Pia Singh and Alex Harring of CNBC report the Nasdaq rises to hit new all-time high Friday as rest of market languishes:

The Nasdaq Composite climbed to an all-time high on Friday, boosted by megacap tech stocks.

The tech-heavy index rose 0.56% to 18,518.61, while the S&P 500 inched 0.03% lower to end at 5,808.12. The Dow Jones Industrial Average shed 259.96 points, or 0.61%, to close at 42,114.40.

Tech stocks boosted the market ahead of their upcoming earnings. Nvidia added 0.8%, and shares of Meta Platforms, Amazon and Microsoft were also higher. On the quarterly results front, HCA Healthcare lost nearly 9% after reporting hurricane disruptions hit its earnings and full-year guidance, while Colgate-Palmolive shares shed 4% after the company reduced the low end of its sales estimate for the year.

The 10-year Treasury yield notably cooled off from its three-month highs after breaking above the 4.25% mark during Wednesday’s session. On Friday, it rose more than three basis points to roughly 4.24%.

“Yields have risen meaningfully, and so I think that’s been an issue for the equity market,” said Phillip Colmar, managing partner and global strategist at MRB Partners. “On one hand, you got earnings that are decent, but then you end up with rate cuts, which should be positive.” However, the rates that matter right now are bond yields, he said. “That has caused a lot of uncertainty and you’re getting some just kind of digestion.”

These moves follow a mixed day on Wall Street. The Nasdaq joined the S&P 500 in finishing the session higher on Thursday, after both indexes were lifted by Tesla’s post earnings rally.

Both the S&P 500 and Dow snapped a six-week winning streak. The former was off nearly 1% on the week, while the latter ended the period lower by 2.7%. The Nasdaq notched its seventh weekly gain, advancing nearly 0.2%.

Rita Nazareth of Bloomberg also reports the S&P 500 sees first gain this week as Tesla Up 22%:

Stocks rose for the first time this week, with traders parsing a slew of corporate earnings for clues on the health of the world’s largest economy. Treasuries rebounded after days of losses.

A gauge of the “Magnificent Seven” hit a three-month high, with Tesla Inc. up 22% in its biggest rally since May 2013. Elon Musk’s electric-vehicle giant reported strong earnings and forecast as much as 30% growth in car sales next year. United Parcel Service Inc. — an economic barometer — jumped 5.3% after returning to sales and profit growth. International Business Machines Corp. and Honeywell International Inc.’s results failed to inspire.

“Despite the possibility of more volatility as we get deeper into earnings season and close in on the November election, the market’s longer-term outlook remains solid,” said Daniel Skelly at Morgan Stanley’s Wealth Management Market Research & Strategy team.

The market barely budged after Thursday’s economic data, with new home sales beating estimates, initial jobless claims dropping and business activity expanding at a solid pace.

“Goldilocks data that’s in-line with expectations (so not too good or too bad) is the best outcome for a continued rebound in stocks and bonds,” said Tom Essaye at The Sevens Report.

The S&P 500 rose 0.2%, reclaiming its 5,800 mark. The Nasdaq 100 climbed 0.8%. The Dow Jones Industrial Average dropped 0.3%, posting a fourth consecutive day of losses — the longest losing streak since June. In late hours, Tapestry Inc. — the maker of Kate Spade handbags — rallied as a judge blocked the planned acquisition of rival Capri Holdings Ltd.

US 10-year yields fell four basis points to 4.20%. A $24 billion five-year TIPS auction drew the lowest yield this year as inflation-protected Treasuries have outperformed since the Federal Reserve cut rates last month.

Oil dropped as oversupply concerns overshadowed the risks from Israel’s potential retaliatory strike on Iran.

“The market appears to be driven by the projected outcome of the earnings reporting period, the presidential election, and the bond market’s interpretation of future monetary actions by the Federal Reserve,” said Sam Stovall at CFRA. “Investors see the resiliency of the economy and employment forcing the Fed to be ‘slower to lower’ on rates.”

This week was all about rates backing up and Tesla smashing expectations with a stellar report.

So let me give you my two cents here because in both cases, it's much ado about nothing.

First, long bond yields always back up after the Fed starts to cut rates.

If you look at the 10-year Treasury yield, it has backed up pretty significantly since September 9th when it hit a low of 3.65%: 

Are we headed back up to the 5% yield hit last October? 

No, we are not, the Fed is in easing mode, inflation expectations have dropped significantly, this latest backup in yields is textbook after the Fed cuts rates by 50 basis points for the first time in four years.

I drew that line around 4.3% because I have a hard time seeing the 10-year rate backing up much higher, maybe 4.5% but that's it and then I expect the rally in long bonds to resume.

I know, the presidential election is right around the corner, Trump has an edge over Harris and if he wins, he's threatening to impose tariffs and cut taxes.

I say we all take a deep breath and remember Trump 1.0 also said a lot of things that never materialized. 

Now, my two cents on Tesla shares which surged higher following stellar earnings, steamrolling short sellers and erasing a year's gain in one day:

Whenever a mega cap tech stock pops 22% or more in a couple of days, expect the stock to cool off in subsequent weeks.

Will it continue higher making a new 52-week high? Possibly, it might go to $300 but I have my doubts there too as I think it's as good as it gets for Tesla and once the recession becomes clearer it and other Mag-7 stocks will not be spared.

I say $300 because it roughly corresponds to the July 2022 high before it started tanking:

Anyway, predicting stocks and recessions isn't easy but I tend to not get carried away when I see big moves either way.

All I know is at the end of the day, Tesla is a car company and it's still way overvalued.

So what? So are many other Mag-7 and non-Mag-7 tech shares and the Nasdaq keeps melting up:

A chart like that is music to Ed Yardeni and Tom Lee's ears but we shall see if it continues next week after a slew of other mega cap tech stocks report.

It might continue, who knows, but the rally is getting long in the tooth.

Of course, this week, legendary investor Paul Tudor Jones appeared on CNBC saying "all roads lead to inflation" and he's long "gold, commodities, bitcoin and the Nasdaq".

He thinks the debt and deficit is unsustainable and the only way out of this mess is inflating it away.

He also said he owns no long bonds but he doesn't understand asset-liability management and why pension funds would jump on Treasuries again if the 10-year yield hit 5% (hell, I bet you they are buying them now).

Alright, before I leave you, my biotech stock of the week:

And the biotech stock of the day: 

The amount of insane pumping and dumping going on in the stock market every week is staggering, just staggering, a lot of market makers (one on particular) are making a killing.

Alright, that's a wrap, have a nice weekend.

Below, Paul Tudor Jones, Tudor Investment founder and CIO and Robin Hood Foundation founder, joins ‘Squawk Box’ to discuss the 2024 presidential election, state of the economy, how to fix the federal deficit, the Robin Hood investors conference, and more.

Next, Kevin Warsh, Hoover Institution distinguished visiting fellow and former Federal Reserve Governor, joins 'Squawk Box' to discuss the Fed's inflation fight, state of the economy, rate path outlook, and more.

Third, Dubravko Lakos, Head of Global Markets Strategy at JPMorgan, joins CNBC's Halftime Report to discuss his outlook for equities.

Fourth, David Zervos, Jefferies chief market strategist, joins CNBC's 'Squawk on the Street' to discuss market outlooks, the potential impact of the election, and more (listen to his views on debt and deficits).

Fifth, Jeremy Siegel, Wharton School finance professor, joins 'Closing Bell' to discuss markets, the Fed's next moves and the economic outlook.

Lastly, Ed Yardeni, Yardeni Research president, joins 'Squawk Box' to discuss the latest market trends, why he believes the market may be in the early stages of a melt-up, state of the economy, impact of the 2024 election, and more.

