Workshop Hedge Funds and Sovereign Wealth Funds - Habbard

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Workshop Hedge Funds and Sovereign Wealth Funds - Habbard

  1. 1. Pension Fund Investments in Activist Hedge Funds – Ensuring Accountability Across the Investment Chain Workshop 2/3 EC Restructuring Forum 6 July 2010 1
  2. 2. Activist hedge funds Workers’ capital Pension fund investment in private funds Accountability across the investment chain 2
  3. 3. 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
  4. 4. Time line of a stylised activist engagement – Private vs public engagement Source: adapted from Becht, Franks & Grant 2010 4
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. Activist hedge funds Workers’ capital Pension fund investment in private funds Accountability across the investment chain 8
  9. 9. Stewardship of workers’ capital Activism for – Board accountability – ESG reporting – HR & labour rights 9 Source: TUAC
  10. 10. 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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. Activist hedge funds Workers’ capital Pension fund investment in private funds Accountability across the investment chain 14
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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

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