Foreign Corrupt Practices Act and Implications for Institutional Investors

For those who don't know, I am the lead contributor to an investment compliance blog known as Good Risk Governance Pays. I created this second blog as a way to showcase investment issues that had a wider reach than just the pension fund community. While I strive to publish different education-focused analyses on each blog, sometimes there are topics that I believe would be of interest to both sets of readers. A recent article that I co-wrote is one example. Entitled "Avoiding FCPA Liability by Tightening Internal Controls: Considerations for Institutional Investors and Corporate Counsel" (The Corporate Counselor, September 2014), Mr. H. David Kotz and Dr. Susan Mangiero explain the basics of the Foreign Corrupt Practice Act. Examples and links to reference materials are included, along with a discussion as to why this topic should be of critical importance to pension funds and other types of institutional investors. Click to download a text version of "Avoiding FCPA Liability by Tightening Internal Controls: Considerations for Institutional Investors and Corporate Counsel."

Free Infrastructure Conference For Pension Plans

As I wrote on October 13, 2013, I am delighted to join the speaker roster for an upcoming December 5 and 6, 2013 conference about infrastructure. I will be part of the session entitled "How international investors are structuring their portfolios."

Infrastructure is getting noticed by pension plans, albeit slower than some would like. Important issues such as political stability in a country and risk-adjusted expectations about cash flows over the long-term are two of the factors that must be addressed. Given the multi-year nature of infrastructure economics and the sometimes perpetual characteristic of defined benefit plan liabilities, this $40+ trillion global capital markets sector is hard to overlook. According to a Reuters article, the Ontario Municipal Employees Retirement System has committed $7.5 billion "together with Japan's Pension Fund Association and a consortium led by Mitsubishi Corporation." See "Pension plans launch $20 billion infrastructure fund" (April 26, 2012).

For pension plan representatives who want to learn more about investing in infrastructure or have an investment program in place and want an update, you can attend this conference for free, courtesy of infrastructure Investor Magazine. The LP Summit, to meet on December 5 and 6 at the Westin Times Square in New York City, will feature both pension fund managers and investment managers as they discuss the solutions and opportunities in infrastructure asset allocation. Among the pension funds that will have its representatives in attendance are the Canadian Pension Plan Investment Board, Virginia Retirement System, Employees Retirement System of Texas, and New York City Retirement Systems. To register your complimentary place, please contact David Grana at david.g@peimedia.com.

For those interested readers who want information ahead of the conference, check out the following resources:

Dr. Susan Mangiero Speaks About Pensions and Infrastructure Investing

I am delighted to join the faculty of the PEI Alternative Insight Infrastructure Investor conference for limited partners on December 5, 2013. I will be joined by Mr. Emil Frankel (Senior Advisor, Crosswater Advisors and Visiting Scholar, Bipartisan Policy Center), Ms. Jodie Misiak (Manager of Innovative Finance, Maryland Department of Transportation), Ms. Kathleen Sanchez (Program Manager, Public-Private Partnership Program, Los Angeles County Metropolitan Transportation Authority) and Ms. Sonia M. Axter (Managing Director of Infrastructure Investments, The Union Labor Life Insurance Company).

In our session entitled "How international investors are structuring their portfolios," we will be address issues such as regulatory risk constraints, sub-sectors that are currently in favor with institutional investors, role of infrastructure investments for limited partners and the different ways that limited partners can invest in this asset class.

To access the agenda for this two-day program to be held at the Westin Hotel in New York City, click here. I hope to see you at what looks to be an exciting, timely and informative event.

U.S. Infrastructure and Pension Fund Investment

The world is truly getting smaller. A recent Wall Street Journal article describes the continued interest on the part of Japanese pension funds to directly invest in U.S. infrastructure projects such as a Michigan power plant. See "Japan's Pension Fund Association Targets Infrastructure Abroad" by Kosaku Narioka (July 2, 2013). Last year, the Ontario Municipal Employees Retirement System ("OMERS") joined forces with Japan's Pension Fund Association and a group led by Mitsubishi to invest $7.5 billion in roads, airports and other types of infrastructure projects. The goals are to raise $20 billion in total, avoid the expense of using intermediaries and gain exposure to long-term assets that are arguably a natural match to a defined benefit plan's long-term liabilities. See "OMERS, Japanese partners launch infrastructure fund" by Greg Roumeliotis (The Globe and Mail, April 26, 2012).

In their 2011 publication entitled "Pension Funds Investment In Infrastructure: A Survey," authors Raffaele Della Croce, Pierre-Alain Schieb and Barrie Stevens estimate the global infrastructure market at U.S. $50 trillion by 2030. This includes climate control projects. They add that, given the strain on numerous municipal and sovereign budgets and regulations that have impaired some banks' abilities to lend, infrastructure financing must depend on private sector finance.

With these opinions in mind, infrastructure investing by pension funds seems like a good idea. There is both a demand for long-term capital and a supply in the form of interested money in search of returns over time. Like any investment and/or strategy however, one needs to weigh risks against expected returns.

Currency risk and project completion risk are two considerations. Being able to obtain and properly interpret adequate performance reports is another concern. In "Insurers call for more transparent infrastructure investments," Risk.net contributor Louie Woodall (June 14, 2013) writes that opacity is a roadblock to having insurance company institutional investors allocate more money to this asset class. Regulations cannot be ignored either. Olav Jones, deputy director-general of Insurance Europe is quoted as saying that "...the Solvency II calibration for long-term investments does not account for the actual default of these assets, which is the primary risk insurers have to reserve for when using a buy-to-hold strategy." To the extent that pensions may be asked to comply with Solvency II mandates (or something similar for non-European funds), their trustees will no doubt want to ensure that capital is being pledged on the basis of "true" economic risks they deem to be associated with identifed investments.

Fiduciary liability is another factor that, in my view, is seldom discussed. Specifically, there are situations when a pension fund may feel that political pressure is being brought to bear to have trust money used to support a local project. When I recently spoke about pension governance before an audience that included public fund trustees, several persons complained about the exertion of uncomfortable "influence" to allocate assets in a way that could be said to fuel growth for a particular city or county or state but not necessarily fit with the pension fund's investment strategy. I served on a June 17, 2013 panel entitled "Fiduciary Responsibility for Management & Trustees." It was part of the Tri-State Institutional Investors Forum. The conference was produced by the U.S. Markets Center for Institutional Investor Education.

Published in 2008, interested readers may want to download "Pension Fund Investment in Infrastructure: A Resource Paper" by Larry W. Beeferman, JD. I have had the pleasure of speaking about governance and pension risk management at events put together by Mr. Beeferman, senior executive with the Labor and Worklife Program at Harvard Law School.

Another resource is "Trends in Large Pension Fund Investment in Infrastructure" by Raffaele Della Croce (OECD, November 2012). Based on his survey research of beneficial owners with control of more than $7 trillion of assets, he describes infrastructure investing as "attractive" because it can "assist with liability driven investments and provide duration hedging." Later in the report, he discusses the tradeoff between liquidity of these longer-term commitments with the chance to diversify a pension portfolio.

With planes, boats, trains, cars and fast technology, we can go from Peoria to Paris in hours. It is no surprise then that we see pension giants focused at home and abroad.