CIC's Disappointing Year

As reported by Xinhua, yesterday CIC announced a disappointing decline of 4.3% in the value of its portfolio “due to the slow recovery of global economy and the European debt crisis.”  This brings its 5-year annualized return to 3.9%.  This was not exactly “new” news, as CIC had already disclosed the disappointing results in its annual report (although the cumulative annualized number is different by 0.1):












What do these results mean for the Chinese government?  Managing public expectations of sovereign wealth fund performance is a concern from Alaska to Oslo to Beijing, and although the expectations may differ slightly, I think all would agree that “headline risk” is a major issue for SWFs.  Many Alaskans, no doubt, were disappointed by the relatively small $878 payout from the Alaska Permanent Fund this year.  One of the less discussed issues involving SWFs (an issue I’m writing on now) is how the funds can serve as an expression of cultural values or as a reflection of the society in general-think of a SWF like a national soccer team, or, since I’m in Columbus (Go Bucks!), like a college football team.  The downside to this is that poor performance may be taken quite badly by the public (but hopefully not this badly).  I believe that having a sophisticated public relations team is part of good governance practice for SWFs.


How Do You Get Voters to Pass a Constitutional Amendment Allowing the Government to Tap into a SWF?

By writing the ballot proposal like this (my emphasis):

Proposing an amendment to the Constitution of Alabama of 1901, to provide adequate funding for the State General Fund budget, to prevent the mass release of prisoners from Alabama prisons, and to protect critical health services to Alabama children, elderly, and mothers by transferring funds from the Alabama Trust Fund to the State General Fund beginning with the state’s 2012-2013 fiscal year and concluding with the state’s 2014-2015 fiscal year; to provide a new procedure for distributions made from the Alabama Trust Fund beginning 2012-2013 fiscal year; to create a County and Municipal Government Capital Improvement Trust Fund advisory committee; and to provide further for distributions made from the County and Municipal Government Capital Improvement Trust Fund.

The results of the vote:

Amendment 1
Result Votes Percentage
 Yes 357,036 64%
No 193,072 36

(Source: Ballotpedia)

So, apparently Alabama’s fund is not a SWF after all, but a rainy day fund. 

The wording of the initiative was coercive and, to me, shows bad faith on the part of the legislator that drafted the language.  Would the government truly release criminals it believed were dangerous, or would the government find other ways to fund the prisons?  Assuming the latter, why mislead citizens into believing that their safety is imperiled if they do not vote for the amendment?  The jarring part to me is that the scare tactic regarding the “mass release” of prisoners was not even grounded in legal reality.  The Anniston Star interviewed Kim Thomas, commissioner of the Alabama Department of Corrections on the effect of a failure of the ballot initiative.  The paper reports that:

[T]here are about 25,000 people “behind a fence” in the corrections system. If the amendment fails, [Thomas] said, the state would have to release 9,000 of them in order to balance the books.

It’s not clear how prison officials would make that release happen.

“We would need some legislative mechanism to allow us to release them,” Thomas said.

Under current law, Thomas said, the prison system has only a few paths for early release.

Failure of a funding initiative is not one of those paths.  If you had a “mass release”-equivalent statement in a proxy statement in the corporate voting context, I believe that it would qualify as an actionable misstatement.

The Fletcher School – Sovereign Wealth Fund Initiative

I’m happy to announce that I have been named as one of 10 affiliates of the Sovereign Wealth Fund Initiative (SWFI). SWFI is an interdisciplinary research program at the Center for Emerging Market Enterprises at The Fletcher School at Tufts University, and “examines with SWFs the key cross-border issues they face with a particular focus on managing conflicts and external relationships. . . SWFI provides dedicated research and a forum for SWFs to develop insights, approaches, and policies that can be incorporated into their management processes and operations.”

SWFI is headed by Thomas Holt, Eliot Kalter, and Patrick Schena.  You can read more about SWFI here.

OSU Parking Deal Closing Tomorrow

The controversial (but in my opinion, wise) deal to lease OSU’s parking operations for the next 50 years is scheduled to close tomorrow.  The administration worked hard to bring the deal together and sell it to the Ohio State community.  Not everyone is convinced of the wisdom of the deal, but the difficult reality is that support from the state government is diminishing, and the university is going to have to be creative in finding ways to generate revenue (as an aside, OSU–like other universities–is still trying to figure out how to generate revenue from MOOCs facilitated by ventures like Coursera, which we just partnered with).