Razak Musah Baba of IPE Real Assets reports CPP Investments invests £500m in UK housing venture with Kennedy Wilson:

Canada Pension Plan Investment Board (CPP Investments) has committed an initial £500m (€600m) to a newly established UK single-family rental housing investment venture formed in partnership with Kennedy Wilson.

The C$647bn (€434bn) Canadian fund will hold a 90% interest in the venture, while Kennedy Wilson will commit £56m to become a 10% shareholder and will target new-build housing stock.

The partnership – with an initial target asset value of approximately £1bn including leverage – has been seeded with properties from two developments sourced by Kennedy Wilson. The seed assets comprise units currently under construction by Barratt Redrow in Norwich.

Kennedy Wilson, which will manage the venture and earn fees, has a pipeline of investment opportunities valued at over £360m and comprising 1,100 units. The company has the capacity to expand this pipeline to reach 4,000 units upon full capital deployment.

Tom Jackson, head of real estate for Europe at CPP Investments, said: “Private capital can play an important role in addressing the current undersupply of high-quality rental housing in the UK, particularly where it is professionally managed to provide a great customer experience.

“Investing into the UK single-family housing sector aligns well with our broader real estate strategy, to undertake scalable investments into high quality assets with growing cash flows.”

Mike Pegler, president of Kennedy Wilson Europe, said: “The structural challenges facing institutionally managed rental housing in the UK provides a clear investment rationale to enter the market and leverage our deep experience in the sector.

“We are actively seeking opportunities to grow our portfolio, which offers substantial scalability potential in the UK, driving consistent risk adjusted returns in this high-conviction subsector.”

Earlier today, CPP Investments issued a press release stating it is partnering with Kennedy Wilson to launch a new UK single-family rental housing joint venture targeting £1 billion in real estate:

London, United Kingdom. (October 24, 2024) – Canada Pension Plan Investment Board (CPP Investments) has partnered with global real estate investment company Kennedy Wilson (NYSE:KW) to launch a new single-family rental housing joint venture (“the JV”) in the United Kingdom. CPP Investments will initially commit £500 million, with Kennedy Wilson committing £56 million. The JV will have an initial target of approximately £1 billion of asset value, including leverage, with the potential to commit further capital depending on market opportunities. CPP Investments will hold 90% of the venture and Kennedy Wilson will hold a 10% ownership interest moving forward.

Through partnerships with housebuilders, the JV will target energy efficient, new-build housing stock in strong and growing local economies that offer residents excellent connectivity, attractive local amenities, and proximity to strong employment prospects and educational institutions.

The investment program is seeded with properties from two developments sourced by Kennedy Wilson, including units under construction by Barratt Redrow in Norwich, where Kennedy Wilson is now leasing up the first phase of completed homes, and units by Miller Homes in Stevenage, which will deliver completed houses from Q2 2025. Kennedy Wilson has an active pipeline of opportunities totaling over £360 million and 1,100 units, with the capacity to reach 4,000 units at full capital deployment.

“Private capital can play an important role in addressing the current undersupply of high-quality rental housing in the UK, particularly where it is professionally managed to provide a great customer experience,” said Tom Jackson, Head of Real Estate Europe at CPP Investments. “Investing into the UK single-family housing sector aligns well with our broader real estate strategy, to undertake scalable investments into high quality assets with growing cash flows. We look forward to launching the JV alongside Kennedy Wilson to deliver strong returns for 22 million contributors and beneficiaries of the CPP fund.”

Kennedy Wilson will manage the JV and earn customary fees, leveraging its expertise as a long-term owner, operator, and debt provider for rental housing with more than 60,000 units owned or financed by Kennedy Wilson managed platforms across the United States, the UK, and Ireland. The company’s established global residential platform comprises a vertically integrated investment, asset management, and development team, and operating and reporting systems.

“Residential has long been a crucial part of Kennedy Wilson’s investment strategy, and our JV with CPP Investments, a leading global institutional investor, will propel our efforts to deliver much-needed rental homes for local families,” said Mike Pegler, President, Kennedy Wilson Europe. “The structural challenges facing institutionally managed rental housing in the UK provides a clear investment rationale to enter the market and leverage our deep experience in the sector. We are actively seeking opportunities to grow our portfolio, which offers substantial scalability potential in the UK, driving consistent risk adjusted returns in this high-conviction subsector.”

About CPP Investments
Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 22 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2024, the Fund totalled C$646.8 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Instagram or on X @CPPInvestments.

About Kennedy Wilson

Kennedy Wilson (NYSE: KW) is a leading real estate investment company with over $27 billion of assets under management in high growth markets across the United States, the UK and Ireland. Drawing on decades of experience, our relationship-oriented team excels at identifying opportunities and building value through market cycles, closing more than $50 billion in total transactions across the property spectrum since going public in 2009. Kennedy Wilson owns, operates, and builds real estate within our high-quality, core real estate portfolio and through our investment management platform, where we target opportunistic investments alongside our partners. For further information, please visit www.kennedywilson.com.

This is a sizeable joint venture for CPP Investments with Kennedy Wilson, a publicly traded company that operates and invests in real estate both on its own and through its investment management platform, focusing on multifamily and office properties located in the Western United States, the United Kingdom, Ireland, Spain, Italy, and Japan.

The company manages 27 billion of assets under management and is a perfect partner for CPP Investments on this strategic joint venture in the UK.

It's worth noting what Tom Jackson, Head of Real Estate Europe at CPP Investments states in the press release:

“Private capital can play an important role in addressing the current undersupply of high-quality rental housing in the UK, particularly where it is professionally managed to provide a great customer experience. Investing into the UK single-family housing sector aligns well with our broader real estate strategy, to undertake scalable investments into high quality assets with growing cash flows. We look forward to launching the JV alongside Kennedy Wilson to deliver strong returns for 22 million contributors and beneficiaries of the CPP fund.”

Like many other markets, there is a lack of supply of professionally managed, high-quality rental housing in the UK and they see an opportunity to address this market.

The JV will have an initial target of approximately £1 billion of asset value, including leverage, with the potential to commit further capital depending on market opportunities.

Now recall, CPP Investments and GIC recently signed an agreement with Equinix for a $15 billion joint venture to build US data center infrastructure.

When you hear people say "CPP Investments is to big, too slow" clearly they don't have a clue of what they're talking about because they use their size, brand, reputation and global presence to find the right strategic partners to develop joint ventures they can scale.

The other thing I will mention on this deal is the fundamentals for UK single-family housing sector are extremely strong.

According to Savills UK (2023):

Single Family Housing (SFH) is redefining rental living. In the year to September 2023, SFH has already attracted a record £1 billion of investment and investors we surveyed aim to commit more than £25 billion to the sector over the next five to ten years.

You can read the full report here and see conclusions below:

In 2022, Say property also put out an interesting comment on the UK single-family housing sector:

Single Family Housing (SFH) is becoming one of the UK’s fastest-growing asset classes, with several prominent industry names announcing their entrance into the sector. At SAY, we have seen a huge upturn in interest in Single Family Housing but what exactly is Single Family Housing and what should those looking to enter the market consider?

SFH provides high-quality rental accommodation in suburban areas. The schemes usually comprise two to four-bedroom houses or low-rise apartments and are usually part of a wider mixed-use development, creating communities close to public transport, schools and areas of employment. Unlike urban Build to Rent (BTR), SFH schemes usually have minimal onsite amenities including a limited onsite staff presence.  

