Boards face a vital role supporting governance around climate change. The board journey of Canadian fund HOOPP serves as a starting point for other boards feeling equally challenged by the complexity of the issue writes Gerry Rocchi.

For pension plans and other institutional investors, the greatest concern around board governance of climate change issues can be put simply: how to ensure you’re having meaningful discussions on such a complex subject.

This is a risk with any subject that is highly complex – that the discussions stay at a superficial level. And climate change has, perhaps more than any other issue, the potential to amplify all complexity, especially in the investment area, where climate change impacts are ubiquitous.

It would take a whole other, and lengthy, article merely to describe the unique aspects of climate change in relation to investments that includes uncertainty and rapidly changing estimates of the level, path, pace, costs, regulations and opportunities related to decarbonization and adaptation; macroeconomic impacts; collective investment and reporting initiatives.

What can a diverse board, with members of varying levels of understanding of climate change, do when faced with governing such a complex issue? Our approach at HOOPP (Healthcare of Ontario Pension Plan) was to underpin critical decision-making and supervision on climate change with effective and efficient process and practical steps. What follows is the story of the HOOPP board’s journey on climate change, at least to date, as this is a rapidly evolving space. It may serve as a starting point for other boards feeling equally challenged by the complexity of the issue.

HOOPP is a pension plan for healthcare workers in Ontario. It finished 2022 with C$103.7 billion in assets and a funded ratio of 117 per cent (meaning for every dollar we owe in pensions, we have $1.17 in assets). A history of strong returns has been accompanied by frequent increases in benefits and stable contribution rates while maintaining strong funding. HOOPP and its board are responsible for all aspects of the pension plan – investment, administration, contribution rates and benefits.

In 2022 and 2023, the HOOPP board analyzed how it should fulfill its fiduciary obligation with respect to climate change. Here’s what we have done:

1. Separated climate change from ESG for board-level governance because climate change poses unique issues that merit unbundling it from other discussions. We seek to retain consistency of approach and cross-pollination between the two areas.

2. Clarified committee mandates to reduce overlap and concentrate expertise. The audit and finance committee is now responsible for oversight of reporting because what gets measured gets done, and we expect that climate change reporting will attract more demands for external assurance.

3. Conducted a competitive search and hired an external advisor (EY) to provide independent advice to the board. This advisor is not meant to repeat work done by management, but will focus on board education, independent advice to the board, and independent board research. Some of the early research by HOOPP’s advisor will be directed to a review of best practices in pension board climate change governance; what we learn may inspire us to evolve our approach even further.

4. Designated a specific day to exclusively discuss climate change between the Q1 and Q2 meeting cycles. While we hold routine and comprehensive discussions on climate change at regular board meetings, this dedicated session ensures that any new or modified board requests are relayed to management promptly, facilitating coordination with other policy updates for Q4 approvals.

5. Commissioned research on the most effective ways to incorporate climate change in incentive compensation, including whether to use climate change results as another weighted additive factor, or as a multiplicative modifier.

6. Prioritized board education on climate change and related governance, including current guidance, regulations and court cases on how a board fulfills its fiduciary obligation with respect to climate change. This is done through a combination of management, the external advisor, external counsel, and external courses. HOOPP already has board members who have taken the Institute of Corporate Directors’ Governance of Climate Change course, and more external education will continue.

As HOOPP’s website states: climate change poses one of the most urgent and pressing systemic challenges of our time, with unique risks and opportunities. And it can no longer be approached solely as a long-term issue.

Against that backdrop, it is imperative that a board executes its governance role with focus and purpose, and ensure it is having meaningful discussions. The key to achieving this is process and practical steps. The steps outlined above have set the HOOPP board on a promising path, yet we understand this is an ongoing journey. We will re-examine our approach as we learn more and as we reap the results of the decisions we have made and the processes we have implemented, having taken the time as a board to build a solid foundational capacity and knowledge base on this critical issue.

