COP28 in Dubai had all the ingredients for both decisive action and controversy. Given the UAE’s status as a significant fossil fuel producer, it was seen by many as the host likeliest both to commit significant resources as well as face criticism from climate campaigners.

Perhaps inevitably, both happened.

First, action. COP28 produced the most deliberate commitment from participants to move away from fossil fuels, in the form of its annual “global stocktake”. From day one, the UAE made it clear it would deliver on expectations for large scale financial commitments, demonstrated by the Emirati government’s pledge to create a $30 billion climate-focused investment fund, Alterra. This move was met with widespread praise and announcements of further support from other nations. Less noticed, but just as significant, was the announcement the following day that the multilateral funds set up under UN auspices would begin to coordinate their mitigation efforts.

Later, controversy. By day four, headlines quoting COP28 president, Sultan al-Jaber, as saying that there is “no science” behind calls to phase out fossil fuels cast a wide shadow.

As expected, the early news out of Dubai was both powerful and contentious. Looking back, however, there is much more cause for hope than doubt that can be taken from COP28.

Those on the ground, myself included, bore witness to a significant level of innovation on display, evidence of how much deep thinking has been going on behind the scenes in the finance sector. The launch of a climate finance new think thank, the Global Climate Finance Centre, hosted by the UAE’s Abu Dhabi Global Market and co-funded by ADQ, Blackrock, HSBC, Ninety One and others, was also a much noticed early announcement.

Elsewhere, participants delved into various novel investment strategies aimed at addressing the most critical global concerns. Among the proposals explored were specialized food and agriculture funds, notably from Principal Asset Management and Federated Hermes. These funds, aligning with the newly introduced TNFD regulations, aim to channel investments to improve food security for the world’s most vulnerable populations. Additionally, innovative approaches from State Street involving agricultural mortgages and the utilization of securitization techniques were discussed as mechanisms to increase financial flows for smaller-scale farmers.

In the race to achieve the ambitious goals set last week, allocating capital to high-emitting sectors will remain critical to real-world decarbonization. The role of private equity in this effort was a focal point for many. Multiple participants engaged in discussions centered around where private capital can make the most impact, particularly toward hard-to-abate assets that need to make the transition from “grey to green” The desire from investors to look beyond the consensus view on the role private markets can play in helping transition energy production towards a more sustainable mix was evident.

By the time the final text and global stocktake was published, it was clear that the intense multilateral effort had produced further progress, albeit after arduous negotiations. Were I focused on the short term, COP28 achieved too little. But, zooming out, I sense there are more capital and countries committed to this effort than ever before, and explicit mention of the shift away from fossil fuels is a sign of more to come. Furthermore, the work being done on the sidelines by the investment community bodes well for the effort to reach net zero.

From this point on, it will be incumbent on all those who made COP28 headlines – governments, corporates, and investors alike, to follow through with concrete action that helps build stakeholder trust in the multilateral process, and in the ability of business leaders to deliver change.

Olivier Lebleu is senior advisor at FCLTGlobal.

Norges Bank Investment Management, investment manager of Norway’s $1.5 trillion wealth fund, Government Pension Fund Global, has once again petitioned policy makers in the Ministry of Finance to let it invest in private equity. NBIM is requesting a 3-5 per cent allocation with large and mid-sized managers that will extend into a co-investment program overtime.

Some four previous appeals, most recently in 2018, have fallen on deaf ears leaving GPFG excluded from the $7.8 trillion market that has grown 20 per cent every year since 2017 in marked contrast to over sovereign funds. A decision is likely to come in the first half of next year.

“Investment in private equity could give higher returns after costs than listed equities over the long term,” wrote Ida Wolden Bache, chair of the executive board and Nicolai Tangen, chief executive of NBIM in a letter sent to the Ministry of Finance.

“The unlisted equity market has grown rapidly in recent years and accounts for an ever-larger share of the global market portfolio. A broader investment universe will provide more investment opportunities and help the fund benefit from a larger share of global value creation.”

Wolden Bache and Tangen stressed the diversification benefits of investing in private equity, arguing that moving into the asset class now fits with GPFG’s gradual diversification over time. Back in 1996 the fund only invested in government bonds; listed equity was added in 1998 and more countries and market have come online over the years. Unlisted real estate was added in 2010 and unlisted infrastructure in 2019.

The strategy could also tap into NBIM’s decade of experience investing in unlisted markets. “Norges Bank will be able to draw on experience from its existing unlisted investments. This will be relevant in areas such as designing partnership agreements, structuring ownership, accounting, risk management, tax matters, regulatory compliance and reporting.”