The current suburban rental market is almost entirely supplied through traditional Buy to Let (BTL) properties, opening up a market opportunity for institutional investment. Around 60% of Private Rented Sector (PRS) households are based in suburban areas, with most of these households residing in houses, not apartments.

The pandemic and the increase in hybrid working has encouraged people to reassess their living arrangements. Many renters are looking to suburban areas for more space, a home office or study, gardens, and outdoor space.

The changes to the Help to Buy scheme which saw regional price caps introduced and restrictions to first-time buyers, also provides an opportunity with Single Family Housing helping to replace the demand for stock when these changes come into place. 

This demand in the market is supported by current portfolios already in a steady state. In January 2021, BTR News reported on Gate House announcing the sale of its Thistles Portfolio to Goldman Sachs. The portfolio was at 99.8% occupancy with rental collection rates around 98% consistently.  

There are several operational benefits associated with SFH. Firstly, longer tenancies and fewer voids are attainable whereby families living in SFH are less transient as they are tied to the property where their children have secured a place at the local school. As there are fewer onsite amenities and onsite staff, these schemes generally have a lower gross to net leakage than urban BTR schemes.

Utilising modern methods of construction such as modular, helps to speed up the return on investment and permits investors to deliver standardisation across the product specification. Furthermore, modular construction can allow for projects to be delivered quickly and can help contribute to ESG objectives whilst constructing lower carbon homes.

Read more here but clearly this sector has room to grow and CPP Investments picked the right time and partner to get into it.

Lastly, this recent blog comment from Build-Zone on the growth of FSH in the UK is also worth reading: 

Although this shift is still at an early stage compared to the US—where large-scale institutional investors make up as much as 50% of the market—the UK’s rental landscape differs notably. Unlike the US, which primarily features multifamily homes managed by large operators, the UK’s private rental sector is more varied, predominantly single-family homes.

Alright, let me end it there and just say Sophie van Oosterom is joining CPP Investments to head up Real Estate at the right time.

Below, experts in Britain are warning that a generation of young people may never be able to own their own homes because of a grave housing crisis. There is a shortfall of over four million homes and it is now a hot political issue. Pressure is growing to start building in England's rolling countryside where construction has been outlawed for decades. PBS News Hour Special correspondent Malcolm Brabant reports (2023).

Also, a MoveIQ interview discussing how built to rent are popping up all over the place in the UK and delivering a different type of rental option to our varied housing stock, but it's not just about apartments in town and cities, family homes available to rent this way too and many more are being built.

Lastly, Garrington Property's latest comprehensive review of the UK property market following the election and formation of a new government.

Silas Brown and Kat Hidalgo of Bloomberg report Florida pension to offload up to $4 billion of private credit:

The Florida State Board of Administration is looking to sell a bundle of private credit stakes worth as much as $4 billion in what would be one of the largest deals of its kind, according to people with knowledge of the matter.

The pension fund is looking to offload between $3 billion and $4 billion as it seeks to cut exposure to higher-yielding opportunistic credit and invest more in mainstream direct lending, said the people, who asked not to be identified discussing private matters. The deal may end up being less than that range, and could be broken up into a series of sales where funds have the option of picking parts of the portfolio, the people said.

“The SBA is always evaluating opportunities to reposition investments in the fund, and to shift between strategies when those decisions can optimize our portfolio and maximize return,” Emily Percival, the Florida SBA’s director of external affairs and special projects legal counsel, said in an emailed statement. “As a policy matter, we do not publicly discuss the details of any potential transaction.”

The Florida SBA, which manages state pensions and other funds, aims to double its exposure to direct lending over the next few years, Trent Webster, a senior investment officer at the Florida SBA, said in an investment advisory council meeting in June. Webster also said the fund planned to shed higher-yielding, opportunistic credit stakes. 

At the meeting, Webster said the fund “directionally will be going more into the income-generating and more of what I like to call boring credit.” The Florida SBA has backed many opportunistic credit strategies from firms including Blackstone Inc., Oaktree Capital Management and Värde Partners, according to public filings. 

The pension fund’s decision to offload some of its holdings comes as the market for buying private credit stakes is booming. As much as $15 billion of such sales are predicted to close this year, according to a survey by Ely Place Partners Ltd., which advises firms on these types of transactions.

Firms focused on credit secondary deals including Coller Capital, Ares Management Corp. and Pantheon Ventures have increasingly large pools of capital to buy up such stakes. They’re typically often bought at a discounted price from institutional investors looking to generate some liquidity in the rapidly-expanding $1.7 trillion private credit market.

The slides below were taken from the SBA's investment advisory meeting in June (see full document here, it's extremely detailed):

You should also read SBA's latest monthly trustee report here as it too is packed with detailed information.

In fact, one thing I really like about Florida's SBA is the level of detail in their documents across all asset classes and there I give them an A+ on transparency (this is part of their governance required by state law).

Alright, so the headline figure of $4 billion out of private credit garners a lot of media attention but the plan has over $260 billion in assets now and from what I can read, this is just a portfolio move down the risk curve in private credit.

In particular, they are shifting $3-$4billion out of high yielding (riskier) opportunistic credit funds which make up 27% of their private credit portfolio into more lower yielding (more conservative) direct lending strategies which makes up 15% of this portfolio.

From the article above:

At the meeting, Webster said the fund “directionally will be going more into the income-generating and more of what I like to call boring credit.” The Florida SBA has backed many opportunistic credit strategies from firms including Blackstone Inc., Oaktree Capital Management and Värde Partners, according to public filings.

They are using secondaries market to offload some of these credit opportunity funds and they will do so at a discount but that's all part of business to manage the liquidity and diversify vintage year risk.

In fact, Florida's SBA is very active in the secondaries market in private equity, buying and selling funds to improve performance:

For Florida State Board of Administration, the effect of using the secondaries market to rebalance its PE portfolio is starting to show in its investment performance.

Florida SBA, which has $251 billion in assets under management, has been an active participant in the secondaries market over the past decade. The system’s private equity team has conducted six secondaries sales in the last 10 years, generating over $5 billion, according to its June investment advisory council meeting.

The system’s portfolio sales primarily involved divestments from its European and venture managers – both of which proved to be positive decisions. The system fully exited its stakes in eight European funds in 2014, a move that “jump-started” the performance of its European PE portfolio, according to John Bradley, senior investment officer for private equity at Florida SBA.

The pension’s European private equity portfolio saw its IRR increase from 6.9 percent in 2013 to 12.4 percent in 2023, according to documents prepared for the meeting.

Similarly, in its venture portfolio, the pension dropped four managers in the secondaries market in 2013-23. Its venture IRR increased from 8.4 percent to 15.3 percent over the same period, according to the documents.

“All those active decisions have paid [off],” Bradley said in the meeting. He added that the pension would see an increased GP turnover rate in the near term and would replace managers that continue to rely on financial engineering to generate profits.

According to Bradley, the team “anecdotally” tracked the performance of funds sold in the secondaries market after the deals were completed. It did so by tracking the returns of the funds as reported by other LPs. The divestments from the European and venture managers have proved to be beneficial to the system, he added.

Florida SBA has also been an active buyer in the secondaries market. In its October investment advisory council meeting, Bradley said the SBA had been bidding on second-hand fund stakes where it didn’t have a prior relationship – mainly in energy funds. The pension also looked to funds where it didn’t have a relationship because it previously cut off ties with a manager or because it wasn’t able to access a particular fund, Bradley said at the time.

The system’s previous divestments from European and venture GPs, as well as its recent search of second-hand stakes in energy funds, have demonstrated that the secondaries market is an area where the SBA can “use creative partnerships to access opportunities”, Bradley said in the June meeting.