Gerry Rocchi is co-chair of the Healthcare of Ontario Pension Plan

The $315 billion CalSTRS is looking to build a top-down portfolio function to better incorporate liquidity management alongside portfolio construction and to consider how it can better deal with often lumpy cashflows to maximise returns, while continuing to keep a tight rein on risk.

CalSTRS is developing a new top-down total portfolio function to better incorporate liquidity management alongside portfolio construction.

Deputy chief investment officer Scott Chan says the fund is at the early stages of enhancing its liquidity oversight and is building the teams and tools to centralise that function.

“Portfolio construction is at the heart of how we look at liquidity oversight, as a tool to enhance how you construct the portfolio. They go hand in hand,” he told Top1000funds.com in an interview.

“But it is integrating these components into the portfolio construction that is the hard part. You need all of your private and public markets working together and that’s hard for organisations to get right.”

Chan says the fund already has significant experience and tools for liquidity management across the various divisions, but the maturation of the portfolio meant evolving and enhancing the liquidity function was important.

The fund has a mature member profile and it pays more in benefits than it receives in contributions. In addition, a two-decades old private markets allocation means cashflows need smoothing.

“We have been increasing our allocations to private markets over the past two decades which has worked out remarkably well,” Chan says.

“But if you start every year with a negative cashflow and layer on more volatile cashflow there is an ongoing need to manage liquidity. For example, in 2021 we had a ton of cashflows come back from private investments but today not so much.”

CalSTRS’ liquidity priorities are paying benefits, avoiding selling assets at a discount, taking advantage of dislocation opportunities, and building a resilient portfolio that can rebalance to asset-allocation targets and take advantage of opportunities in the event of a recession.

“Liquidity is a tool that enhances your portfolio construction and helps build a resilient portfolio,” Chan says.

“Liquidity is the lifeblood. In this environment it’s becoming more and more important.”

A core goal in the liquidity and leverage management is to smooth out cashflows over a business cycle.

“Some years you get a lot of cash back and others you don’t, it’s lumpy cashflow,” Chan says.

“Over a cycle you can smooth that out using leverage and liquidity tools.

“We are not intending to take on permanent amounts of leverage, thinking of it more as a way to enhance the portfolio construction over a business cycle.”

Chan says the intention is that balance sheet/liquidity management will add to the existing investment strategy and risk unit which already looks after asset allocation.

A team will be hired, from both internal and external resources, and sit under a head of total portfolio management.

“It will be really critical to get this right,” Chan says.

“It is important to integrate this tightly and weave it into portfolio construction. It will be a multi-year evolution and phasing. Our organisation needs to mature into the idea of how we enhance the liquidity management.”

Chan says it is not just the technology and resources that need to evolve, but the governance structure as well.

“As we evolve we will continue to build out those risk processes,” he says.

“And we will have to build out further governance too, related to how we make the decisions. It’s going to be a multi-staged evolution for us.”

ALM and asset allocation evolution

The $315 billion fund recently went through an asset/liability exercise and made three significant changes to its asset allocation.

The global equities allocation was reduced by 4 percentage points with 2 per cent of that going to a new private debt allocation. The fund had previously invested in private lending through its innovation bucket and this is the first time that it has had its own allocation.

“Private credit is an incredible opportunity today,” Chan says.

“When you think about the portfolio of the future, here you have something near mid-teens returns and you are high in the capital structure, which is better in a recession. It is a critical part of our asset allocation going forward.”

CalSTRS’ innovation portfolio has been an incubation bucket for many asset classes that now have their own, more permanent allocation like private credit, inflation-sensitive assets and the risk-mitigating strategies bucket, which is where global macro, CTAs and other risk-mitigation hedge funds sit.

That bucket is now going to be expanded to consider other opportunities to add to diversification.

“We’re looking at how we can design greater flexibility to the portfolio,” Chan says.

“For example if there is a recession can we take advantage of the opportunities.

