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Workshop Hedge Funds and Sovereign Wealth Funds - Habbard

Workshop Hedge Funds and Sovereign Wealth Funds - Habbard






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    Workshop Hedge Funds and Sovereign Wealth Funds - Habbard Workshop Hedge Funds and Sovereign Wealth Funds - Habbard Presentation Transcript

    • Pension Fund Investments in Activist Hedge Funds – Ensuring Accountability Across the Investment Chain Workshop 2/3 EC Restructuring Forum 6 July 2010 1
    • Activist hedge funds Workers’ capital Pension fund investment in private funds Accountability across the investment chain 2
    • Private pool of capital, limited partnership status – underperforming management or business model (conglomerates) – take 2-5% share ownership Event-driven, merger arbitrage Activist 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) 3
    • Time line of a stylised activist engagement – Private vs public engagement Source: adapted from Becht, Franks & Grant 2010 4
    • 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) 5
    • 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 6
    • Case studies 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/ 7
    • Activist hedge funds Workers’ capital Pension fund investment in private funds Accountability across the investment chain 8
    • Stewardship of workers’ capital Activism for – Board accountability – ESG reporting – HR & labour rights 9 Source: TUAC
    • Stewardship of workers’ 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 10
    • The investment chain Perimeter Perimeter of the company AGM of the pension fund (“workers’ as employees”) (“workers’ as investors”) Asset Board management Board of Management trustees Works council Workers Source: TUAC 11
    • The investment chain - international guidance Perimeter Perimeter of the company AGM of the pension fund Asset Board management Board of Management trustees Works council Workers 12
    • The investment chain - national laws and regulations Corporate law Securities law AGM Financial regulation Asset Board management Pension law Board of Management trustees Works council Workers Labour law 13
    • Activist hedge funds Workers’ capital Pension fund investment in private funds Accountability across the investment chain 14
    • No regulation, no reliable data 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% lic ) rtu ds st iu m ep c Sp ary Ita d G and n nd Fi ) Po ) ) Sw ay Au n nm (4) itz 6) No y a a Hu 8 ) Be 9) rk o M a ) th 5) St 005 (3 (1 (7 i Un d om (2 an an bl i e re Tu xic ub Ic str ( Po rlan Sw al ( ( Ne ly ( Ca rla rw ed ng e c pu Au lg lia k n Ko es a De nd ey nl m l e (2 ar ai ng ad e g er Cz Re ra at e R el h ak d ov ite Ki Sl d ite Un Alternatives (land & buildings, unallocated insurance contracts, private investment funds, other) AUM > 10% GDP Mutual funds (CIS) Shares Cash and Deposits, Bills and bonds issued by public and private sector, Loans 15 Source: OECD Pension Markets in Focus 2007 www.oecd.org/daf/pensions/pensionmarkets & www.oecd.org/dataoecd/47/0/39510746.xls
    • From quantitative restrictions to prudent person standard 16 Source: Source: OECD Survey of Investment Regulations of pension funds, July 2008, www.oecd.org/dataoecd/12/46/40804056.pdf
    • In need of harmonisation? Country Quantitative restrictions (% of AUM) Average Exposure (% of AUM) Austria 30% max in unlisted securities (incl. HF) Canada None* 1% (federally regulated plans) Czech Republic 5% max Estimated up to 1% Denmark Solvency requirements Finland Authorised since 1st January 2007 3.10% Greece 5% max 0% Ireland 10% max in unlisted securities (incl. HF) Thought to be extremely low Italy 20% max in CIS (incl. HF); max 1x leverage; short Negligible selling, lending & borrowing prohibited. Netherlands Solvency requirements Approximately 2-3% Poland 10% max in CIS (incl. HF) 0% Portugal 5% max (to be raised to 10%) 3% Slovakia Prohibited 0% Spain 5% max; indirect restriction via caps on fees Source: OECD 17
    • 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 18
    • 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 19
    • 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 20
    • 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 21
    • 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) 22
    • 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) 23
    • Governance of private 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 24 Source: Private equity, Treasury Committee, House of Commons, 24 July 2007 www.publications.parliament.uk/pa/cm200607/cmselect/cmtreasy/567/567.pdf
    • Governance of private pools of capital SRI AGM Engage- screening voting ment External management √ √/X X Internal management √ √ √ Bond & fixed income √ X √/X Listed equity √ √ √ Private capital √ ? ? Weak AM accountability √ X X Weak TU infrastructure √ √/X X 25
    • 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 26 Source:http://www.oecd.org/dataoecd/3/10/43056196.pdf
    • Shareholder transparency 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) 27
    • The investment chain - EU Directives Shareholders’ right AGM Transparency Asset UCITS Board management Takeover (AIFM) 4th company law Board of Management IORPs trustees Info. & Consult. Acquired Rights Works council Workers EWC 28