“Our team has always had a contrarian culture,” Bradley said. “When everyone loves something, our tendency is to think maybe we shouldn’t. When things are hated, our tendency is to jump in and look for value.”

Florida SBA also backs secondaries investments via two GPs: Lexington Partners and Aegon Asset Management, which have generated a combined DPI of 1.1x and TVPI of 1.5x for the pension, according to the 10 June meeting documents.

The SBA’s secondaries portfolio, which returned 4 percent last year, was one of the two main drivers of its PE performance amid the downmarket, said Lamar Taylor, interim executive director and CIO at Florida SBA, at the meeting. The other driver was its buyout investments, which returned 10.4 percent in 2023.

In addition to secondaries, the pension will review alternative liquidity options such as collateralised fund obligations and NAV loans, according to Bradley.

“Both have become much more common over the past five years,” Bradley said, adding that CFOs and NAV loans could be more attractive if LPs must take a massive discount in portfolio sales in the secondaries market.

Indeed, as Sarah Rundell of Top1000funds reported back in July, Florida SBA mulls CFOs as alternative to secondaries:

Florida State Board of Administration (SBA) is exploring innovative new strategies in its $18 billion private equity portfolio like Collateralised Fund Obligations (CFOs) and “NAV loans” to tap liquidity and reposition the portfolio as an alternative to selling in the secondaries market where investors continue to get clobbered with massive discounts.

The SBA doesn’t have the statutory authority to put these strategies in place because they involve issuing securities. But speaking to the Investment Advisory Council during an asset class update in June, John Bradley, senior portfolio manager in private equity, said the investment team will resume the conversation with the Legislature next year, adding that these types of strategies have become much more common in the past few years.

Bradley explained that the highly complex CFO process typically involves GPs bundling stakes in private equity-owned companies into a single ($1 billion, for example) portfolio, contributing it to an SPV and securitising the cash flows, marketing interest-bearing securities to new investors to return cash to existing investors.

He added that these types of strategy offer a better cost of capital than the secondary market where in contrast to earlier years when investors used to sell at a premium, they now risk giving up a significant return.

The challenging secondaries market reflects the markedly changed conditions in private equity where the boom of the last decade has swung into reverse.  Low interest rates and high growth led to “massive multiple expansion” but the decade ahead will be characterised by higher interest rates and slower growth, requiring portfolio companies to add value through their operations.

“The value created by GPs in the future won’t be same as in past,” predicted Bradley.

Strategies shaped around borrowing, M&A and growing the EBITDA are over. Today it is much more about being good owners of a business and driving value through operations, he said.

The SBA is preparing for more churn in its  GP relationships. But forming new partnerships and creating access with top GPs is a laborious process alongside working down the existing list of GPs coming back to market.  In the last year, SBA only closed with four new funds after  a journey that began with 326 meetings and calls.

Manager due diligence is detailed and process orientated, striving for a consistent approach in how the investor reviews fund opportunities. At each stage the team debate if the opportunity is worth taking to the next level in a process that takes 3-4 months.

At the end of last year, the SBA was invested in 243 funds managed by 71 GPs  of which 45 count as core relationships. Fifty three per cent of the private equity portfolio is concentrated in ten firms including names like Lexington Partners, Truebridge Capital and SVB Capital. These top ten names together represent 32 per cent of SBA’s committed capital today.

Contrarian strategy

SBA prides itself on a contrarian strategy.

For example, the team dug deep into traditional energy assets in 2020, snapping up secondary oil and gas assets, buying into fund and co-investments, as ESG-minded LPs bailed out of the strongly performing sector. But Bradley warned the benefits of active management and repositioning are often not felt for years.

Like overhauling the European portfolio in favour of regional, and country-focused funds. The SBA “took advantage of the 13-year bull market” to conduct six secondary sales over the past ten years, creating $5 billion in proceeds.

“We sold to realise value in the face of extreme valuations,” said Bradley. “The next evolution in European private equity is sector-focused fund investment.”

An exploration of how these assets sold in the secondary market went on to perform under new ownership revealed these funds went on to perform well. However, sharp falls in the euro produced an FX win that offset subsequent fund performance.

That contrarian approach is also visible in venture.  In 2010 the SBA increased its exposure to venture at a time many other investors were throwing in the towel. The team put together creative investments via SMAs and fund-of-one to gain access.

“It turned out that venture wasn’t dead, and we reaped huge rewards ten years later,” said Bradley.

In 2021 the SBA reduced the venture portfolio via the secondary market, selling $1.8 billion in tech and venture assets.

The SBA’s bias to early-stage venture  makes up two thirds of the portfolio. The majority of the allocation is in IT and software, largely around Silicon Valley, New York and Boston.

Bradley said that although the venture portfolio is down on the year, it has outperformed peer benchmarks and is the strongest performing sub strategy within private equity, an envelope of the portfolio that includes allocations like distressed and secondaries.

The future

The committee heard how the integration of IT into the private equity portfolio is another key focus and will include the modernization and cloud migration of legacy systems. Technology is leading to changes in how the SBA updates PE fund data, and is creating efficiencies.

Bradley concluded that the SBA will remain active in the secondary market and bring more co-investment in house where two staff members now oversee co-investment.

All this tells me Florida SBA has some pretty sharp managers that know what they're doing.

Below, private credit continues to be the biggest focus for limited partners in the next 12 months, according to a new Goldman Sachs survey. Goldman Sachs Global Head of Client Business, Asset and Wealth Management Division Matt Gibson discusses on "Open Interest".

Thomas Gualtieri and Dinesh Nair of Bloomberg report Canadian pension funds ready €7 billion sale of Cubico:

Canada’s Ontario Teachers’ Pension Plan and PSP Investments are about to kick off the sale of renewable energy company Cubico Sustainable Investments, according to people with knowledge of the matter. 

The two pension funds are working with Bank of America Corp. and Canadian Imperial Bank of Commerce on a potential transaction, the people said. The owners are considering seeking a valuation of €7 billion ($7.6 billion) or more for London-based Cubico, the people said. They are prioritizing a full divestment, although some potential bidders could be interested in only some of the assets, the people said, asking not to be identified as the plan isn’t public.

Cubico operates clean-energy assets in Spain, Italy, Greece, the UK, the US, Mexico, Uruguay, Colombia and Australia. The company will likely draw interest of large sovereign wealth funds, one of the people said. A formal process could start within weeks, according to the people.

Deliberations are ongoing and details could still change, the people said. Representatives for OTPP, PSP, Bank of America and CIBC declined to comment, while Cubico didn’t respond to requests for comment.

Renewable energy companies have attracted strong interest from investors who are seeking more exposure into the sector amid the push for greener sources of power. Brookfield is seeking to acquire a majority stake in Neoen SA with a view to launch a takeover offer that would value the French renewable energy developer at about €6.1 billion. KKR & Co. offered in March to acquire German renewable-power producer Encavis AG in a €2.8 billion deal.

Cubico was launched in 2015 by the current owners alongside Spain’s largest lender, Banco Santander SA, which sold its stake a year later. The company operates different technologies, including onshore wind, solar, batteries and transmission lines, according to its website. Its asset portfolio has 2.8 gigawatts of installed capacity in total, plus 450 megawatts under construction and a development pipeline of over 17 gigawatts. Cubico has more than 500 employees globally.

