competitive and offer stable returns for investors.

“We’re not going after them because they’re renewables, we’re not filling a bucket of renewables,” Machin said. “We have a view that the energy transition is underway.”

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Canada Pension Plan sets record for country’s largest green bond in $1.5-billion debut

Canada Pension Plan Investment Board went green with a bang.

The pension fund, which boasts the highest credit score at the three largest rating firms, priced $1.5 billion (US$1.15 billion) of green bonds Wednesday in what it called the first green bond sold by a pension fund globally. It was also a record size for a single green bond transaction in Canada, according to Bloomberg data.

The 10-year bonds, sold via its unit CPPIB Capital Inc., were sold at a spread of 71 basis points over similar-maturity federal government bonds and offer a 3 percent coupon. They attracted 79 buyers with demand at $2.7 billion, according to a CPPIB statement. The sale was led by CIBC World Markets Inc. and RBC Dominion Securities Inc.

“I like the AAA and the spread is attractive given the credit support,” said Mark Carpani, who helps manage $1.2 billion as head of fixed income at Toronto-based Ridgewood Capital Asset Management and bought the CPPIB green bonds. “CPPIB will put proceeds to good use so I’m fine supporting this.”

CPPIB’s new debt dethrones Ontario’s securities due 2025 as the country’s largest green bond in Canadian dollars. The province’s outstanding securities due 2023 stand at $1.55 billion, yet that total was split between two offerings; an initial $750 million was sold in January 2016, followed by a $800 million add-on of the same notes a year later.

Canada’s green bond issuance has recently been dominated by provincial governments, but an increasing number of other issuers such as insurers and municipalities have been making forays into the market lately too.

In November, Manulife Financial Corp. became the world’s first life insurer to sell green bonds when it priced securities in Singapore dollars. The company followed that transaction in May with the first corporate green bond in Canadian dollars since 2015. The city of Ottawa sold green bonds in November, while Toronto seeks to follow suit in the second half of this year.

CPPIB’s green-bond framework allows for investments in wind and solar energy, sustainable water and wastewater management, as well as green buildings. It plans to invest more than $3 billion in renewable energy as it prepares for an expected global transition to a lower-carbon economy.

CPPIB invests on behalf of the $356.1 billion Canada Pension Plan. It started issuing debt in 2015, selling bonds in both Canadian and U.S. dollars and the euro since.


CPP Investment Board approached about Trans Mountain, but no decision yet: CEO

OTTAWA — The head of the Canada Pension Plan Investment Board says the federal government’s financial adviser has raised the possibility of getting involved in the Trans Mountain pipeline project but there’s been no political pressure applied.

CPPIB chief executive Mark Machin says that the Toronto-based fund manager and its peers will likely take a look at the stalled Trans Mountain project because there are a limited number of investment opportunities of its magnitude.

Machin’s comments to the House of Commons finance committee come less than two weeks after the government announced it would buy the project for $4.5 billion from Kinder Morgan to ensure the pipeline will be completed.

Finance Minister Bill Morneau has predicted the Trudeau government will have no difficulty selling the Trans Mountain pipeline expansion project after uncertainty about its future is resolved.

The federal government’s hand was forced by B.C. Premier John Horgan, who is waging a court battle over the federally regulated pipeline, which would carry diluted bitumen from Alberta’s oilsands to a sea port near Vancouver.

Machin told the finance committee that the Canada Pension Plan Investment Board has had both good and bad experiences with pipelines and will use its usual approach when deciding whether to put money into Trans Mountain.

CPPIB plans inaugural green bond to fund renewables

Canada Pension Plan Investment Board plans to issue green bonds in Canadian dollars for the first time, joining a growing list of borrowers selling the debt to finance environmentally friendly investments.

“The issuance of green bonds is a logical next step to CPPIB’s investment-focused approach to climate change, and we are pleased to be a pioneer among pension funds in this regard,” Poul Winslow, senior managing director and global head of capital markets and factor investing, said in a statement Monday. “The capital raised will help support strong, long-term investments in eligible green assets that position the fund for continued success.”

CPPIB’s statement doesn’t specify the timing or size of the sale, but says the Toronto-based fund engaged the Centre for International Climate Research, which specializes in providing second opinions on the qualification of debt for green bond status.

