Government Fund Weekly News Roundup — Good Governance, Bad Governance

April 22, 2016 by SWC Editors

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In the news this week: Singapore’s GIC and Canada’s Caisse de dépôt et placement du Québec rearrange their management teams as Malaysia’s scandal-hit 1Malaysia Development slides deeper into the mire. China Investment Corp. and Temasek Holdings bid for the Chinese operator of KFC and Pizza Hut.

Governance Reshuffles

In 1991, as the Salomon Brothers bond-trading scandal shook Wall Street, Warren Buffett responded with one of his trademark aperçus. "Trust is like the air we breathe," he said. "When it’s present, nobody notices. But when it’s absent, everybody notices."

The same might be said of good governance. If an investment organization is to run smoothly — and hit its return targets — it needs an effective management structure. But operational matters are too often taken for granted.

Aware of the vital importance of good governance, two major state-owned funds fine-tuned their organizational models this week. At Singapore’s GIC, each asset class will now be overseen by a separate chief investment officer. In a statement, GIC’s Group President Lim Siong Guan said the move reflected the "maturing of GIC’s investment talent" and strengthened the fund’s "capacity to deal with an investment environment of lower returns, increased volatility, and greater uncertainty."

In Canada, government pension fund Caisse de dépôt et placement du Québec (CDPQ) introduced similar changes to its model. Under the new structure, CDPQ's private equity teams will report directly to CIO Roland Lescure (previously, the CIO had no direct oversight of the fund's investments in private markets). The fund also created a new department, the Depositors and Total Portfolio Division, to control top-down asset allocation across the fund's various subsidiaries, and introduced a new unit called CDPQ Infra to oversee the fund's infrastructure portfolio.

By streamlining their management structures to ensure greater transparency and accountability, these massive government investors are likely to gain long-term benefits. Nevertheless, the changes at GIC and CDPQ attracted almost no comment in the mainstream financial press.

In Malaysia, on the other hand, the media continues to be transfixed by a spectacular case of governance — and trust — gone awry. Authorities in five countries are now investigating state-owned investment organization 1Malaysia Development (1MDB) over alleged corruption and financial mismanagement. Abu Dhabi’s International Petroleum Investment Co. (IPIC), cut its long-standing business ties with 1MDB on Monday amid the controversy.

To modify Buffett’s observation: When good governance is absent, everybody notices. Even Hollywood.

GIC’s $1.3 Billion Infrastructure Deal

In addition to overhauling its organizational structure, GIC sealed an eye-catching infrastructure deal this week. The fund has agreed to acquire a minority stake in U.S.-based electricity transmission company ITC Holdings Corp. for $1.3 billion.

In February 2016, Canadian utility operator Fortis announced it would acquire ITC in an $11.3 billion takeover, and began marketing a 19.9 stake in the American firm in order to finance the massive deal. GIC will buy the stake from Fortis when it completes the takeover later this year.

In a statement, Rhys Evenden, GIC's head of infrastructure for North America, cited ITC's "high quality transmission platform" and "the strength of Fortis' management team" as factors that attracted the Singaporean fund to the deal.

According to Bloomberg data, Fortis’ urgent need for financing meant that GIC was able to buy the stake at a discount of 7.5 percent to its market value.

CIC and Temasek Hungry for Yum!

According to news reports, both the China Investment Corp. (CIC) and Singapore’s Temasek Holdings are interested in buying a majority stake in the Chinese unit of Louisville, Kentucky-based fast food giant Yum! Brands, which owns the Taco Bell, Pizza Hut and KFC brands.

More than 7,100 Pizza Hut and KFC outlets operate on the Chinese mainland, giving Yum! Brands the largest market share of the country’s fast-food sector. CIC is reportedly leading a consortium of investors that includes buyout firms KKR & Co. and Baring Private Equity Asia in a bid for the business. The consortium faces competition from Temasek and Chinese investment firm Primavera Capital, both of which are separately vying for a stake in Yum! Brands' Chinese operations. The deal could value Yum! China at nearly $8 billion.

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