Cubico Sustainable Investments is a powerhouse in renewable energy which PSP Investments and Ontario Teachers' acquired back in 2016 from Santander:

LONDON, MONTREAL AND TORONTO (July 22, 2016) — The Public Sector Pension Investment Board (PSP Investments) and Ontario Teachers’ Pension Plan (Ontario Teachers’), two of Canada’s largest pension investment managers, today announced that they will acquire, in equal proportions, Banco Santander, S.A.’s (Santander) indirect interest in global renewable energy and water infrastructure company Cubico Sustainable Investments Limited (Cubico). As a result, PSP Investments and Ontario Teachers’ will remain the sole ultimate shareholders of Cubico, on a 50-50 basis. Both parties are fully committed to supporting Cubico in achieving its investment mandate. The company’s assets and investment activities will continue to be managed by Chief Executive Officer Marcos Sebares and his seasoned leadership team.

“Our increased participation in Cubico is aligned with PSP Investments’ long-term investment approach and strategy to leverage industry-specific platforms and develop strong partnerships with liked-minded investors and skilled operators,” commented Guthrie Stewart, Senior Vice President and Global Head of Private Investments at PSP Investments. “We look forward to continuing supporting Cubico’s growth strategy by providing the company with access to capital to facilitate development initiatives,” Mr. Stewart added.

“We remain committed to supporting Cubico’s management team as they execute on their strategy of delivering high returns in the renewables sector. Ontario Teachers’ is proud to be supporting the continued conversion from hydrocarbons to clean and renewable sources of power. Cubico's flexible investment and acquisition approach fits well with Ontario Teachers’ approach to private investments,” commented Andrew Claerhout, Senior Vice-President, Infrastructure at Ontario Teachers'.

Headquartered in London, Cubico was established in May 2015. Its initial portfolio included 18 wind, solar and water infrastructure assets previously owned by Santander, representing a net capacity of 1.2 gigawatts (GW). Since inception, Cubico opened regional offices in London, Milan, Sao Paulo and Mexico City. It also successfully completed four acquisitions spanning four different countries, growing its total net capacity to 1.62 GW. The company’s portfolio now comprises 22 wind, solar and water infrastructure assets in operation, construction or under development across eight countries (Brazil, Italy, Ireland, Mexico, Portugal, Spain, United Kingdom and Uruguay).

“Global investment in sustainable clean energy reached a new record in 2015, and Cubico’s excellent local market knowledge and strong relationships will allow us to continue to create and capitalize on attractive growth opportunities,” commented Marcos Sebares, Chief Executive Officer, Cubico. “We see Ontario Teachers’ and PSP Investments’ joint acquisition of Santander’s position as an important endorsement of our strategy and capabilities. We look forward to collectively leveraging our relationships and expertise to create value through the acquisition and operating excellence of renewable energy assets.”

The closing of the transaction is subject to customary closing conditions.

Andrew Claerhout who I consider to be one of the better infrastructure investors in Canada was part of that deal and in eight years, both PSP and OTPP have supported the growth of Cubico and are now looking to realize on their investment.

Why sell such a coveted asset? First, demand for prized renewable energy assets is high. Second, and more importantly, it allows both pension funds to shore up liquidity and focus their attention on other opportunities that interest them at this time.

Now, this story isn't really new. 

Recall, last August I wrote about how OTPP and PSP Investments were looking to unload Cubico for $6 billion. 

A year later, the price tag went up to $7.6 billion (€7 billion) and that's because Cubico has been growing its operations nicely, expanding its enterprise value.

Last year I noted that according to sources, the reported sale price of USD $6 billion is about 10 times its earnings before interest, taxes, depreciation, and amortization (EBITDA) of $641 million in 2022.

I don't have the latest figures but they've obviously grown EBITDA and are growing nicely.

If OTPP and PSP Investments do manage to sell Cubico for €7 billion ($7.6 billion) or more, then they will both realize great returns on this asset.

I would invite my readers to visit Cubico's newsroom here to see the latest developments there. 

Like I said, this is one of the more successful joint ventures among Canadian pension funds.

Below, Davide Romano, Head of Operations at Cubico Sustainable Investments Italy, shared his experience working with BaxEnergy.

Bloomberg’s Paula Sambo recently interviewed Ryan Chin, Managing Director, Balance Sheet & Liquidity Management, Healthcare of Ontario Pension Plan (HOOPP), and Brandon Weening, Executive Vice President, Corporate & Capital Markets Finance, OMERS, at the 2024 Bloomberg Canadian Finance Conference to discuss the challenges and opportunities shaping their investment strategies.

This is an excellent interview which I embedded below because it showcases top talent from HOOPP and OMERS that we don't typically hear much from and  it once again demonstrates the incredible bench strength at these organizations.

Both Ryan and Brandon are really smart guys who know their stuff and it's worth listening to their views below keeping in mind their respective functions.

Ryan handles balance sheet and liquidity management at HOOPP and as he explains, he deals with the less risky part of the overall portfolio to make sure there's plenty of liquidity to invest in risk assets when opportunities arise.

Brandon's job as EVP  Corporate & Capital Markets Finance at OMERS is a bit different because his job is to raise OMERS' profile across the global institutional fixed income community to make sure people know about the plan and why it's smart to invest in OMERS' debt (mostly in Canadian, US, European currencies but also in Australian now and their Board approved the British pound in the future if needed).

He explains very well why OMERS issues debt and part of the reason is also to capitalize on opportunities as they arise.

HOOPP doesn't issue debt, it instead has extensive repo activities (mostly) leveraging its massive bond portfolio which Ryan's team is in charge of to make sure there's always liquidity at hand when needed.

Two different asset mixes, two different approaches but the goal is the same: manage liquidity needs of the plan so they are never caught with insufficient liquidity when they need it the most.

Brandon discusses how issuing bonds at OMERS is 'deployment dependent' mainly in three asset classes: infrastructure, real estate and private credit.

Ryan explains that when TIPS are offering 1-2% (real yield), the natural shift when running an LDI program is to shift more assets into fixed income. 

He also explains why inflation risk is the risk that he's most concerned about and why that's so.

Anyway, take the time to watch this excellent interview below, well worth it.

I would also advise you to carefully read this article on why a fixed income expert at T. Rowe Price thinks Treasury 10-year yields will test 5% in six months:

Benchmark Treasury yields may soon hit a key level on the back of rising inflation expectations and concerns over US fiscal spending, according to T. Rowe Price.

“The 10‑year Treasury yield will test the 5% threshold in the next six months, steepening the yield curve,” according to Arif Husain, chief investment officer of fixed-income, who helps oversee about $180 billion of assets at the firm. The fastest path to 5% “would be in the scenario that features shallow Fed rate cuts,” he wrote in a note.

The call stands out against market expectations of lower yields, after the Federal Reserve cut rates for the first time in four years last month. It also underscores the increasing debate in the world’s biggest bond market, following strong economic data that has raised questions about the likely pace of cuts.

Yields on 10-year Treasuries most recently traded at 5% last October, hitting their highest level since 2007 as fears of a prolonged period of high interest rates gripped markets. Turbulent repricing could be on the cards if Husain’s prediction proves accurate, with strategists currently expecting yields to fall to an average 3.67% in the second quarter.

Ten-year Treasury yields held at 4.08% on Monday.

Husain, a near three-decade market veteran, said ongoing issuance by the Treasury to fund the government deficit is “flooding the market” with new supply. At the same time, the Federal Reserve’s policy of quantitative tightening — an attempt to reduce its balance sheet following years of bond-buying — has removed a key source of demand for government debt.

The yield curve is likely to steepen further because any rises in the yields of short-maturity Treasury bills will be limited by rate cuts, said Husain, who is also T. Rowe Price’s head of fixed income.

Deutsche Bank’s private banking arm said last month that 10-year Treasury yields would touch 4.05% by next September, a prediction that took only around a month to prove correct. Blackrock Investment Institute, meanwhile, issued a report last week telling investors to expect yields on longer-term US debt to swing in both directions as new economic data is released.

