Thursday, August 3, 2017

CPPIB Shaking Things Up?

Shannon Bond of the Financial Times reports, Funds give WME-IMG extra punch with $1bn investment:
WME-IMG has landed a $1bn investment from the Canada Pension Plan Investment Board and GIC, Singapore’s sovereign wealth fund, that values the US entertainment and sports agency at $6.3bn.

The company will use the new funds to buy out some minority partners in the Ultimate Fighting Championship, the mixed martial arts league it acquired for $4bn last year, and allow some senior management and investors to take cash out, according to a letter to investors from Silver Lake Partners, WME-IMG’s majority shareholder. The infusion will also fund new acquisitions.

Silver Lake, which first invested in 2012, will maintain the entirety of its equity stake. The latest round follows investments in 2016 of $55m from Fidelity and $250m from SoftBank, the latter at a valuation of $5.5bn.

WME-IMG has been expanding in recent years from its origins as a Hollywood talent agency into fashion, sports, marketing and branding.

WME, run by Ari Emanuel and Patrick Whitesell, bought IMG for $2.4bn in 2013, giving it a dominant position in fashion and sports. It also owns the Miss Universe and Miss USA beauty pageants, Global eSports Management and Professional Bull Riders.

Last year, WME-IMG partnered with venture firm Sequoia Capital China and internet group Tencent to expand its business in China.

“We’re thrilled to welcome CPPIB and GIC — two leading global investors — to the WME-IMG family as our newest strategic partners,” said Mr Emanuel and Mr Whitesell. “We look forward to working with them to continue growing our international footprint and delivering valuable new opportunities to all our clients and partners.”

“WME-IMG has transformed both their business and their industry, creating a powerful and highly differentiated‎ global platform,” said Egon Durban, managing partner of Silver Lake. “We are very excited to welcome CPPIB and GIC as new strategic partners. In addition, we are highly enthusiastic about Silver Lake’s decision to extend our investment in WME-IMG.”
Ann Williams of The Straight Times also reports, GIC, Canadian fund to invest US$1b in powerhouse Hollywood agency WME-IMG:
GIC, Singapore's sovereign wealth fund, and the Canada Pension Plan Investment Board (CPPIB) are investing a combined US$1 billion (S$1.36 billion) in US entertainment, sports and fashion agency WME-IMG.

The agency owns and operates hundreds of events, including the Ultimate Fighting Championship (UFC), Miss Universe and Miss USA beauty pageants and New York Fashion Week. WME-IMG, which is led by co-CEOs Ari Emanuel and Patrick Whitesell, spent over US$4 billion to purchase the UFC last July.

GIC and CPPIB will join current investors Silver Lake, SoftBank and Fidelity as WME-IMG strategic partners, said the announcement on Thursday (Aug 3).

In a separate letter to its investors, Silver Lake said the new investment will make it possible to buy out some minority partners in the UFC and to allow some of WME-IMG's senior management and investors to take cash out. The investment is also intended to enable further acquisitions.

The latest cash infusion values the agency at US$6.3 billion, an increase from its US$5.5 billion valuation in 2016.

Silver Lake, a global leader in technology investing, will continue its strategic partnership with WME-IMG, which began with its first investment in WME in 2012, maintaining the entirety of its equity stake.

"GIC is committed to supporting WME-IMG's continuing innovation, industry leadership and international expansion," said Eric Wilmes, managing director of private equity at GIC.

"WME-IMG has demonstrated a capacity to grow and diversify in an increasingly complex environment for sports, entertainment, and fashion globally. As a long-term investor, GIC believes the company will benefit from the strong trend of consumers demanding quality content."
You can read CPPIB's press release on this deal here. In my opinion, this is another great deal on CPPIB's part to diversify returns and prepare for landing. Also, whenever you see Silver Lake has a big stake and is keeping its stake, you know this is a great deal for all parties, including GIC and WME-IMG.

Sports entertainment and entertainment in general, is growing fast and is recession proof. Unless total disaster strikes and we get another Great Depression, you will see people continue spending on movies and pay-per-view UFC matches and other entertainment events.

Are the valuations of WME-IMG a bit high? Maybe but if they continue growing by leaps and bounds, over a very long horizon, all parties will make great returns on this deal.

