workshop hedge funds and sovereign wealth funds - habbard
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Pension Fund Investments in Activist Hedge Funds– Ensuring Accountability Across the
Investment Chain
Workshop 2/3
EC Restructuring Forum 6 July 2010
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Activist hedge funds
Workers’ capital
Pension fund investment in private funds
Accountability across the investment chain
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Private pool of capital, limited partnership status– underperforming management or business model (conglomerates)– take 2-5% share ownership
Event-driven, merger arbitrageActivist Engagement
– Board change / replacement of CEO– Payout policy (dividends and share buybacks)– Restructuring : takeover, demerger & spin-offs (or opposition)
“Structurally obliged to aggressively seek maximum short-term extraction”– Must beat the “hurdle rate” to take their 20% on capital gains– Bounded by a maximum holding period (3 years)
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Time line of a stylised activist engagement– Private vs public engagement
Source: adapted from Becht, Franks & Grant 2010
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Examples– UK
• Hermes Focus Fund (Océ), The Children’s Investment Fund (ABN Amro 2007, Deutsche Börse 2005-2009)
– US• Paulson & Co (Cadbury), Wyser Pratte & Co (Lagardère)
– France• Colony Capital Europe (Carrefour, Accor), Eurazeo
(Accor),
– Sweden• Cevian Capital (Volvo 2007, Old Mutual)
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Case studies
Accor– Colony Capital Europe & Eurazeo build up 30%
stake in 2009• Spin-off of real estate assets in the hotel branch• Demerging of hotel and voucher activities• CEO forced out, board change
– Opposition by the EWC and French state-owned minority shareholder
– February 2010: Standard & Poors downgrades Carrefour from BBB to BBB-
Source: IUF's Private Equity Buyout Watch
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Cadbury– Takeover bid by Kraft December 2009– Hedge funds ownership rises from 5% to 30% in 1 month– January 2010: Board accepts takeover offer– Roger Carr, Cadbury’s outgoing chairman:
“It may be unreasonable that a few individuals with weeks of share ownership can determine the lifetime destiny of many,”
– Adam Lent, TUC :“it’s a deal which goes through because it is largely supported by short-term investors after a quick buck than those with a long-term interest in the company.”
Source: ft.com & http://www.touchstoneblog.org.uk/
Case studies
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Activist hedge funds
Workers’ capital
Pension fund investment in private funds
Accountability across the investment chain
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Stewardship ofworkers’ capital
Activism for– Board accountability– ESG reporting– HR & labour rights
Source: TUAC
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Stewardship ofworkers’ capital
Pension governance & funding rules– Board representation– risk based supervision, quantitative restrictions– Pressure on liabilities arising from risk sharing (DB, DC, Hybrid)– Assets with ownership responsibilities vs fixed income (bonds)
Asset management accountability– Governance of asset managers, conflicts of interest– Effective exercise of proxy voting rights
Enabling regulatory framework– Fiduciary duties of trustees– Access to the AGM agenda– Acting in concert – strange bedfellows– Trade union infrastructure: education, expertise, leadership
Source: TUAC
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Board
Management
Workers
Board oftrustees
Assetmanagement
AGM
Works council
Perimeterof the pension fund
(“workers’ as investors”)
Perimeterof the company(“workers’ as employees”)
The investment chain
Source: TUAC
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Board
Management
Workers
Board oftrustees
Assetmanagement
AGM
Works council
Perimeterof the pension fund
Perimeterof the company
The investment chain- international guidance
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Board
Management
Workers
Board oftrustees
Assetmanagement
AGM
Works council
Corporate law
Labour law
Financial regulation
Securities law
Pension law
The investment chain- national laws and
regulations
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Activist hedge funds
Workers’ capital
Pension fund investment in private funds
Accountability across the investment chain
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No regulation, no reliable data
0%10%20%30%40%50%60%70%80%90%
100%
Slovak
Rep
ublic
Czech
Rep
ublic
Korea
Mexico
Turkey
(8)
Hungary
Spain
(7)Pola
ndGerm
any
Norway
Sweden
Austria
Icelan
d (4)
Denmark
(3)Finl
and
Italy
(5)Nethe
rland
sPort
ugal
(6)Switz
erlan
dCana
da (2
)
United K
ingdom
(200
5)
United S
tates
(9)
Belgium
Austra
lia (1
)
Alternatives (land & buildings, unallocated insurance contracts, private investment funds,other)Mutual funds (CIS)
Shares
Cash and Deposits, Bills and bonds issued by public and private sector, Loans
AUM > 10% GDP
Source: OECD Pension Markets in Focus 2007 www.oecd.org/daf/pensions/pensionmarkets & www.oecd.org/dataoecd/47/0/39510746.xls
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From quantitative restrictions to prudent person standard
Source: Source: OECD Survey of Investment Regulations of pension funds, July 2008, www.oecd.org/dataoecd/12/46/40804056.pdf
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In need of harmonisation?