The parking lease nets OSU about $483 million.  Adding that to our roughly $2 billion-and-change endowment will move OSU up a few places in the ranking of university endowments market values.

For fun (and I acknowledge there are probably not many who think of this as “fun”), I made a chart showing the 5 largest university endowments and the 5 largest US state sovereign wealth funds (all figures in billions of dollars). 




Overall, there are a lot more universities with endowments in the billions than states with at least a billion  in AUM (only about 8 or 9).  However, note that state endowments (with the exception of the Texas PSF) are 1) younger, and 2) growing much more quickly since they are typically funded by oil and mineral extraction.  I expect that we will see a significant number of new state SWFs in this decade.


Qatar Holdings an "Activist Investor"?

This is a subject that I intend to write more about (likely in a white paper), but I wanted to reiterate some points I made earlier on QH’s behavior in the Xstrata/Glencore deal.  Particularly, I want to respond to arguments that QH is acting as an “activist investor” and that QH’s behavior is a “game changer.”  My point is largely definitional, but definitions are important because regulatory responses often link to definitions. 

Much of my research is devoted to corporate governance issues, including the particularly difficult problems that activist investors can pose to existing corporate legal frameworks, so when I hear the term “activist investor” it means to me an investor who takes the initiative to use its voting power to shape corporate policy or effect a corporate transaction.  Activists may do this to unlock value for shareholders generally; alternatively, they may simply seek to further a particular social or governance policy.  Examples of activist investors are hedge funds Icahn Associates or JANA Partners, the labor union fund sponsored by the American Federation of State, County and Municipal Employees (AFSCME), and professional corporate gadfly John Chevedden.  I submit that this is the way most institutional investors, managers, and the bankers and lawyers that advise them use the term “activist”.

What all of these activist investors have in common is that they are catalysts of change.  That is what makes them activists.  To put it another way, they are exercising positive rights of share ownership–calling for a special meeting, requesting a shareholder proposal to be placed on the ballot, or putting up a slate of directors.  QH, by contrast, is not acting as a catalyst for change.  Indeed, they have been a roadblock.  They are using what I would call negative shareholder rights–the right to vote on a transaction, for example.  Negative rights operate like negative covenants in a bond agreement.  Under the agreement, the bondholder (or the Trustee) can prohibit the company from taking an action.  This contrasts with a positive right (which bondholders typically do not have, but shareholders may try to exercise) to force a company to take an action.  I see this as a significant difference because regulatory review of transactions involving foreign-controlled entities will generally be triggered only where positive shareholder rights are exercised.  This regulatory posture makes good sense from a policy perspective.  Negative rights do not tend to divert management authority away from the directors and officers to the extent the exercise of positive rights might (which is precisely the kind of activity that one might worry about with SWFs, i.e., that management is influenced to do something that inures to the political benefit of the SWF), but negative rights place limits on the ability of directors and officers to impair the rights or interests of the negative right-holder.  Exercising positive rights makes you an activist.  Exercising negative rights makes you a responsible shareholder.

QH is exercising its negative rights–impeding a transaction that it feels will impair its large investment in Xstrata.  The exercise of negative rights is exactly what we need from SWFs because it indicates that they are fulfilling a useful monitoring role as shareholders.  Most institutional investors would cringe at the label of “activist” simply because they planned to vote against a transaction they saw as value-decreasing; QH is no different as far as I can tell.  I will not worry about SWF as “activist investors” until I see SWFs making plays for board seats or putting up shareholder proposals that resemble what real activist investors are submitting.

Treasury Seeks to Sell Majority of AIG Stake

The US Dept. of Treasury is seeking to sell most of its remaining shares of AIG common stock.  From the prospectus, here is a brief history of the Treasury’s post-bailout AIG common stock investment and subsequent divestment (bullet points added for a bit of clarity):

On January 14, 2011, upon the closing of the Recapitalization, we issued 1,655,037,962 shares of our common stock to Treasury, in exchange for shares of various classes of our preferred stock held by Treasury . . .