In another defensive move, Benefits Canada reports, CPPIB boosts IP assets by investing in rights to cancer drug:
The Canada Pension Plan Investment Board is boosting its intellectual property portfolio by purchasing royalty rights to a cancer drug.

CPPIB Credit Europe, a wholly owned subsidiary of the pension fund, has acquired the rights to a portion of future royalties in the drug, venetoclax, from the Walter and Eliza Hall Institute of Medical Research in Australia.

The transaction includes an upfront cash payment of about $315 million and possible milestone payments of more than $90 million, with the institute maintaining partial royalties for the drug. Venetoclax is specifically effective as treatment for certain patients with relapsed or refractory chronic lymphocytic leukemia.

“This investment is an attractive opportunity to expand CPPIB’s global intellectual property program through the acquisition of royalty rights for this proven anti-cancer treatment,” said John Graham, managing director and head of principal credit investments at the CPPIB. “With stable, long-term cash flows, alternative assets like intellectual property add diversification to the CPP fund as performance is generally uncorrelated to that of the broader capital markets.”

The CPPIB launched its strategy to invest in rights for royalties, patents, trademarks and copyrights, primarily in the pharmaceutical and technology sectors, in 2011. Since then, it has invested about $3 billion in the area.
I personally love these royalty deals and think they are great long-term investments for many reasons, especially the global aging demographics.

In other news, Geoffrey Morgan of the National Post reported last month, CPPIB buys into Ireland offshore gas project for $1.4 billion in latest energy acquisition:
The Canada Pension Plan Investment Board will buy Royal Dutch Shell PLC’s interest in a natural gas project in Ireland in the pension fund’s latest deal for oil and gas assets.

The CPPIB announced the $1.4-billion deal Wednesday for a 43-per-cent interest in the Corrib gas project off Ireland’s northwest coast — a deal that, once approved, would bring the size of the pension fund’s natural resources portfolio above $6 billion.

Last month, the CPPIB announced a commitment to invest US$1 billion in a partnership with privately owned Encino Acquisition Partners to invest in U.S. oil and gas assets. The pension fund also made two significant deals in 2016 through companies it backs to purchase a pipeline in Alberta from Devon Energy Corp. for $1.4 billion and oil assets from Penn West Petroleum Ltd. for $975 million.

The CPPIB said in a release that Wednesday’s deal in Ireland furthers its strategy of investing in natural resources assets operated by third parties. For its part, Shell said in a release the deal helps put the company halfway towards its goal of divesting US$30 billion in assets following its massive US$50-billion merger with BG Group.
Corrib project

“In Ireland, in particular, we think the gas market is attractive and we continue to see opportunity there over the medium- to long-term,” CPPIB director and head of natural resources Avik Dey said, adding the Corrib project contributes 60 per cent of the total gas consumption for electricity in Ireland.

“We view gas as playing an important part of the energy transition story so we expect in Ireland, as in many European jurisdictions, to have an increasing dependency on natural gas and also the continued emergence of wind and solar,” Dey said.

As part of the deal, Calgary-based Vermilion Energy Inc. will increase its ownership in the Corrib gas project slightly from 18.5 per cent to 20 per cent and the company will take responsibility for operations from Shell. Norway’s Statoil ASA owns the other 37 per cent of the Corrib project.

National Bank Financial analyst Travis Wood said in a research note the deal could help make Vermilion more efficient as the company now operates 87 per cent of its production, compared with 72 per cent before.

“Although this is the first transaction that Vermilion has completed with CPPIB, there is a chance for future business development given the potential for complementary capital and operating gains,” Wood said.
Vermilion

“We’d much prefer to be operating our assets rather than have other parties do it,” Vermilion president and CEO Anthony Marino said, adding the company is looking for more opportunities to operate more of its production.

He said Vermilion would happily consider doing another deal with CPPIB but nothing is planned.

Marino said the Corrib gas field allowed Ireland to reduce its dependence on imported natural gas from the U.K. and that gas demand in the country is now “primarily met by domestic gas production.”

Data from BP PLC’s annual statistical review shows natural gas consumption in Ireland increased 14 per cent from 4.2 billion cubic metres in 2015 to 4.8 billion cubic metres in 2016.

