Workshop Hedge Funds and Sovereign Wealth Funds - Habbard

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1 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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Transcript of 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