All private equity investment would be via managers. And although GPFG will be able to draw on its deep expertise of manager selection in listed markets, a new allocation to private equity will require new hires. “We anticipate around 10-15 employees working on unlisted equity investments in the early phase, and around 20-30 in the longer term.”

Wolden Bache and Tangen rule out investing directly in unlisted companies. “Direct investments would demand considerable and different expertise to that required to invest in or with private equity funds, which primarily requires competence in manager selection. Norges Bank has built up considerable expertise in evaluating external managers in listed markets since 1998 and has good experience with this.”

NBIM would cap investment at 5 per cent in any one fund. To manage country risk, it would invest primarily with private equity funds in developed markets in Europe and North America which mainly invest in companies in the same regions. “In order to avoid too many partners and ensure cost-efficiency, we will therefore invest with mid-sized and large partners,” they add.

GPFG would be able to make much of its advantages, they continue. “Large investors in private equity often have better access to both the best managers and co-investments, and obtain lower management fees,” continuing. “An unlisted equity portfolio of 3-5 percent of the fund will enable us to take advantage of the benefits of the fund’s size and facilitate adequate diversification across managers and vintages.”

Cap on fees?

The letter recognises the resistance to private equity’s high external manager fees – even when these investments bring the fund an excess return after costs. NBIM’s agreements with external managers currently include a cap on fees and the authors acknowledge it is unlikely that a private equity fund will accept a limit on fees, flagging “this requirement will need to be adjusted if the fund invests in private equity funds.”

NBIM will therefore build expertise in its ability to co-invest alongside private equity funds in a bid to reduce fees. “Investors do not normally pay fees on co-investments, and investments of this kind are effective in reducing total fees in relation to invested capital,” they write. “Fees as a share of invested capital will fall proportionally with the share of co-investment.”

Co-investment will involve deciding whether or not to participate in co-investments offered by the private equity fund with the opportunity to opt out. “Investors are typically given ten working days to consider whether to participate in a co-investment.”

“We will build a portfolio of co-investments gradually to ensure diversification across companies, sectors, geographies, and managers. We will acquire non-controlling interests in the companies. The GPFG’s total interest in any one company will not normally exceed 15 percent,” they write.

Transparency

The submission also addressed the MofF fears around transparency given the lack of publicly available information in the asset class and lack of daily pricing. “Norges Bank will set strict requirements for selecting partners, responsible investment and transparency, as well as restricting investments geographically.”

“For unlisted equity investments, reported results will likely be negative in the early years. It will, on average, take longer to sell unlisted equity investments than investments in listed companies, and there is a risk that we will not be able to sell before the lifetime of private equity fund naturally ends.” The board also reassured that the strategy would not increase the equity market risk in the fund relative to the benchmark index.

The latest push by NBIM has raised questions from investment commentators on linked-in, voicing concerns around building an investment program from scratch with annual allocations running into billions. Rob Baur, Professor of Finance, Institutional Investors chair at Maastricht, an expert on the fund,  writes.

“I just wonder how the executive board of Norges Bank dealt with these pro and con arguments in an (academic) evidence-based way. Has this process been spelled out in a formal document? If so, where can I find it?”

Oxford University’s Ludovic Phallipou, a critic of the private equity industry, argued the GPFG is being drawn into the industry by PE fund managers and “sales guys.”

日本株にかつてほとんど興味を示さなかった海外投資家が、いま注目し始めているのは驚くことではない。デフレ脱却が見え、企業のガバナンス改善も進む。地政学リスクが高まる中国からの資金流出の「受け皿」として有望とされ、海外からの資金流入は「一時的ではない」との声も出ている。

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With Japanese stock prices reaching a 33-year high, the economy emerging from deflation, and the positive impact of corporate governance reforms over the past decade, it’s not surprising that money managers, especially foreign investors, who previously showed little interest in Japan are now flocking to Tokyo. The global uncertainty in China further adds to the appeal of the Japanese market.

Rene Aninao, founder and managing partner of Corbu LLC, believes that the current geopolitical environment is causing capital outflows from China, with Japanese equities expected to mostly benefit among the Asian countries. US and European investors are increasingly recognising the risk premium associated with the Chinese market, driven by ESG concerns and geopolitical risks. Consequently, there is a growing trend of global asset managers seeking exposure to Asia without investing in China.

“The question is do global asset managers still want to have exposures to Asia without directly exposed to China or directly investing in China. The answer is yes,” Aninao told Top1000fund.com in an interview in the sidebars of the 17th Global Fiduciary Symposium on November 15, 2023. He continued that Japan and South Korea will emerge as preferred investment destination due to their larger, more sophisticated markets compared to other Asian countries such as Malaysia, Indonesia, the Philippines, or Vietnam.