“Ireland has a great energy mix,” Marino said, adding that renewable energy production is also increasing in the country and emissions are decreasing.

Asked whether the venture plans to expand output from the Corrib gas field, Dey said it’s too early to speculate and the deal announced Wednesday has not closed, but it is possible.
Again, this deal is a long-term deal and even though I'm not bullish on oil and gas over the next year or two, this deal makes perfect sense over a much longer period and I am very bullish on Ireland for all sorts of reasons, least of which is the country's energy potential (if only Greece could learn from Ireland!).

Lastly, let me end this comment with an article from Barbara Shecter of the National Post which was published at the beginning of last month, Executive shakeup at CPPIB reveals apparent change of heart about risk management:
The Canada Pension Plan Investment Board, which stood apart from other major pension plans and Canadian financial institutions because it didn’t have a chief risk officer, appears to have had a change of heart.

Neil Beaumont, who was most recently vice-president of Finance Minerals America for BHP Billiton, will become chief financial and risk officer at CPPIB on July 24.

Beaumont will take over some functions from Benita Warmbold, who is retiring, but adds duties to reflect the pension fund’s “continued focus on rigorous risk management across the organization.”

The appointment comes a little more than a year after Mark Machin became chief executive of the pension management organization that invests money for Canada’s national pension scheme.

Jason Mercer, an analyst at Moody’s Investors Service, was among the critics of CPPIB’s trend-bucking decentralized model of risk management.

He argued that a chief risk officer has a critical role in balancing operations and risk, by playing devil’s advocate to other senior members of management who take risks to achieve business objectives. Mercer suggested that this position, a staple at an increasing number of banks, pensions and insurance companies since the financial crisis of 2008, provides comfort to stakeholders that risks facing the organization are being overseen independently.

CPPIB had deflected such criticism, and an official told the Financial Post last fall that the pension organization had created a framework that didn’t rely on a single executive to monitor risks. The decentralized enterprise risk management system gave individuals closest to the risks, and best equipped to exercise judgment, local ownership over management of those risks, he said.

The establishment of a senior risk officer position at CPPIB was announced Wednesday, along with other executive changes at the pension management organization that invests money for Canada’s national pension scheme.

Graeme Eadie will step back from his role as global head of real assets on July 15, a role which will be assumed by Ed Cass, who was chief investment strategist.

Geoffrey Rubin, who was head of portfolio construction and research, will take the chief strategist job, joining CPPIB’s senior management team. Before joining CPPIB in 2011, Rubin held finance roles at Fannie Mae and Capital One Financial.

“The appointments demonstrate the deep pool of world-class talent we have at CPPIB, and reflect our succession planning and ability to recruit top talent,” Machin said in statement.

He said Eadie, who has been with CPPIB for 12 years, will “continue to provide valuable guidance and continuity,” while stepping back to a general management role with a focus on investment approval processes.
I read this and while I like the idea of a chief risk officer and absolutely think CPPIB needs one, the truth is risk management at CPPIB was always very rigorous and involved many heads of various departments. This isn't necessarily a bad thing but given the size of the organization, it's a good idea to have a chief risk officer overseeing all risks across public and private markets.

As far as the other changes to senior management at CPPIB, all I can say is I trust Mark Machin's judgement and you should too. I've only met the man once and he's top-notch in every regard. If he deemed these changes necessary, then they are as he's privy to the inner workings of the organization and has a much better vantage point than anyone else.

The executive shakeup shouldn't alarm you, it should put you at ease because Mark knows what he's doing and is positioning the organization for its next growth phase.

Below, an older interview from last November where CPPIB President and CEO, Mark Machin, discusses his concerns with Bloomberg's Amanda Lang on the market being full-valued. If he thought the market was fully-valued then, I can only imagine what he thinks now.

Update: Benefits Canada reports that CPPIB and Allianz Capital Partners have signed an agreement to acquire a 20 per cent minority equity interest in Gas Natural Fenosa’s gas distribution business in Spain. CPPIB and Allianz will invest about $1.3 billion and $900 million, respectively. Gas Natural Fenosa will retain the remaining 80 per cent of the business.

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