“The innovation portfolio has done well historically. Bonds might have returned 1.7 per cent over the last 10 years and we got a lot more return out of the asset classes [in the innovation bucket] and got diversification. We will continue to expand that opportunities bucket to flow into different areas. It gives us that flexibility that’s important in portfolio construction and asset allocation because the market is a lot more uncertain.”

It also allocated a further 1 per cent to private equity, taking it to 14 per cent, and another 1 per cent to infrastructure.

CalSTRS had a one-year return to June 30 of 6.17 per cent and a three-year return of 10.1 per cent, well above the actuarial rate of return of 7 per cent.

Australia’s sovereign wealth fund has handed mandates to external active managers and built a dedicated treasury management function, six years after going all-in on passive index strategies. It is is also on the hunt for early stage venture opportunities as it continues to forecast challenging conditions and higher persistent inflation.

Australia’s sovereign wealth fund has handed a handful mandates to external active managers and built a dedicated treasury management function, six years after going all-in on passive index strategies. The A$206 billion ($136 billion at June 30) Future Fund has entered into contracts with specialist global equities over the past two years as it seeks an edge in what it expects to be a challenging environment for investors amid higher persistent inflation.

“We have been looking at active management in global equities … where we think there are pockets of opportunity for active managers and we can do that at meaningful scale,” Future Fund CEO Raphael Arndt told Top1000funds.com. “We’re definitely not in ‘set and forget mode’.”

While Ardnt made clear he wasn’t moving entirely out of passive mandates, the comments reflect a major strategic re-direction for the Future Fund, which in 2017 placed the vast bulk of its equities portfolio into low-cost index strategies, concluding it was increasingly difficult to justify the fees asked by active managers, especially in Australian domestic equities (Future Fund revamps equities).

“This is a multi-year strategy and we haven’t lost conviction in that. You don’t move $250 billion worth of capital in six months.”

The sovereign, which must by Australian law publicly disclose the external managers it employs, lists four developed and emerging market managers on its books at March this year (UBS, State Street, Legal & General, Insight and Robeco) and is expected to add more names at its next update.

The sovereign has also commenced a project of more actively managing and monitoring liquidity, centralising and establishing a formal treasury function staffed by three full-time equivalents, and investing in software upgrades.

The revelation came as the fund reported what Arndt described as a “solid” result of 6 per cent in the 12 months to June 30, under-performing its target of 6.9 per cent a year. It has returned 8.8 per cent a year over the 10-year horizon and has grown its initial A$60.5 billion ($43.3 billion at April 3 2006) endowment from the Australian government almost fourfold since, with no additional contributions.

Arndt said the sovereign held to the thesis that inflation would be “sticky and sustained”, revealing a more bearish outlook than some global peers, with consensus beginning to emerge that the worst of the post-pandemic inflationary cycle may have passed.

“Favourable investment conditions that drove markets in recent decades have been undergoing profound changes,” Arndt said.

“Markets have been under-pricing the significant economic and geopolitical risk that we have anticipated. “The … portfolio is positioned moderately below neutral risk settings at a time when the economic outlook and the direction of inflation and interest rates make investment returns less certain.”

Nonetheless, he said the fund would actively pursue opportunities, via its specialist managers, including in risk assets, especially venture capital.

“We continue to invest in early stage venture because if anything its becoming more attractive – capital is drying up and it’s actually getting cheaper and more competitive,” Arndt said. “We have high conviction we are investing with the best managers in the world, so we continue to do that.

“[Another] area we are getting quite excited by is pretty boring, vanilla credit, we’re investing in investment-grade credit [that is] … structured and somewhat liquid.

“And even boring old bonds are [looking] not too bad, relative to the risk you’re taking.”

The sovereign earlier this month announced Ben Samild, its former deputy chief investment officer, as the permanent CIO, a role Arndt had been performing since the departure of Sue Brake in June 2022.

Samild, who previously ran the Future Fund’s debt and alternatives strategy, is a noted advocate of its “joined up” strategy, akin to the total portfolio approach.