Aminao went on, saying, “The political regimes in these four countries aren’t stable and there isn’t enough market capitalisation to accommodate and absorb all of the scale of capital that may come out from China. So, that’s why Japan is the beneficiary.”

The trade war between the US and China, the pandemic, Russia’s invasion of Ukraine, political tensions between China and Taiwan, and the recent escalating conflict between Israel and Hamas have reshaped the world into competing geopolitical blocs, Aminao said. This re-regionalisation has compelled a change in the policy frameworks employed by the U.S.-NATO and its allies. While these developments have heightened investor risk aversion, the re-regionalisation has given rise to a substantial global capital expenditure cycle — specifically, digital industrialisation — creating numerous emerging investment opportunities,

Aninao highlighted Warren Buffett’s increased exposure to Japanese equities in recent years. “So that’s the same, Buffett has been selling TSMC in Taiwan,” he said. “Buffett is concerned about contingencies in the straits—which is true. So, he needs to invest that money in Japanese brokerages and trading houses. I anticipate more of this trend. Particularly in the West, where there’s a pursuit of returns, the Nikkei’s increase is only going to drive more capital flows.”

Foreign Buying

Jiro Nakano, the general manager of Japan sales planning and management at Nikko Asset Management, has observed a transformation in the Japanese stock market since the beginning of the year. The Nikkei stock average has surged by about 30 per cent, reaching a 33-year high of 33,000, with crucial support from foreign investors, marking the strongest foreign investor activity in 14 years.

Japanese equities are becoming an increasingly attractive investment destination for overseas investors as they are growing cautious about investing in US equities as the US interest rates rise and China becomes less attractive amid concerns about the country’s real estate market, Nakano said in a keynote speech at the symposium on November 15.

“While some may view the current market upturn as temporary, I have a different perception,” he said. “The market is currently experiencing a major shift in the Japanese stock market, and we believe that the magma is on the verge of exploding.”

Nakano echoed Aninao, saying that Buffett’s entry into the Japanese stock market in August of 2020 serves as a symbolic indicator of this shift. Attracted by low valuations in domestic trading companies, Buffet invested heavily in the sector. Since then, stocks of trading companies have experienced remarkable surges, doubling or tripling in value. Buffett’s success in Japanese stocks raises questions about his expectations for the market’s growth over the next decade.

Nakano said that factors contributing to Japan’s market appeal include the anticipation of renewed growth driven by inflation and wage hikes, the continued undervaluation of Japanese stocks, and the robust financial position of Japanese corporations. These elements combine to create an environment that global investors to consider Japan as a lucrative investment destination.

CalSTRS has saved more than $1.6 billion in costs since 2017 thanks to its collaborative model approach, which brings more assets in-house and encourages the use of different investment vehicles, including co-investment, joint ventures, SMAs, direct ownership and revenue share. Now, as it sets its targets for the next five years, it’s looking to measure the other benefits of the program, including boosted returns and more control over risks.

As institutional investors around the world invest in more private assets, facing liquidity risks and resourcing pressures, they are often looking at how to evolve and adapt into a more direct-investing model. For CalSTRS, the $304 billion fund for Californian teachers, the evolution into private markets took on a slightly different approach through a collaborative model that focuses on partnerships and innovative structures.

Since the fund moved into this model five years ago, it has achieved average annual savings of $273.5 million and has now set an internal target of an additional estimated $200 to $300 million a year of savings over the next five years.

In an interview with Top1000funds.com from his Sacramento office, deputy chief investment officer Scott Chan says the fund will also consider measuring more directly the other benefits of increased returns and control over risks.

The collaborative model includes more internally managed assets, with 62 per cent of the portfolio now managed internally. But as the fund moves more into private assets, the collaborative model focuses not just on internal management but how CalSTRS can partner with external providers in innovative ways to achieve similar benefits.

“As we shifted more into private assets we didn’t think we could build an ‘internal Blackstone’, so we decided to build a model to leverage our partners,” Chan says. “We desire to be the partner of choice, and that is not just a term of hubris, but a term for our partners to know we want to develop a relationship with them. It’s reciprocal.”

Chan says this means the team at CalSTRS is very active in its work with fund manager partners, aiming to be nimble, responsible and knowledgeable.

“We want to be trusted experts and be nimble. For example, if they have a co-investment request we want to come back in the same day,” he says.

The model includes a whole toolkit of flexible structures including SMAs, comingled funds, co-investment, joint ventures with managers and peers, minority or majority interests and full ownership.