Cracks are already appearing in the US’s fiscal position, lending credence to Husain’s views. The country’s debt interest-cost burden climbed to its highest level since the 1990s in the financial year that ended in September, but neither former President Donald Trump nor Vice President Kamala Harris has touted reducing the deficit as a key element of their campaign. That has left US government debt a key risk for market participants.

The most likely scenario for the Federal Reserve is a period of small rate cuts, comparable to its reductions between 1995 and 1998, said Husain. In this scenario, China would inject more stimulus to help its own economy, boosting global growth and creating a clearer outlook for Fed officials.

There are also prospects of a normal easing cycle where the Fed cuts to nearer to the neutral rate, which Husain said is probably around 3%. He also considered a scenario in which the US went into recession, which would spur aggressive cuts.

“Investors sharing my view that a near‑term recession is unlikely should consider positioning for higher long‑term Treasury yields,” Husain wrote.

Take the time to read my recent comment  going over Francois Trahan and Martin Roberge's presentations at Quebec ANEB last week.

As Francois pointed out last week, fiscal stimulus has its limits and at one point, just like in England, the market might react negatively to tax cuts and rates can go back up.

We aren't there yet but you have to wonder how long before the ratings agencies start issuing warnings or worse still, credit downgrades. 

Can the 10-year Treasury yield reach 5% in six months? I doubt it as long as inflation expectations keep dropping and employment decelerates further but you never know. 

All I know is Canada's large pension funds will pounce on 5% 10-year Treasury notes if the yield goes back to 5% and so will global pension funds managing assets and liabilities.

And before I forget, OMERS recently launched a new hub on its member website dedicated to retirement income sources:

The new webpage is designed to support the OMERS’ members on their retirement savings and planning journey, emphasizing the importance of a secure and stable income foundation in retirement. This includes interactive tools to illustrate the impact collecting Canada Pension Plan and Old Age Security payments earlier or later.

Read more about his initiative here.

Alright, that's it from me, take the time to watch all the interviews embedded below.

First, Ryan Chin, Managing Director, Balance Sheet & Liquidity Management, Healthcare of Ontario Pension Plan (HOOPP), and Brandon Weening, Executive Vice President, Corporate & Capital Markets Finance, OMERS, discuss the challenges and opportunities shaping their investment strategies with Bloomberg’s Paula Sambo at the 2024 Bloomberg Canadian Finance Conference.

Next, Eric Girard, Minister of Finance, Province of Québec, discusses Québec’s investments in education and infrastructure with Bloomberg’s Mathieu Dion at the Bloomberg Canadian Finance Conference 2024.

Third, Laurent Ferreira, President & CEO, National Bank of Canada shares his views on the current financial landscape and his plans for the National Bank of Canada with Bloomberg’s Caroline Gage at the Bloomberg Canadian Finance Conference 2024.

Lastly, Stéfane Marion, Chief Economist & Strategist, National Bank of Canada, shares his insights on current trends and their potential impacts with Bloomberg’s Christine Dobby at the Bloomberg Canadian Finance Conference 2024. 

I worked with Eric, Laurent and especially Stefane at the National Bank years ago, they're extremely smart people who definitely know their stuff. Take the time to listen to their interviews.

Canaccord Genuity's Martin Roberge and Francois Trahan of Trahan Macro Research presented their views at a luncheon yesterday at the St-James Club in Montreal to raise money for ANEB Quebec, an organization that provides support for people suffering from eating disorders.

Even though my back has been killing me the last couple of weeks (I have to write about the ups and downs of spinal fusion surgery), I got out of my bubble and attended the event and was very happy I did as it's a great cause and these are my two favourite strategists.

I asked both gentlemen to provide me with their presentations afterwards and they were kind enough to oblige.

Francois was up first, presenting the bearish case.

I am not going to go through his whole presentation but provide you with some key points and slides.

He began by noting there was an unusual amount of Fed tightening for today's investor:

And then stated the last 5 recessions began when the yield curve started steepening:

This is important to understand. The Fed rate hikes take a full two years after commencing to start hitting the economy and when the Fed starts easing, the front end of the curve rallies more than the long end and the curve starts steepening.

This typically occurs at the start of the recession but since the NBER doesn't officially mark recession dates till after they occur, we will have to wait for official confirmation.

What Francois said yesterday is despite what many economic forecasters have said about the yield curve, it's still one of the best recession indicators and it's not when the yield curve is inverted that you need to worry, it's when it un-inverts and starts steepening:

So many people get this wrong, they a) don't understand the big lag between monetary policy and the economy and b) they don't understand how the yield curve reacts at the start of a recession.

For me, the only reason we have averted a recession thus far is insane fiscal profligacy and both Francois and Martin touched upon this.

Anyway, back to Francois's presentation.

He notes the yield curve and rates still point to tight policy settings:

This just means the Fed has room to start cutting more aggressively if things get a lot worse, something Martin Roberge also stated in his presentation.

Francois then explained why it's a fairly normal peak in the Fed funds rate from the market's perspective:

The change in stock leadership since Q2 is noteworthy:

Of course, a lot of this is driven by the long bond yield, when it goes down, utilities, tech, real estate and staples rally, when it creeps back up, they get hit.

Francois did note that stocks and bond yields are increasingly positively correlated, which is what you'd expect at this stage of the economic cycle:

And he was also clear that earnings will weaken and that will usher in a bear market:

He also warned not that it's normal that consensus believes we are headed for a soft landing:

But the forecasting record of Wall Street and the Fed is terrible at this juncture of the cycle:

And with a recession, layoffs mount and earnings get hit:

Still, people don't see it, they're glued to their screens, Netflix hit an all-time high today, Nvidia is on fire lately, bank stocks are soaring, so it's hard for them to comprehend that this is the top of the market.

But if you believe the recession is just getting underway, earnings will be hit and a bear market is coming:

Worse still, Francois warns a US slowdown is even more dire for the Chinese economy now because their housing woes limit fiscal stimulus and they're heavily reliant on exports:

Add to this a global slowdown and how it will impact China and you start to understand why the Big China Long I wrote about recently fizzled out fast.

I worry a lot about a significant slowdown in China because it's deflationary and will clobber risk assets.

Martin Roberge's Presentation

Alright, let me move quickly to Martin's presentation.

He shared his key takeaways with me:

The key takeaway is that the biggest two economies in the world, the US and China, are in a hyper reflation mode with projections of further stimulus even if economic or credit imbalances seem not on the horizon. This over easy policy is likely to allow inexpensive assets such as non-US equities and smaller capitalization stocks to close some of the performance gap with US stocks. 

That being said, the global economy is still slowing down but just not in a linear fashion. The real test for stocks will be whether central banks can accelerate the pace of easing in 2025 if labour market conditions weaken in a more significant fashion as we believe. Our inflation models are signaling a re-acceleration in 2025 which could tie the hands of world central banks.  

But until or before we get to the decision to protect growth or quell inflation, central banks are likely to rush rate cuts which could lead to a late-cycle liquidity melt-up in “lagging” risk assets. In other words, risk of a speculative bubble seems higher than the risk of a recession over the next 3 to 6 months.  

His presentation was supposed to be the "bullish scenario" but as he explained, we are at the end of the cycle, it's just that he thinks it can last a little bit longer because the fiscal backdrop remains very accommodating:

He also thinks as global central banks slash rates, the global economy should pick up in the second half of next year:

Here I beg to differ because it takes a while before rate cuts feed into the economy and that means the recovery might not materialize to the second half of 2026!

