The world is full of bloggers; not the folks who think 140 characters of wit counts as blogging, mind you. I’m referring to the people who genuinely ply the trade, 500 or 1,200 words at a time, with real research or insightful commentary that’s grounded in their own area of professional or personal expertise.
We fellow travellers in this thankless task generally get along famously; who better to understand the fruitless exercise of writing into the ether than a fellow blogger? This rule of thumb was recently
bruised broken when one of them, a guy named Leo Kolivakis, decided to take a crack at me in response to my most recent post regarding the CPP Investment Board (see prior post “CalSTRS exec gives a frank assessment of CPP Private Equity portfolio” July 15-14). His form of blogging seems to amount to reposting long articles from the media or industry press releases, and then dropping in his commentary here and there. Everyone has their own style.
He writes that he doesn’t “like” me. He’s not the first, and won’t likely be the last, unfortunately. Having not ever met the man, nor any of his friends or family I suspect, it seems quite judgmental if this silly blog is the source of his distain. He may well hate Billy Bishop Toronto City Airport, which I am blamed for from time-to-time, despite its 1939 founding; but, even then, I get along with lots of folks who take issue with the BBTCA (even the jet angle). Perhaps he’s a devotee of Kevin O’Leary (see representative prior post “Highlights of our Kevin O’Leary Blog Posts” Sept. 27-12). I suppose it doesn’t much matter; “haters are gonna hate” as they say.
My fellow blogger goes on to make clear that CPPIB is “a subscriber” to his blog. His Pension Pulse website states that institutions voluntarily pay $500, $1,000 or $5,000 a year for his posting efforts. There’s even a helpful “subscribe” Paypal button for those who don’t have a cheque writing machine. If only I’d known that this is how you can turn blogging into a profit centre: just put your hand out. If you tech entrepreneurial types had the same resources as the institutional investors that Leo’s writing for I might have been able to retire by now.
I appreciate Leo’s disclosure about his commercial relationship with Canada’s pension plan manager; transparency is key in life. Leo goes on to detail his apparently close relationship with CPPIB CEO Mark Wiseman. According to Leo, they emailed back and forth about the blog in question; let’s be honest — not everyone can get instant email responses from the CEO of a $200 billion fund. This Leo obviously has the attention of some members of the pension industry. Mr. Wiseman advised him that he hadn’t read the post, which is of great relief to me. If all of you would just join him and ignore the drivel herein, I could stop writing altogether (the reader I randomly met in a Costa Rican pool on March Break will attest to this speech: the sooner y’all stop wasting your time, the sooner I can hang up the blogging skates). Mr. Wiseman doesn’t have time to waste, which is one of the many reasons why he runs CPPIB and you don’t.
Perhaps Leo’s 21 months as a consultant at the Business Development Bank of Canada, where he was partly responsible for drafting its annual corporate plan during 2008-10, might explain his distain of this space (see prior representative post “C.D. Howe report recommends BDC mandate shake-up” Feb. 7-13).
Leo is quite confident that he can still be critical of CPPIB when required, despite his financial ties. The fact that he thinks my CPPIB analysis is flawed is, no doubt, completely unrelated to that fact that he’s on their payroll. The Globe and Mail didn’t find any such flaws, mind you. Since we all own the CPP’s assets, I suppose it is nice to know another fellow who is on our collective payroll. The good news is that his $5,000(?) annual fee isn’t so large as to have contributed materially to CPPIB’s outsized management expense ratio (see prior representative post “Why is CPPIB’s MER higher than its peers?” Jan. 9-13).
What’s really troubling about this fee-for-service arrangement is that Leo doesn’t come across as a very good analyst. His attempted knee-capping is rife with errors, flawed analysis and unsupported conclusions.
If he’s going to try to show his patron at CPPIB that he’s an effective hitman on their behalf, which may well be why he gave Mr. Wiseman the heads-up about his plans for a takedown, you’d think he’d be a bit more careful about doing some exacting research and nailing down his arguments prior to pulling the trigger. But, as we’ve come to learn, far too many “analysts” come off as CPP cheerleaders; even those who claim to be visionaries of the pension industry (see prior post “Professor Kesselman’s arguments for “Big CPP” don’t hold water” Nov. 26-13).