In the first year the fund participated in 106 collaborative model transactions, and in the past year that has grown to 371 including 309 collaborative private structures, 60 internally managed funds and two rebate agreements, resulting in $428 million of savings in 2022 alone (growing from $134 million in savings in the first year of the model).

While Chan says the cost savings “get the headlines” what is less talked about are the benefits to returns and managing risks.

“We have to look holistically. We are net-return investors and are trying to create value in the costs savings and returns through innovative structures,” he says.

“The evolution is we will do more SMAs and co-investment, but we will also do joint ventures, revenue shares, minority shares and outright ownership, in an order that looks like a pyramid. They all have resourcing needs that are sophisticated at the top of the pyramid. When you own an asset manager you need two staff full-time to manage that organisation strategically. The goal of that would be adding 3 to 7 per cent to the IRR, which is significant.”

According to Chan the collaborative model has been a contributor to net value added, with alpha-above-benchmark over three years of 97 basis points, five-year alpha of 67 basis points and 29 basis points over 10 years.

He says it is also contributing to a fuller understanding of risk.

“It is helping to move the dial on risk because as we get to know and partner with managers on the ground floor, our PMs end up understanding the risks a lot better,” he says.

“Out of that we want to own this risk long-term and sell that risk to the market. We want to inherently know what to retain and sell. For an investor with 43 per cent in private assets it is important to manage the risks.”

Execution risk

A direct result of the collaborative model is that CalSTRS internally is taking on more execution risk, which has a direct implications for the size and quality of the team.

“We are taking on more execution risk and that falls on having more staff and more resources but also more sophisticated resources to be able to manage those risks and mitigate them. The good news about execution risk is you can mitigate it, versus market risk where you’re just taking the beta.”

In its 2021-22 five-year plan the fund outlined 91 new hires and has developed a plan to hire more staff to manage and mitigate the execution risk and to train and equip the current staff. The CalSTRS investment team currently numbers 231.

“We need people who have more of a background to suit those types of investments,” Chan says.

“We are powering up the co-investment unit and recently hired an ex-VP from KKR, and a PM from ADIA.

“All the credit goes to the team; they have executed this excellently. We have a great team and culture, they feel empowered and have delegation up and down the chain. We have a streamlined decision-making process and they can be nimble in the marketplace.”

Next phase: Evolving structures

The first phase of the collaborative model was to get every division and team executing collaborative model deals in their own way.

Five years ago about 2.5 per cent of the private equity book was co-invested, now it’s about 25 per cent with a new target of 35 per cent.

Other asset classes take on a different look. In real estate about 80 per cent of the portfolio is in joint ventures with managers, and CalSTRS also owns majority interests in a few real estate operating companies, in what is a more strategic move.

“Each of our partners is unique and the transactions are unique, so we go to the partners and say let’s be innovative, they have the canvas,” Chan says.

A lot of the opportunities in the fund’s sustainable investment portfolio were falling between asset classes, so a collaborative model was adopted from the outset.

“Now, because we have expertise across the whole organisation, we can execute a collaborative model straight away,” Chan says.

“We have a partnership with Just Climate, which is part of Generation, where we co-invest and have a strategic stake in the business. The exciting thing is we have the expertise to do any of these structures and can map it to new endeavours that we see coming up.”

Private credit is another area the fund is looking at strategically. It recently made a 2 per cent strategic allocation and it’s approaching the investments innovatively.

“Private credit is where we want to drive a lot of co-investment and as the industry grows we can take some shots at owning and growing with these organisations,” Chan says. “Where we have taken an ownership stake or revenue share is in areas where we want to grow together with the organisation, be strategic and on the ground. We think private credit will continue to grow and an area we want to grow with a select number of groups and we’ve done some revenue shares, owning the managers.”

Chan says as the fund moves into the next phase of the collaborative model it will move more into joint ventures and revenue share and ownership.

“Doing co-investment is something we can do well and at scale, joint ventures, revenue share or ownership takes more time and we can get more efficient and be more prolific. As we evolve we will likely be evolving from SMAs and co-investment to be doing more revenue share and minority and majority ownership. It will look like a pyramid. It’s got be strategic for us to have that stake, we won’t do it very often but it’s an area we are growing into.”

三井住友銀行の企業年金基金は、インフラ投資やプライベート・エクイティ（ＰＥ）などオルタナティブ投資を増加させる運用方針を示した。流動性は低いものの、リターン（収益率）の最大化を追求する。日本国債は過去10年以上、低水準に抑えてきたが、日銀の政策修正を受けて今後、金利上昇が予想されるため、運用戦略の見直しを検討する可能性がある。

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