CPPIB Investing Gangnam Style?

Barbara Shecter of the National Post reports, Canadian pension plan invests ‘Gangnam style’:

The Canada Pension Plan Investment Board is investing Gangnam style — almost.

The pension fund has acquired a 50% interest in a real estate development property in Jamsil, described in a news release as “a growing sub-market near the Gangnam Business District in Seoul.”

It is the first real estate investment in South Korea for the CPPIB, whose equity commitment for the stake in Samsung SRA Private Real Estate Investment Trust No. 4 is $118.6-million.

The development property is fully pre-leased by Samsung SDS, South Korea’s largest IT services company, and will house the company’s headquarters when it is completed next year.

“We see this investment as an attractive entry point into the Korean market,” said Graeme Eadie, senior vice-president and head of real estate investments at CPPIB, which invests the funds not needed by the Canada Pension Plan to pay current benefits.

“As Asia’s fourth-largest economy, South Korea is a key market with stable long-term growth prospects,” Mr. Eadie said.

The Gangnam district of Seoul drew international attention last year when a song and video by South Korean pop star Psy that featured repeated references to the district and “Gangnam Style” went viral, drawing more than 1.7 billion views so far on YouTube.

You can read CPPIB's press release on this transaction here. I think this is a great investment and Graeme Eadie is right, South Korea is a key market with stable long-term growth prospects.

CPPIB also recently partnered up with BT Pension Scheme (BTPS) to form a 50:50 joint property venture investing in London real estate:

The partnership will initially include eight Central London office assets from BTPS' existing portfolio, and CPPIB will invest £173.9m to acquire a 50% interest in this core-plus/value-add portfolio, with the assets primarily located in London's West End.

As far as Asia, Mark Wiseman, CPPIB's President and CEO, discussed the region's growing importance for the fund's long-term strategy with the Wall Street Journal back in April: 

Mr. Wiseman: If you look at North America today, 2% to 3% growth would be an outstanding outcome. In Europe, frankly, any growth is a positive outcome. If you think about our management of the Canadian pension plan reserve fund, we need to create long-term returns that are going to pay pensions for generations to come.

We're attaching a greater proportion of our assets to those growth economies, whether it be directly into countries like Brazil, Turkey or China, or indirectly into countries like Australia, which has an economy driven in large measure by its connection to Asian economies.

For CPPIB, a quarter is 25 years, not 90 days. That's the time frame we're thinking of when we choose long-dated assets to invest in, like real estate and infrastructure.

WSJ: Why is investing alongside partners so important to CPPIB?

Mr. Wiseman: Today, we're just over 900 employees and while that sounds like a lot, given the types, geographic scope and the scale of the assets we're managing—C$172.6 billion at Dec. 31—we know we are best placed as long-term, diligent, financial partners.

Part of the ethos of our organization is to find the best partners around the world.

We don't look at any single transaction as an end game, like shorter-term investors who may choose not to leave any crumbs on the table. We start with a different assumption; that both we and our partner will be around for a long time, and that we'll do more deals down the track.

WSJ: Do you find competition from other pension plans—both Canadian and otherwise—is on the rise?

Mr. Wiseman: We do compete for the best assets and at times, for the best partners. But by the same token, we find ourselves cooperating with them more often than you'd expect to see in normal commercial enterprise.

A great example of that was in 2007 when Ontario Teachers' Pension Plan and CPPIB were in opposite sides in a takeover battle to purchase Bell Canada in what would have been the largest buyout in history, a deal north of C$50 billion. CPPIB was with KKR & Co. on one side and OTPP was on the other with Providence Equity Partners.

Toward the end of that battle, CPPIB and OTPP were cooperating on a A$7.2 billion takeover proposal for Australian toll road operator Transurban Group Ltd. So there are times when it's in our interest to partner, often in the instance if the asset is too large for one of us to bid alone.

Interestingly, CPPIB recently partnered up with PSP Investments to buy the French assets of TDF, Europe’s largest telecoms tower operator, but it seems they might lose out to an ex-Blackstone top executive:

Blackstone Group's former top executive in Asia has emerged as the leading contender to buy the French assets of TDF, Europe’s largest telecoms tower operator, in a deal that could be worth €3.8bn, according to four people with knowledge of the matter.

Dering Capital, the firm started by Ben Jenkins after he left the US private equity group in 2011, is competing against separate bids from Canadian pension groups CPPIB and PSP Investments for the assets, which are being sold by buyout group TPG.

American Tower is also looking at the French business, according to two of the people close to the process. Dering Capital has submitted a non-binding offer that is close to the €3.8bn minimum valuation – including debt – that the sellers have requested, they said.

Dering Capital relies on a group of wealthy co-investors – including sovereign wealth funds, pension funds and families in Asia – to fund its deals on an ad hoc basis.

TPG and Axa Private Equity, which together own 60 per cent in TDF, are seeking to sell TDF in segments after taking control of the company in 2006, in a deal worth €5bn including debt.

So far, all the indicative bids for TDF France have come in below the sellers’ asking price. At that level, they would enable the sellers to reimburse only the company’s debt, people familiar with the talks said – indicating the challenges in selling the large private equity assets bought during the credit boom.

Mr Jenkins has experience of deals in the sector. He was involved in Blackstone’s investment in US telecoms tower operator Global Towers, which was sold to Macquarie in 2007 for $1.43bn.

As I mentioned in my last comment, Mark Wiseman recently stated the CPP Fund will make fewer deals if rising investor confidence drives prices too high:

"There is a risk that investors will ignore some of the fundamental issues that still exist in global markets and global economies and will be tempted to overpay, and we have to be sure that when that happens, we simply let transactions and opportunities pass us by," he said.

"When other people are willing to pay more, we can simply leave our capital invested in passive alternatives ... (and) it means fewer deals."

Wiseman said he sees opportunities across asset classes and geographical regions in the months ahead, including real estate deals in growth markets that may be out of favor, and infrastructure investments in Latin America and Europe.

"I think in private equity, probably the opportunity set that is most interesting at the present time is North America," Wiseman said.

The CPPIB said its assets rose to C$188.9 billion in the first fiscal quarter from C$183.3 billion three months ago, as it notched a gross investment return of just 1.1 percent amid rising interest rates and bumpy equity markets.

The C$5.6 billion increase in assets consisted of C$1.9 billion in net investment income after operating costs and C$3.7 billion in net contributions.

Its asset mix at the end of June stood at 31.8 percent public equities, 17.7 percent private equities, 33.6 percent fixed income, 11.1 percent real estate and 5.8 percent infrastructure.

I find it interesting that North America was highlighted as the "opportunity set that is most interesting in private equity." As I've covered, the pressure is on funds to find deals and investors have been lukewarm on this asset class, being fully committed but tempering their return expectations.

But Mark Wiseman didn't get at the top of the list of the 50 most influential people in Canadian business for no reason. He and his team know what they're doing and I can say the same for all of Canada's top ten.

Below, Bloomberg's David Ingles reports on how money is flowing into South Korea despite the outflow from other emerging markets. He speaks to Susan Li on Bloomberg Television's "First Up."