Here are a few of the quick highlights of Leo’s flawed analysis:
He starts off by saying that I have an “axe to grind”, which is a traditional slur used to undercut everything that someone writes on the basis that they have a hidden agenda. I’ve never thought any of ~2,500 blog posts I’ve written was driven by an agenda per se. A theme, perhaps, about honesty, transparency, fair dealing and so forth. But not an “agenda” in the political or commercial sense of the word. If I did have a agenda, surely I’d be falling all over myself paying CPPIB compliments left, right and centre in the hopes that they’d hire me to manage a few crumbs on their behalf.
Leo might have missed them, but many a positive word has been written here about CPPIB over the years. I was a fan of the 2009 Skype investment, I posted about the huge private equity NAV gains in 2010, CPPIB’s 10 year results exceeding the median found praise, as did the position it took on Income Trusts, for example.
It seems that Leo is confusing opinions on topics such as Management Expense Ratio, Value Add, exec comp, asset allocation choices and transparency/governance with an anti-CPPIB “agenda”. Perhaps that’s because no one on Bay Street says any of this publicly, but these topics are definitely yakked about over lunch or drinks by many a fund manager, trader and i-banker, albeit off the record, as MSM journos will attest.
Leo has no reason to know this, but the agency was practically founded by one of my Bay Street mentors, the late John MacNaughton, CM; attacking his creation for blogging fodder would be counterintuitive. As I like to remind everyone, these folks work for us, and we shouldn’t be browbeaten for asking good, respectful questions. Mr. MacNaughton never thought so, anyway; “that’s what makes a democracy”, he once said to me.
Leo on CPPIB investing in venture capital:
Most public pension funds are going to lose their shirts investing in VC. Anyways, all this to say that while McQueen wants CPPIB to invest directly in VC funds, I think he’s nuts and the evidence doesn’t support his case. Even if CPPIB did invest directly in VC and made money (a big IF), it would be peanuts in terms of the overall portfolio and wouldn’t make a big difference in terms of value add.
Perhaps Leo is new to this pension fund analysis gig, so we’ll cut him some slack. But he’s wrong nonetheless about “most public pension plans are going to lose their shirts investing in VC.” CPPIB, for example, has long invested in venture capital — does that make Mr. Wiseman and his predecessors “nuts”, Leo? CPPIB’s first direct Canadian VC commitment was back in 2000, seven years before this blog got started, and nine jobs/contracts ago for Leo (via LinkedIn). CPPIB committed directly to many Canadian VC names back then:
$50 million into Edgestone Venture Fund I; $25 million into Skypoint Telecom Fund I; US$13.5 million for Celtic House VP Fund II in 2002; $50 million for Celtic House’s follow-on Fund III; $50 million again into Edgestone Venture Fund II; $50 million for Ventures West 8 in 2003. There was also an indirect strategy, which was initially managed by Edgestone Partners until Northleaf took it over circa 2005.
Northleaf is currently managing a newish ~$150 million Canadian VC allocation for CPPIB, as part of a $400 million PE/VC Canadian Fund-of-Fund vehicle, although it has proven to be hard to track deployments (see prior post “Has anyone seen CPPIB’s venture bucks?” Nov. 2-12). What’s more, Leo, Mr. Wiseman actually thinks this is a good time to be investing new capital in the VC space. This is what he told Boyd Erman at the Globe, in February 2010:
“We believe that there’s an opportunity because we believe there are going to be excellent returns.”
As for most pension plans “losing their shirts” on venture capital, many of the largest plans in the world have made great money on the asset class, enjoying returns that are higher than private equity over the long term (see representative prior post “Buyout vs. Venture returns” Feb. 20-08). In Canada, OMERS has attracted plenty of attention with its $200 million direct VC strategy, and while some Canadian plans have backed out of the assets class (such as Ontario Teachers), several well-known American plans have been backing venture funds for decades.
The Washington State Investment Board’s VC portfolio has returned a multiple of capital of 1.5x since inception, for example. Exactly the same 1.5x multiple as both its “Large Buyout” and “Mid Buyout” investments, which include Apax, GTCR, KKR, TPG, Welsh Carson…. The same positive return, Leo. Do your homework!
Leo on direct versus indirect investing at CPPIB:
And unlike other large Canadian pension funds, CPPIB doesn’t invest directly in private equity or real estate (only in infrastructure).
Really? According to page 51 of the current annual report, Leo, CPP has just under $20 billion in “principal investments” within the Private Equity world. Those are directs (including co-invests), and don’t include our indirect PE exposure via our $38.5 billion of fund commitments.