5% max; indirect restriction via caps on feesSpain
0%ProhibitedSlovakia
3%5% max (to be raised to 10%)Portugal
0%10% max in CIS (incl. HF)Poland
Approximately 2-3%Solvency requirementsNetherlands
Negligible20% max in CIS (incl. HF); max 1x leverage; short selling, lending & borrowing prohibited.
Italy
Thought to be extremely low10% max in unlisted securities (incl. HF)Ireland
0%5% maxGreece
3.10%Authorised since 1st January 2007Finland
Solvency requirementsDenmark
Estimated up to 1%5% maxCzech Republic
1% (federally regulated plans)None*Canada
30% max in unlisted securities (incl. HF)Austria
Average Exposure (% of AUM)
Quantitative restrictions (% of AUM)Country
Source: OECD
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No regulation, no data
Pension funds’ share of hedge funds’ funding– 25% - 40% ?– more if funds-of-funds are included
Hedge funds’ share of pension funds’ portfolio– Netherlands 3.4%, UK 1.5%, Swiss 3.3%,
Australia 5%, … (exposure)
Who invest in alternative assets?– Large (sector wide) pension funds– DB schemes and hybrid DC schemes
Source: OECD 2010
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Implications for PF risk management
Most challenging aspects– Selecting, monitoring managers, due diligence procedures– Fees– Barriers to entry
The fees– 2% on annual commitments + 20% on capital gains– Hurdle rate
Risk management– Exposure = un-funded commitments + remaining value– Governance of limited partnerships
Source: OECD & JP Morgan
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Investment strategies in private equity & hedge funds
Single-Fund investment (2+20%), Fund-of-funds (1+10% + 2+20%)
Strategic partnerships– AP1 & Cevian, AP4 & EQT, OregonPERS & KKR, CalPERS &
Carlyle
In-house / arms length private investment firms– ABP & PGGM owned Alpinvest, Australian Supers’ Industry
Funds Management– Calpers’ Focus list, BT’s Hermes Focus Funds
Mixed strategy– Ontario Teachers’: Teachers Private Capital & KKR
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Activist hedge funds
Workers’ capital
Pension fund investment in private funds
Accountability across the investment chain – Pension fund risk management– Governance of private pools of capital– Shareholder transparency
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Pension fund risk management
International guidance– IOPS Good Practices in the Risk
Management of Alternative Investments by Pension Funds (2008)
– IOSCO high level principles on the regulation of hedge funds (2009)
– OECD Guidelines on Pension Fund Asset Management (rev 2009)
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Risk managing a hedge fund, an oxymoron?
OECD Survey of pension supervisory authorities (forthcoming)
“Key Concerns” regarding alternative investments– Valuation accuracy, liquidity management, price volatility– Level of understanding and skills– Inadequate risk management systems– Non-compliance with quant’ limits or overall risk profile– Lack of information provided to plan members
AIFM– Risk management (#11), liquidity (#12), CDOs (#13),
valuation (#16)– Delegation (#18), disclosure to investors (#20)
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Governance ofprivate pools of capital
British House of Commons, hearings on private equity (2007)– Paul Myners: “Investors can be quite lethargic… [we]
should ask why they invest in private equity with its association with aggressive capital structures, high incentives for management and a minimalist approach to governance … while adopting an entirely different approach when investing in public equity.”
Limited liability partnerships– virtually all control in the hands of the general partners– Un-regulated, no standardisation
Source: Private equity, Treasury Committee, House of Commons, 24 July 2007 www.publications.parliament.uk/pa/cm200607/cmselect/cmtreasy/567/567.pdf
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Governance ofprivate pools of capital
X√/X√Weak TU infrastructure
XX√Weak AM accountability
??√Private capital
√√√Listed equity
√/XX√Bond & fixed income
√√√Internal management
X√/X√External management
Engage-ment
AGM voting
SRI screening
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Shareholder transparency
Corporate governance: OECD lessons of the crisis
Ineffective monitoring by shareholders– Both widely held and concentrated structures– Shareholders’ short termism & excessive risk taking policies
Way forward– Conflicts of interest of proxy advisors– Facilitate access to voting– Institutional investors should not be discouraged from
acting together– Private equity & activist hedge funds should not be
hampered as a side-effect of regulatory reforms
Source:http://www.oecd.org/dataoecd/3/10/43056196.pdf
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Review of Transparency Directive 2004– Lowering the threshold to 3%– Derivatives contract for difference, Share
lending, Empty voting, Beneficial ownership– Disclosures on intentions & financing
arrangements– Disclosures of voting policy & ESG criteria
AIFM– Reporting for significant interest or a controlling
influence in companies (#26-29)– Delegation (#18), disclosure to investors (#20)
Shareholder transparency
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Board
Management
Workers
Board oftrustees
Assetmanagement
AGM
Works council
IORPs
(AIFM)
Transparency
EWC
Acquired Rights
UCITS
Info. & Consult.
Shareholders’ right
4th company law
Takeover
The investment chain- EU Directives