  • On May 27, 2011, Treasury sold 200,000,000 shares of our common stock in a registered offering.
  • On March 13, 2012, Treasury sold 206,896,552 shares of our common stock in a registered offering, including 103,448,276 shares we purchased in the offering.
  • On May 10, 2012, Treasury sold 188,524,589 shares of our common stock in a registered offering, including 65,573,770 shares we purchased in the offering.
  • On August 8, 2012, Treasury sold 188,524,590 shares of our common stock in a registered offering, including 98,360,656 shares we purchased in the offering.

The shares of our common stock held by Treasury represented approximately 53 percent of our outstanding common stock as of August 31, 2012. 

AIG is one of a number of companies with US government bailout-associated ownership (the list includes GM, Ally (formerly GMAC), and a significant number of banks).  The Obama administration has been looking to trim the list, but has been in a quandary: 1) trickle out the shares so as not to depress the market price, but remain vulnerable to criticism of the government’s ownership of GM, AIG, etc., or 2) sell the shares as quickly as possible–even if that means realizing losses on the “investment”–thereby exposing the administration to criticism for wasting taxpayers’ money.  The administration has taken the first option, and they have fairly successfully deflected criticism over their continued ownership of stocks in the bailed-out firms (by “successfully”, I mean in the sense that criticism over post-bailout stock ownership has not been an issue with legs in the campaign; people may not like the bailout, but Republicans have gotten very little mileage over the administration’s handling of its stock holdings).

That said, the prospectus includes some interesting disclosure in the “Risk Factors” section, which I think encapsulates the problems that can come with mixed governmental/private investor ownership where the governmental investor controls golden shares or otherwise exerts policy-making influence:

Treasury will continue to be a significant shareholder after this offering and may have interests inconsistent with other holders of our common stock.

Treasury currently has approximately 53 percent of the voting power of our common stock before this offering. The voting power of our common stock held by Treasury would be reduced to approximately  [  ] percent of our outstanding common stock after the completion of this offering, assuming no exercise of the underwriters’ over-allotment option to purchase additional shares from the selling shareholder. The interests of Treasury (as a government entity) may not be the same as those of other holders of our common stock.

 Treasury will continue to have a significant vote on matters subject to shareholder approval, including: 

  • approval of mergers or other business combinations;
  • a sale of all or substantially all of our assets;
  • amendments to our restated certificate of incorporation; and
  • other matters that might be favorable to Treasury, but not to our other shareholders.

Moreover, Treasury’s significant vote in connection with a change in control of us could also have an adverse effect on the market price of our common stock. Treasury may, subject to applicable securities laws and except as described under “Underwriting,” transfer all, or a portion of, our common stock to another person or entity and, in the event of such a transfer, that person or entity could become a significant shareholder. Treasury’s rights under a registration rights agreement, dated as of January 14, 2011, between us and Treasury (the “Registration Rights Agreement”), may be assigned to any person purchasing over $500 million of our common stock.

Glencore and Xstrata Back On . . .

So reports Reuters:

 Glencore’s Chief Executive Ivan Glasenberg appeared to have broken an impasse between Xstrata’s two biggest investors – who had not talked to each other for two months – after overnight talks in London.

The meeting, attended by Glasenberg, Qatari prime minister Sheikh Hamad bin Jassim al-Thani and former British prime minister Tony Blair – who has had a role in facilitating the deal – put the takeover now worth $36 billion back on the table.

Xstrata shareholders had been due to vote on the original $34 billion bid on Friday, with a rejection widely expected. But Glencore, already Xstrata’s biggest shareholder with a 34 percent stake, then proposed the revised offer of 3.05 new shares for every share it does not already own, up from 2.8.

Qatar, Xstrata’s second largest shareholder, had demanded a ratio of 3.25 in June, though in recent days sources involved in the deal had said the Gulf state could compromise.

So it looks like Glencore needs the deal more than Glasenberg let on, and Glencore expressed its desire to push a deal through by answering a question I had been asking myself all along: why not ditch the statutory merger (as we Yanks would call it) with its 75% approval requirement, and go for a takeover?  That is just what Glencore has decided to do, but I doubt this strategy will be attractive to the Qataris who seem to be supportive of Xstrata’s CEO Mick Davis.  What does Xstrata think of the new strategy and offer?