CPPIB’s green-bond framework allows for investments in wind and solar energy, sustainable water and wastewater management, as well as green buildings. It plans to invest more than $3 billion (US$2.3 billion) in renewable energy as it prepares for an expected global transition to a lower-carbon economy.

Canada’s green bond issuance, totaling $8 billion according to data compiled by Bloomberg, has recently been dominated by provincial governments, yet an increasing number of other issuers such as insurers and municipalities have been making forays into the market in recent months.

Manulife Financial Corp. in November became the world’s first life insurer to sell green bonds when it priced securities in Singapore dollars, and followed that transaction in May with the first corporate green bond in Canadian dollars since 2015. The city of Ottawa sold green bonds in November, while Toronto seeks to follow suit in the second half of this year.

The province of Ontario is the country’s biggest green borrower with $3.05 billion of securities outstanding that were sold in five transactions, including the country’s largest — $1 billion of seven-year bonds — sold in January.

CPPIB invests on behalf of the Canada Pension Plan. The $356.1 billion pension fund, which boasts the highest credit score at the three largest rating firms, started issuing debt in 2015. It has sold debt in the loonie, U.S. dollar and the euro.


CPPIB backs fledgling hedge funds as titans falter

Canada’s biggest pension plan aims to back as many as four fledgling hedge funds a year at a time when investors are balking at high fees and disappointing returns from the industry’s biggest managers.

Canada Pension Plan Investment Board has made initial investments of as much as $250 million each in five startups and young hedge funds under its Emerging Managers Program in the past two years, according to Poul Winslow, Toronto-based head of thematic investing and external portfolio management. While the pension fund has allocated to external hedge funds for almost a decade, it rarely invested in managers with a track record of less than a year before the start of the program in October 2015, he said in a telephone interview.

The Canadian investor, which has $337 billion (US$261 billion) in assets, is getting into promising hedge funds earlier in their life cycles to secure the ability to invest more as they expand. The move reflects a growing realization that smaller managers can access a different set of investment opportunities while being flexible on fees and other terms. It’s also a symbolic shift from a focus on industry behemoths, who have taken a lion’s share of investor assets even as returns from many high-profile managers have been lacklustre in recent years.

“There is some argument that early-stage managers have a different return profile, something that can diversify our investments in mature funds,” said Winslow. “With early-stage investments, you can negotiate better fees, revenue share, capacity and transparency terms with the managers.”

Globally, hedge fund managers overseeing at least US$5 billion attracted US$166.1 billion of additional capital since the start of 2009, while smaller peers saw US$13.2 billion of net outflows, according to data from Hedge Fund Research Inc. Funds larger than US$1 billion gained an average of 6.1 per cent in 2017, while those smaller than US$250 million were up 9.7 per cent, according to an eVestment report in January.

California Public Employees’ Retirement System, the largest U.S. public pension fund, decided in 2014 to divest its entire US$4-billion hedge fund holdings, partly citing the inability to expand such investments in a way that could justify costs. Investors have also pushed hedge funds to change the way they charge fees to better align investor and manager interests.

CPPIB has produced an annualized real investment return of 5.7 per cent in the past 10 years, according to a February quarterly update. It has farmed out $75 billion to 160 external hedge- and private-equity funds by March 2017 to help diversify investments, said Winslow.

Its emerging managers program, led by London-based Pete McConnon, typically commits US$150 million to US$250 million of seed capital each to hedge fund startups for two or three years in exchange for a cut of their fee revenue and the ability to invest more later, said Winslow. It also participates in what it calls “acceleration” deals, where it provides a similar amount of money to managers that have typically been operating for fewer than three years and oversee less than US$250 million of assets, he said.

CPPIB seeks to stay with successful managers after the initial lockup periods end, using the emerging managers program as a way to expand its investments in mature managers, Winslow said. It has given additional capital to several funds in the program, he added. That sets it apart from other hedge fund seeders that raise money for private-equity-like funds and often reinvest their money somewhere else once the initial lockups end.

Ovata, the Hong Kong-based startup it backed, is led by James Chen, who previously ran the Asian equities team at Michael Platt’s BlueCrest Capital Management. It started trading on Dec. 1 with more than US$200 million. His team, which trades Asian stocks, includes members of his former BlueCrest team.