Remember the chart above Francois showed, the fed funds rate remains restrictive, something Martin also acknowledged:

Martin also warned that white collar jobs are at risk when the downturn hits:

On markets, he said that bond yields always back up after the first Fed rate cut and then sink again as the economy slows and inflation expectations decline:

Remember what I told you above, the long bond rate goes down, utilities, real estate, staples and high dividend stocks rally as do tech stocks. This is normal. The opposite happens when rates back up.

Interestingly, Martin said he sees utilities continuing to rally because of the insatiable energy demands from data centers and they will "decouple" from rates eventually (if that happens, will be interesting).

He talked about oil and copper but it's this chart on gold that caught my attention:

On US stocks, he thinks they're fully valued compared to Canadian and international stocks but said they should rally till we hit the recession cliff:

Martin also warned you cannot rule out the 1998-99 playbook:

I think Francois touched upon this too but he thinks there is little fiscal room to manoeuvre and it's unlikely we see this play out.

If I can sum up the biggest difference between Martin and Francois's presentation is the former thinks the pain trade is still up whereas the latter thinks it's down. 

Martin told me after he sees FOMO kicking into high gear as we close out the year and he might be right about that. 

He ended his presentation on why he thinks non-US equities offer more attractive upside and stated Canadian companies in the TSX (not the general economy) are seeing a productivity boom which will support margins.

In terms of sectors, he likes utilities (XLU), medical equipment (IHI) and thinks there remains upside in gold shares (GDX) as free cash flows swell translating into higher dividends.

I'm not a huge fan of Canadian stocks but there are a few great companies to invest in as the economy slows.

Lastly, my stock of the week:

It was a little over a dollar last week and hit a high of $79 today before coming back down.

The amount of speculative nonsense, biotech pump and dumps and other dumb meme stock moves I see, sometimes I wish the Fed hiked rates back up to 20% and just create a depression.

The only thing I know is when the real bear market strikes, all this nonsense will come to a screeching end.

Hope you enjoyed my recap, remember to support my work financially through the PayPal on the top left-hand side under my picture. I thank all of you who support my work.

Below,Tom Lee, Fundstrat co-founder, and David Zervos, Jefferies chief market strategist, joins 'Closing Bell Overtime' to talk the day's record market action.

Next, Trivariate’s Adam Parker and Morgan Stanley’s Ellen Zentner, join 'Closing Bell' to discuss markets, election uncertainty in the market and earnings season.

Third, Eric Johnston, Cantor Fitzgerald chief equity and macro strategist, joins 'Closing Bell' to discuss the bullish case for small caps.

Lastly, Duquesne Family Office Chair and CEO Stanley Druckenmiller says Donald Trump is the favorite to win the presidential election. 

I agree with Druck and think Trump will trounce Harris on November 5th. Be prepared for anything but that's what I am anticipating.

James Bradshaw of the Globe and Mail reports the Ontario government plans governance review at pension fund manager OMERS:

The Ontario government is launching a governance review of the province’s largest pension fund for municipal employees, responding to pressure from associations representing police and firefighters that complained of a perceived lack of transparency from one of the pension plan’s two boards of directors.

The review will examine how effective the governance model for the Ontario Municipal Employees Retirement System (OMERS) has been. It will also look at decision-making processes, the composition and effectiveness of two separate boards that oversee OMERS, and the level of engagement with employees and employers.

The review was ordered in August by Ontario’s Municipal Affairs and Housing Minister, Paul Calandra, and revealed publicly at an annual update OMERS gave to Toronto city councillors on Wednesday. Over the summer, multiple associations representing OMERS members wrote to the government urging it to review governance at the $133-billion pension fund, which invests on behalf of more than 626,000 Ontario public service workers.

The provincial government plans to appoint a special adviser to carry out the review over the next year, with a similar mandate and focus as the last review of OMERS’s governance, carried out in 2012 by Tony Dean, a former Ontario secretary of the cabinet and head of the Ontario Public Service. The review will not cover the financial sustainability of the plan or OMERS’s investment performance, nor will it revisit the proposed changes to contribution rates.

“The review is designed to strengthen the governance of OMERS to ensure that it is serving the interests of plan members, and that decisions are made transparently for the long-term interests of the plan,” David Wasyluk, a spokesperson for Mr. Calandra, said in an e-mail.

Under a structure set up in 2006, OMERS is governed by two separate boards overseeing two corporations. The Sponsors Corporation (SC) board, which has been the target of pension plan members’ recent complaints, has 14 directors and is responsible for making board appointments, setting benefits and contributions, and monitoring the plan’s long-term health. A separate Administration Corporation (AC) board has 15 members and oversees the fund’s investments, plan valuation and pension administration.

The requests for a governance review did not raise specific concerns about the AC board, OMERS’s investment performance or the fund’s capacity to pay pensions. OMERS earned an investment return of 8 per cent over the past three years and 7.1 per cent over the past 10 years, and the plan is 98-per-cent funded.

AC board chair George Cooke said in a statement the review is welcome, and good governance practices “include a review from time to time of what is working well, and what could be working better.” SC board chair Barry Brown said the SC board has tried to put the interests of plan members “as a whole” first and foremost.

“In the spirit of continuous improvement, we are committed to fully cooperating with the government in its planned governance review, just as we did in 2012 when the last review was undertaken,” Mr. Brown said in an e-mailed statement.

The flashpoint that sparked the provincial review came over the summer, when associations representing police officers in Ontario felt blindsided by planned changes to contribution rates starting in 2027, according to correspondence reviewed by The Globe and Mail.

Last year, an assessment done by the OMERS SC board concluded that there did not need to be changes to benefits or total contributions to the pension fund. In June, however, that same board approved a reallocation of contribution rates that will require police, firefighters and other employees who earn more than $90,000, as well as some employers, to pay higher contributions – about $15 to $20 more per pay period for most police officers. About 70 per cent of OMERS members will pay the same or lower contribution rates, meaning the total level of contributions to the pension fund won’t change, OMERS said in Wednesday’s presentation.

“It’s about who pays how much,” Joe Pennachetti, a director on the SC board, said at Wednesday’s presentation to city councillors. “A reallocation of rates between classes was required to help ensure that contribution rates continue to be fair and reasonable across all of our diverse group of members.”

The proposed increase to some contribution rates “was unexpectedly revealed to stakeholders at the last moment” before a summer vote, according to a letter that Police Association of Ontario president Mark Baxter and Toronto Police Association president Jon Reid wrote to members, which The Globe reviewed. “We were blindsided by the announcement.”

The two police associations wrote to the Ontario government formally requesting a governance review of OMERS, raising concerns about “an eroding and significantly lacking level of adequate transparency in the decision-making processes within the OMERS SC and its Board of Directors.”

“As it stands, we do not believe the current management of the Sponsors Corporation best serves the interests of our members – and plan members as a whole,” Mr. Baxter said in an e-mailed statement.

Later in June, leaders of the Ontario Professional Fire Fighters Association, the Ontario Association of Chiefs of Police and transit agency Metrolinx each wrote similar letters reviewed by The Globe to Premier Doug Ford, urging the government to launch a governance review.

Other associations representing OMERS members have since weighed in, citing long-standing concerns about governance that preceded this summer’s decision on contribution rates. Mike Major, the executive director of the City of Toronto Administrative, Professional, Supervisory Association (COTAPSA), wrote a letter to Mr. Calandra and Mr. Ford earlier this month emphasizing the association’s “very strong support” for the governance review, and said the current OMERS model is “compromised by undue complexity and expense.”

“We don’t believe the Sponsors Corporation is effective, efficient or fair,” Mr. Major said in an interview. “There’s a better way to do this.”