Leo on CPPIB’s allocation to mega buyout private equity funds:
He’s right that CPPIB “doubled down” on buyout funds at the worst possible time but that’s because assets under management were ballooning at the time so they had to invest more in private equity.
At least we agree on something. What Leo has wrong is the claim that this happened because CPPIB’s “assets under management were ballooning at the time so they had to invest more in PE.”
To borrow from Don Drummond, another economist, “math is math.” Here’s some math for Leo to noodle.
According to CPPIB’s financial statements, total assets under management grew by $35 billion between 2004 and 2009 (about 50%). During that window, new CPPIB commitments to private equity funds amounted to $23.9 billion, while our actual “invested” PE portfolio grew by about $12 billion.
Remarkably, CPPIB committed more money to new PE funds between 2004 and 2009 than what Canadians were actually contributing to the CPP via source deductions and employer contributions. Here’s an analysis of “New PE Buyout Fund Commitments as a percentage of Net Contributions by Canadians and Canadian employers”:
You can see a table of the data here:
Surely Leo has reviewed the same CPPIB financial statements that we all have access to online. As such, I’m not sure how he could miss the fact that although our CPP assets grew quickly during that period, there were years where CPPIB was committing more to PE than they were actually taking in. Is that the “ballooning” that Leo was referring to?
One could observe that the investment cycle of PE is such that it takes years to deploy the capital once it has been committed. This is true, but as a percentage of assets under management, drawn PE dollars grew from 2.6% to 13.4% during this period just the same. We are talking invested dollars, not dollars that have been committed and not yet drawn by our 3rd party fund managers. Which means that our invested PE allocation, as a percentage of assets under management, grew more than five times during what Leo refers to as “the worst possible time”. We didn’t just “invest more” on a pro rata basis as the cash rolled in, as Leo claims. CPPIB increased its allocation five fold.
Thus the double-whammy to our financial statements, which may be one of the reasons why the CPPIB team generated negative value add for the four years ending 2013 (see prior post “CPP Investment Board has produced $1.8 billion of negative value-add over a four year period” May 20-13), as well as the 2014 fiscal year (after expenses).
Leo on the wisdom of CPPIB’s concentration in Private Equity:
Importantly, in markets where public equities roar, CPPIB will typically underperform its Reference Portfolio but in a bear market for stocks, it will typically outperform its Reference Portfolio. Why? Because private market investments are not marked-to-market, so the valuation lag will boost CPPIB’s return in markets where public equities decline.
There are two pretty big embarrassing problems here for Leo.
First, his suggestion that “private market investments are not marked-to-market” is just plain wrong. I’m neither an economist nor an accountant, but according to Accounting rule FAS 157, it’s a requirement (see prior posts “Accountants are failing investors with “fair value” accounting” Aug. 6-07, “D’Alessandro: fair market value accounting is ‘perverse’” Sept. 30-08, “New accounting rule adds to LBO pain” Mar. 2-09). And it’s been that way for years and years.
Second, I see no evidence to Leo’s assertion that CPPIB will “outperform its Reference Portfolio” during a bear market due to its large concentration in private equity assets. Perhaps there’s some academic support for the theory, but it didn’t play out in reality: during the “bear market” of 2008-09, which is one of the worst market windows since the Great Depression, CPPIB lost 18.6% (as of the FYE March 31, 2009). On a gross basis, the CPP fund met its Benchmark return, but after including the expense of the team managing the portfolio, CPPIB’s asset allocations and overall structure produced “negative value add” of about 15 bps, according to the 2009 financial statements. In a period where Canadian public equities lost 32.3%, for example, the structure didn’t perform in the manner that Leo says it will during a the next bear market. Let’s hope he’s right on the next one.
Leo can blame a “tough to beat” reference portfolio, but in 2010, for example, CPPIB’s performance was in the bottom decile according to RBC Dexia’s stats for pension plans (see prior post “CPPIB’s 2010 results put pension fund in bottom decile” May 21-10). And these are funds with allocations to private equity, real estate, bonds, hard assets and public equities; the same kinds of assets that CPPIB is buying.
I could go on, but unlike Leo, no one is paying me to blog.
Canadians are well-served by a thorough, healthy discussion about our collective retirement tools. The Fraser Institute provided its timely perspective a few months ago, for example. What undercuts the debate is specious analysis, rabid cheerleading and bromides.
(this post, like all blogs, is an Opinion Piece)