“You can’t run the kind of investment program we do without the culture of ‘one portfolio’ in place from the beginning,” he told a conference hosted by Top1000funds.com sister publication Investment Magazine Australia in 2021.

When Sujoy Bose joined India’s National Investment and Infrastructure Fund (NIIF) in October 2016 he was the first employee at the fledgling sovereign development fund (SDF) that still didn’t have money or funding in place. Set up to catalyse domestic investment and growth, NIIF had a clear structure and firm backing from India’s Ministry of Finance, but things were far from settled. Bose’s first priority was to secure initial expense funding to pay salaries for the organization’s first staffers who joined in January 2017.

Today NIIF has around $4.3 billion under management across three funds comprising infrastructure, fund of funds and growth equity (just like the assets found in any resource-rich country’s sovereign wealth fund) and strategy is overseen in an innovative, collaborative model between the government and commercially minded investors hunting returns in India’s fast-growing market.

All three funds have performed well and are among the largest among their peers in India. The growth equity fund recently announced the first successful exit of one of its investments and NIIF plays an important role in providing informal advisory support to the government around asset monetization and creating investor-friendly policies in sectors such as airports and smart meters.  Recently it announced plans for a new India-Japan Fund focused on green investing which will take AUM to almost $5 billion.

But it is NIIF’s role as a poster child for development finance, an area many governments have been trying for decades, without much success, to formulate the right approach about which he is most excited. After nearly seven hectic years, Bose recently announced his decision to leave NIIF.  He hopes his contribution to building a collaborative investment model that mobilizes equity capital at scale to invest in priority areas in a public private format that also delivers investor returns will be replicated in other countries and sectors.

“It is very encouraging that the success of NIIF has spurred similar initiatives in other countries,” he says. “Those countries are taking aspects of what makes NIIF a solid, well-structured entity and are building on that and adapting and improving the structure.  It is possible that the NIIF model can be used in many development areas – infrastructure, climate, healthcare, education and others.”

key pillars in Getting started

Early, important decisions included withstanding pressure to invest until key pillars were in place.  State-owned investment banks had identified a small pipeline of potential investments, but Bose wouldn’t be rushed. The government had approved a $3 billion investment in the fund subject to conditions but the drawdown process and timing wasn’t settled.

Building the ownership model has been another vital element.  NIIF Ltd, the manager of all NIIF funds is 49 per cent owned by the government, 3 per cent by domestic commercial shareholders and 48 per cent by international institutions.  This ensures Indian-ownership and control – but that it is also majority controlled by non-government shareholders. “It’s the perfect combination of sovereign comfort for investors seeking Indian exposure alongside the discipline required to enable the platform to operate as a fully commercial asset manager.”

International institutions include Abu Dhabi Investment Authority, AustralianSuper, Temasek, Canada’s Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, who are also anchor LPs in NIIF’s infrastructure fund. They entrust capital in a “blind pool” to NIIF’s management team, which invests the capital based on an agreed investment strategy.  It ensures alignment of interest between investors and NIIF, while clearly defining boundaries and a risk-return balance.

NIIF can operate without interference from investor LPs, as long as it operates within the pre-defined criteria. In NIIF’s case, the funds are trusts and the manager is a limited liability company, he continues.

“This enables some investors to become shareholders of the manager, without taking on partnership-related liabilities, which was crucial as it achieved the objective of minority government shareholding”.

Elsewhere the government’s contribution provides instant scale – something that’s always been a challenge in the Indian and emerging markets asset management industries.  “Scale would bring cost efficiency, something that is key to most institutions globally, and attract high quality talent, thereby creating a virtuous cycle over time as NIIF’s track record builds up.”

Bose uses the final close of NIIF’s $2.3 billion infrastructure fund to illustrate these key structural themes in action. Commitments included highly reputed Indian and international institutions alongside the government’s 49 per cent contribution. Investors comprised two SWFs, four international pension funds, two life insurance companies, a DFI, three Indian private banks and a large Indian AMC. “It was an ideal mix for an infrastructure fund,” he says.