Xstrata, in a statement, cited a letter from its independent directors to Glencore. This questioned the revised offer’s 22 percent premium to Thursday’s closing share price as “significantly lower than would be expected in a takeover”. It also criticized the intention to replace Davis and to change incentives for executives to stay with the company as a “significant risk” to its operations.

As one of Reuters’ sources put it, “This is going to get pretty dramatic, it’s gone to all-out war.”

Pension Funds Unfriend Facebook

Last Friday the Los Angeles Times ran a nice article detailing the differing pension fund responses to the $50 billion drop in Facebook’s market value since its $38/share IPO.  

The first response: 

Three pension funds have joined a class-action lawsuit against Facebook and its underwriters. The suit, filed in U.S. District Court in Manhattan, N.Y., alleges that lead underwriters led by Morgan Stanley gave only some select investors a heads-up that Facebook’s revenue forecast had soured.”We expect Facebook and the people who benefited from that sale to pay up,” said George Hopkins, executive director of the Arkansas Teacher Retirement System, which has lost about $2.9 million on about 142,500 Facebook shares it has kept from the IPO.

I have not read the court filings, but how could you not expect a suit when the current market price is less than 50% of the offering price?  Aside from whatever direct damages may have resulted from misrepresentations by Facebook and its underwriters, the decline of the IPO over the last couple of years–filings and pricings of IPOs in 2012 are down from 2011, and 2011 was worse than 2010–will almost certainly accelerate because of Facebook.  Among other reasons, this matters for pensions because, unlike most retail investors, they have traditionally enjoyed first access to IPOs, and in many cases have taken advantage of a first-day pop in the market price.  The pop was short-lived for Facebook: a quick 18% jump in initial trading, then a drop down to $38.23 by the end of the day as demand faded.

But some pension investors are sticking with Facebook because they are taking a “long-term” view.  Again from the LA Times:

The California Public Employees’ Retirement System, the country’s largest public pension, refused to reveal how many shares it bought in the IPO. CalPERS had 557,140 Facebook shares on May 23 and more than doubled its stake to 1.3 million shares as of this week, according to a spokeswoman.

The California State Teachers’ Retirement System bought about 500,000 shares in the IPO — worth about $19 million — and sold them when the price briefly popped on the first day. CalSTRS made about $250,000 on the sale, a spokesman said.

CalSTRS has since loaded up on 1.2 million Facebook shares, a stake that has cost the pension fund about $17 million in paper losses, a spokesman said.

“As a patient, long-term investor with a 30-year investment horizon we believe that over time, the stock and the company should perform well,” CalSTRS spokesman Michael Sicilia said in an email.

Even if they are sticking with Facebook, CalPERS, CalSTRS, and other pension funds are certainly taking a close look at the functioning of the IPO market, and are likely encouraging regulators to do the same.

California Pension Reform

Last week, California’s legislature approved numerous changes to California’s public pension laws.  As reported on Gov. Jerry Brown’s website, the Public Employee Pension Reform Act of 2012 enacts the following reforms:

• Caps Pensionable Salaries at $110,100, or 120 percent of that amount for employees not covered by Social Security.

Establishes Equal Sharing of Pension Costs as the Standard by requiring new employees to pay at least 50% of the cost of their pension benefits (a similar target has been set for current employees, subject to bargaining). Local government employers are also given greater flexibility in requiring higher contributions. 

Unilaterally Rolls Back Retirement Ages and Formulas.  Retirement ages are increased by two years or more for all new public employees, and benefits are rolled back below the levels in effect for decades.

• Ends Abuses by requiring, for all new employees, three-year final compensation and calculation of benefits based on regular, recurring pay to prevent “spiking”; limiting post-retirement employment for all employees; eliminating pension benefits for felons; prohibiting retroactive pension increases for all employees; prohibiting pension holidays for all employees and employers; and prohibiting purchases of service credit for all employees.

CalPERS reports that “A preliminary cost analysis by our actuarial staff estimates that the reforms will save California taxpayers $42 billion to $55 billion over 30 years for CalPERS plans alone. CalSTRS, the California State Teachers’ Retirement System, estimates savings of nearly $23 billion over 30 years.”

Not every one is happy, of course.  Many feel the legislation did not go far enough to reduce existing benefits, and others felt that the legislation was more “cuts” than real reform (see this article from P & I for additional details).

Lawsuits or backsliding to follow.