Alright, I'll tell you how I read this "OMERS governance review" and you can feel free to share your thoughts as well.

First, let me be very clear, there is nothing wrong with the way OMERS is managing its assets and liabilities.

In fact, the funded status of the plan has markedly improved over the last four years and for all intents and purposes, it's now fully funded (98% funded status is fully funded to me).

The way I read this governance review is some members of OMERS aren't happy with the structure of two boards governing OMERS.

In particular, they want a full review of OMERS Sponsors Corporation:

Established under the OMERS Act in 2006, the Sponsors Corporation (SC) works closely and collaboratively with the Administration Corporation (AC) to represent the interests of sponsors, stakeholders, members and beneficiaries of the OMERS Pension Plans.

Our overriding objective is to ensure – through informed decision-making and leading governance practices – that the OMERS Pension Plans remain affordable, meaningful and sustainable in today’s complex and fast-changing world.

This is a simple goal, but a demanding and complex task – all supported by a deeply committed executive team and an experienced Board of Directors nominated by the designated Plan sponsors.

We believe that good governance is the foundation for effective Plan management. To successfully fulfill the SC’s mandate under the OMERS Act, 2006, we have developed a range of effective policies and practices with input and advice from expert third-party advisors.

At the Sponsors Corporation (SC), we are accountable for what we call the “ABCs” of OMERS:

• Appointments;

• Benefits; and

• Contributions.

Specifically, we are solely responsible for:

• Determining benefit levels and contribution rates for the Plans, and

• Setting compensation levels and appointment protocols for both the SC and AC Boards. This includes formal protocols related to the nomination, appointment and reappointment of Directors for both the AC and SC Boards. The intent is to select qualified candidates to provide effective oversight based on, among other things, their considerable experience, proven competencies, sector knowledge, and commitment to the DB pension model.
  

On the other side, you have OMERS Administration Corporation (AC) which is responsible for pension services and administration, investments, and plan valuation.

The AC Board of Directors consists of 14 members nominated by OMERS employer sponsors and nominated by employee sponsors. The AC also has an independent Board Chair for a total of 15 members. OMERS Sponsors Corporation (SC) makes all appointments to the AC Board.

Now, this is the key passage from the Globe article above:

Last year, an assessment done by the OMERS SC board concluded that there did not need to be changes to benefits or total contributions to the pension fund. In June, however, that same board approved a reallocation of contribution rates that will require police, firefighters and other employees who earn more than $90,000, as well as some employers, to pay higher contributions – about $15 to $20 more per pay period for most police officers. About 70 per cent of OMERS members will pay the same or lower contribution rates, meaning the total level of contributions to the pension fund won’t change, OMERS said in Wednesday’s presentation.

“It’s about who pays how much,” Joe Pennachetti, a director on the SC board, said at Wednesday’s presentation to city councillors. “A reallocation of rates between classes was required to help ensure that contribution rates continue to be fair and reasonable across all of our diverse group of members.”

The proposed increase to some contribution rates “was unexpectedly revealed to stakeholders at the last moment” before a summer vote, according to a letter that Police Association of Ontario president Mark Baxter and Toronto Police Association president Jon Reid wrote to members, which The Globe reviewed. “We were blindsided by the announcement.”

The two police associations wrote to the Ontario government formally requesting a governance review of OMERS, raising concerns about “an eroding and significantly lacking level of adequate transparency in the decision-making processes within the OMERS SC and its Board of Directors.”

“As it stands, we do not believe the current management of the Sponsors Corporation best serves the interests of our members – and plan members as a whole,” Mr. Baxter said in an e-mailed statement.

Later in June, leaders of the Ontario Professional Fire Fighters Association, the Ontario Association of Chiefs of Police and transit agency Metrolinx each wrote similar letters reviewed by The Globe to Premier Doug Ford, urging the government to launch a governance review.

Clearly some members felt they were "blindsided" by higher contribution rates and the policy wasn't properly communicated with them and discussed.

Let me take a step back here and tell you that after I was wrongfully dismissed from PSP Investments back in October 2006,  the government of Canada (Treasury Board of Canada Secretariat) hired me to conduct a full governance review of the federal public service pension plan in the fall of 2007.

As part of my report, I had to cover all aspects of plan governance: asset management (PSP Investments), liabilities and plan funding which falls under the purview of the Chief Actuary of Canada, administration, communications, risk management, etc.

As you can imagine, when the folks at PSP Investments caught wind of this, they weren't too pleased and tried to block me, intimidate me using legal demand letters which I sent to my lawyer who sternly warned them to govern themselves accordingly or face legal consequences. 

It was very stressful but I now laugh at that whole episode for a lot of reasons. The executives at PSP back then were total idiots acting hyper-deranged and paranoid but the people at the Treasury Board who asked me to conduct that review on behalf of the government didn't impress me either and they didn't like my final report because it exposed serious governance flaws that made them look bad.

I basically learned the hard way that when you consult, your client doesn't want to hear the truth, they want you to paint a rosy picture of everything they're doing.

Well, that was the end of my consulting career and I decided it's not for me (let McKinsey and Boston Consulting Group charge millions for fluffy reports).

To add insult upon injury, the Treasury Board took months to pay me a measly $25,000 for an in-depth report which was roughly 100 pages long going over best governance practices all over the world (it's still collecting dust somewhere in Ottawa).

And truth be told, I know a lot more about good governance now than I did back then so I feel very comfortable expressing my opinion on this OMERS governance review.

I think OMERS SC dropped the ball communicating this hike in the contribution rate to some members and they didn't take the time to discuss it with members beforehand (through consultations) and that pissed off these members enough to ask for a full review of governance at OMERS.

What else? It's high time OMERS does away with these two separate boards and only have one board like the rest of Canada's large pension plans/ funds and if that requires legislative changes to the OMERS Act, so be it.

I believe in transparency, efficiency and great communication. Period.

There is no good argument to be made as to why OMERS needs two separate boards.

Also note the article states AC board chair George Cooke said in a statement the review is welcome, and good governance practices “include a review from time to time of what is working well, and what could be working better.”

I completely agree with him, it should be welcome and all organizations, not just OMERS, should have governance reviews every five years and a report should be released to the public (posted on their website). 

In Canada, all of our large pension plans/ funds tout world-class governance and they do have amazing governance as the long-term results indicate but part of good governance is an independent report by qualified agency to your members to review your governance and I mean everything including benchmarks, compensation, risk management, communications, plan funding and more.

The problem? Typically such reports are done by the Office of the Auditor General (federal and provincial) and they're not properly staffed to conduct a thorough governance review on all aspects of a plan, especially asset management.

At the federal level, OSFI is better suited to conduct in-depth governance reviews of large pension funds.

But nothing is perfect, conducting a governance review is hard work, it requires a lot of collaboration and expert knowledge and it needs to be updated every five years because governance standards are always evolving (just look at how sustainable investing hit the institutional world like a ton of bricks since the pandemic).

Lastly, and I want to emphasize this again, OMERS is doing extremely well, this governance review isn't about the way they manage assets and liabilities, it's more about efficiency and properly communicating policy changes to plan members.

Remember to read my recent comment on CEO Blake Hutcheson being interviewed to kick off season 2 of The Pension Blueprint podcast here.

My message to plan members is you're well within your right to ask for a governance review, fix things that need to be fixed but leave others alone.

That's a wrap for me as I want to go feed my baby his milk and watch the Habs play the Kings tonight (we are leading 1-0).

Below, OMERS CEO Blake Hutcheson at the Empire Club of Canada discusses the story of OMERS.