Indeed, he believes that NIIF’s approach to infrastructure investment has been notably different to the strategies of most Indian infrastructure funds. NIIF invests primarily via control or co-control platforms, and is reluctant to invest in passive financial stakes alongside EPC contractors or developers, which Bose says mostly leads to misalignment of interest and has a poor track record.

So far NIIF’s infrastructure fund has already invested in six platforms, across ports and logistics, roads, renewable energy, data centers, and airports. In addition, NIIF has also developed India’s fastest growing infrastructure debt financing company, which currently has a loan book of $4 billion, with not a single non-performing asset.

Governance clarity

Bose says that one of the most critical aspects to get right has been management of expectations. Namely balancing the need to generate a return for investors alongside keeping the government happy by investing in economic development at scale.

“Managing expectations and keeping key people in the loop on every step was key,” he says.  “At the same time, it was always important to ensure that the team did not feel any pressure to pursue objectives beyond an appropriate risk-return balance.  Getting all these aspects right enabled NIIF to operate independently and confidently.”

The board of NIIF Ltd has nine directors, two of which are nominated by the government, four by investors, two independents, and the CEO. Key board committees have either a majority of investor-directors or independents which ensures the collaborative approach to the governance of NIIF, without giving control to any one investor or the government.  NIIF also has a governing council, which is chaired by the finance minister.

“The GC is an influential part of the governance of NIIF, however it does not have decision-making power – it provides strategic guidance to NIIF management,” he says, continuing. “It keeps NIIF management connected to senior levels of the political and bureaucratic leadership of the government.”

Finally, the investment committees overseeing the funds are made up of professionals with incentives aligned to the performance of the funds – there are no representatives of either the government or investors on the IC. “The combination of the construct of NIIF Ltd. board, the GC and the IC make for a balanced, arms-length and strong governance structure of NIIF with the right alignment of incentives.”

However, it’s a governance framework that Bose advises might not suit every aspiring sovereign development fund.

“Would a public-private approach work with all the requisite governance and arms-length requirements? If not, governments should just create a state-owned development bank,” he advises.

As to what he is going to do now, he says he’s sifting through a raft of ideas and offers. “I will take my time to consider opportunities and commit once something with the right credentials presents itself,” he concludes.

 

If artificial intelligence (AI) hasn’t already touched the business you work in that’s only because it’s about to. Asset owners from around the world will gather at Stanford University next month to hear first-hand from two technology visionaries on the practical applications and ethical considerations of AI as a tool to improve decision making and efficiency.

The sprawling potential of AI presents institutional asset owners with unprecedented opportunities both as investors and as businesses, but also presents significant challenges as the technology expands its reach into more and more aspects of how we live.

The market for AI is expected to grow from a nearly $100 billion industry today to almost $2 trillion – a twentyfold increase and compound annual growth rate of almost 33 per cent per cent –  by 2030, fundamentally changing a vast number of industries and daily life for billions worldwide, according to Next Move Strategy Consulting.

Institutional investors will be challenged to grapple with this rapidly evolving seismic technology shift through a myriad of different lenses: as an investment opportunity, driving growth or decline; as a global cultural phenomenon, driving innovation or chaos; and as business opportunity, fuelling the capacity to make investment decisions based on greater analytical prowess and the potential to make sense of large swaths of data more efficiently than ever before.

To help put the scale of the AI revolution into perspective, Top1000funds.com has secured the attendance of two world-renowned AI experts at next month’s exclusive, invitation-only Fiduciary Investors Symposium, held on campus at Stanford University from September 19 to 21. They will cover the gamut of biggest issues institutional investors need to consider going forward.

Dr. Ashby Monk, head of Stanford’s Institute for Long Term Investing and author of the book Technologized Investor: Innovation through reorientation, will share insights into how AI will shape 21st century long term investing and drive portfolio construction techniques based on greater amounts of data, optimized for better decision making and performance.

In his book, Monk argues that institutional Investors can gain capabilities for deep innovation by shifting their strategies and organizations to focus on advanced technology. Although technology has historically failed institutional investors, Monk recommends practical changes that they can make to unlock “technological superpowers”.

AI has the potential to impact investment management at the front, middle and back office and many asset owners have already embraced machine learning and natural language processing. APG, who is head of digitalisation and innovation, Peter Strikwerda will also speak at the event, has taken that a step further, recently hiring its first digital portfolio manager. “Samuel” comes complete with an employee identity number and underlines the firm’s ambitions around data-driven money management. Part of “Samuel’s” job is to point to anomalies, questioning where logic isn’t consistent in analytic assumptions.

AI has a large role to play in what Monk describes as a data-driven revolution in investing. For asset owners, this means operational excellence will matter more in the future with people, process, information, governance, culture and technology all driving operational alpha.

Fei Fei Li, Google’s former chief AI data scientist and creator of ImageNet, the basis for machine-learned visualization, will speak to the vast possibilities AI represents, as well as the potential risks and ethical questions critical to address during AI’s infancy.

Li co-launched a non-profit organization, AI4All, to increase inclusion and diversity among computer engineers. She also co-directs Stanford’s Institute for Human-Centered Artificial Intelligence, which aims to develop human-centered AI technologies and applications.

The practical applications and ethical considerations of AI in the world of pension fund management and investing are fundamental questions that all asset owners need to understand and manage. Don’t miss this outstanding opportunity to hear first-hand from two of the leading academics in the field.

For asset owners wanting to find out more or to register for the Fiduciary Investors Symposium, held on campus at Stanford University, September 19-21 click here.

Suyi Kim, global head of private equity at CPP Investments manages quite possibly the largest private equity allocation in the world. At C$146 billion, equivalent to a quarter of the entire C$575 billion pension fund for some 21 million Canadians and forecast to grow bigger every year, Kim leads a program that is also heading into unchartered territory.

In conversation with Top1000funds almost exactly two years since her promotion to the top job, she is mindful of how the portfolio’s size could impact its ability to continue to generate the pension fund’s strongest return of 15.5 per cent on a 5-year basis.

“We are a battleship not a speedboat compared to other programs,” she says.

Kim believes the primary source of the portfolio’s success derives from the quality of the private equity team; its synergy, level of communication and mission-driven culture.

“This is what is going to allow us to outperform the market,” she says.

Yet at 190 people and counting and spread across global divisions that now include an office in Mumbai, ensuring smooth communication is, she says, intellectually challenging.

“The larger the team, the harder the task of maintaining the culture that allows us to outperform and my continual focus is making sure we are working well as a team.”

For example, a key element of team functionality is that different divisions (the portfolio is divided in four departments) work together so that insights gained by one team feed into decision making in another. It provides a level of analysis that goes much deeper than just persistency of returns, she says. “We’d never just re-up with a manager without cross referencing with our other strategies to inform how the manager will perform.”

Partnerships pay

CPP Investments’ GPs are also part of the extended team and the fund’s long-term partnerships have been integral to the portfolio’s success. Back in 2007 when Kim began what would turn into a 16-year stint heading up the fund’s Asian private equity business (she was the firm’s first hire outside Toronto when the portfolio was just C$4.4 billion) partnering with expert GPs was the main strategy.

“If you are not the best investor in the market you need to work with the best, and when we first started out, we were nowhere near the best,” she recalls.

Manager relationships, across the funds and secondaries and direct investments divisions are, she insists, much more art than science and manifest in an understanding of how the other side is going to work. The relationship is based on transparency and trust in the other’s ability to deliver.

Size and scale have helped build GP relationships, but again, it is easy to see how size can become an obstacle. One of the challenges today is making sure the fund’s processes keep up with partner GPs yet this is sometimes slowed down because investment decisions go through various stages of approval.

“For a large-scale deal, we have to go to the global investment committee and even to the board in some cases,” she says. “Our job is due diligence, and for deals that require a level of speed that makes the due diligence difficult, well, we won’t do the deal. I like to be able to sleep at night.”

focus on Quality in a challenging Market

Kim is also preparing for tougher returns in the asset class ahead. Higher interest rates signpost a higher cost of doing business that will impact portfolio companies’ performance and multiples. But she doesn’t believe this will feed through into valuations until 2025-2026.

“When we look at the investment case, higher interest rates will have an impact on the multiple but so far market multiples still haven’t changed that much,” she says.

Unless interest rates start to come down soon (and she doesn’t think that is particularly likely) leverage will remain high and the free cash flow will be lower along with the return to investors. She says private equity players that went through the GFC have “learnt their lessons and built in more of a cushion” but she is concerned that an expectation gap continues to persist between buyers and sellers.

“I have to remind our senior managers and board that returns will be more challenging going forward.  Yes, private equity is the best performing asset from an absolute return perspective, but you must also look at it from a risk adjusted basis, and private equity is the most risk-taking allocation in the fund.”

She notices investors have been putting more money out than they have been getting back. It’s why she believes more exits must happen before investors put more money out the door and is the reason behind a spike in LP secondaries activity and GP’s restructuring their portfolios. For now her focus is on investing – and exiting – high quality companies only.

She reflects that if assets on the ground are performing and compounding at the expected rate, there is no rush to sell in the current market. Being a long-term investor means there is no pressure to constantly deploy so instead she is  continually re-underwriting deals to make sure they are still profitable. “If we are holding a business that still makes sense, I will always choose to hold onto rather than exit and recycle the capital to other deals.”

She says her teams have grown more selective because of the challenges around forecasting the operating case for businesses and notes that the fund’s deployment on the direct side has slowed. On the funds side, because commitments are drawn down over the years trying to time the market isn’t an issue. Instead, her focus is on making steady commitments and ensuring the portfolio doesn’t have vintage concentration. “We use our secondaries to adjust the portfolio here.”

In fact, the number of deals across the entire private equity portfolio has slowed significantly in the last two years. “We have submitted bids, but we often come in far below the winning bid and in retrospect we are happy that we’ve missed these investments.”

Complexity in China

Kim lived in Toronto before she moved to Hong Kong, and because her partner is Canadian she describes her return to the city as a homecoming, even though she is Korean.

But it is her unique experience of private equity in China, where souring geopolitics, complex regulation, the increasing cost of doing business not to mention the inability to forecast exits means other Canadian funds like C$400bn ($295 billion) Caisse de dépôt et placement du Québec (CDPQ) and OTPP have pulled back on direct investing in private assets that the conversation now turns.

CPP Investments, she says, is intent on building a globally diversified portfolio of which Asia Pacific and China remains a vital pillar. Around 9 per cent of the private equity portfolio is invested in China while the total fund currently has around C$52 billion invested in the country. In private equity, a strategy focused on investing in companies that tap consumer spending has famously paid off . “Private equity Asia is one of the best performers in terms of relative performance of the whole book.”

Still, things are starting to change. Strategy in Asia is more bottom up whereby the team apply a risk return framework and then bring investments to the committee to discuss. She notes the market is becoming difficult to navigate and describes an increasingly cautious approach.

The biggest challenge is predicting a company’s operating capability. Drawing up financial models requires the team put together a fan of outcomes but predicting those outcomes has been problematic ever since the pandemic.

“Unlike in public markets, in private markets investors really need to go and see and touch and feel what they are investing in. Not being able to do this in China over the last three years due to the pandemic leads to difficulties predicting the operating case and where returns are going to come through. I can’t see the market going back to how it was in 2019.”

Yet it is precisely this ability of her team to research and dig down into an asset that she is convinced is the winning ingredient. It is also the characteristic that she believes makes it a more honest asset class than public equity.

“Public market investors have a level playing field and they can share all the information that is out there, but in private equity it’s all about how much work you put in, and how that helps you make a better decision,” she concludes.