To the Honourable James Flaherty Minister of Finance, Ottawa, Ontario
by Erik Andersen
Dear Minister Flaherty; after the past year’s experiences I was hoping you would have intervened, on behalf of the beneficiaries, at the CPP IB to impose greater investment prudence.

 

The absence of replies or remarks by you or your representative indicates otherwise. I can only assume this means business as usual at the CPP Fund.

That condition is disturbing and surely incompatible with the expectations of parliamentarians and beneficiaries alike. In my last letter to you I presented material relating to the CPP IB takeover of Macquarie Communications Group. It was a large investment of about $2 billion for the purchase of an over-indebted enterprise that is arguably in an industry group now in global retreat.

 

Today, I want to introduce you to another example of CPP IB investing that further illustrates why we should all be anxious.

The CPP IB just announced it, in partnership with Sterling Partners, is proposing to purchase the assets of Livingston International Income Fund at the equivalence of $8.00 per unit or an approximate total of $270 million. That means that the purchasers will be the direct owner of all assets and liabilities of the Fund. Today the units are trading at a slight premium to $8.00 because Livingston still has the right to consider other offers.

Now what do the CPP Fund beneficiaries get with this investment? To help you with this question I have included a unit price chart for the last two years; a copy of the latest quarterly statements of (loss) income and deficit; the consolidated balance sheet; analysis of cash flows from operating activities and the quarterly consolidated
statements of income.

An examination of the unit trading price shows that as of November of 2008 the LIV.UN price collapsed from about the $10 level to below $5 by March of 2009 where it remained until August and early September. This price drop reflected an income loss before income taxes, in the quarter ending December 31, 2008, of $133.406 million. The two subsequent quarters also showed lesser losses. A drop in net revenues from $73.559 million in the December report to $61.778 million for the quarter ending June 30 2009 helps explain why there were losses.

 

The business of Livingston had just fallen off as on would expect with shrinking international commerce. Why the CPP IB is optimistic at this time escapes me. A quick look at the Baltic Dry Cargo Index suggests no pick up yet in international trade that would be the “bread and butter” of Livingston’s business. Aside from it being wrong for the CPP IB to make this investment they have paid an unwarranted and large premium; about a $100 million too much.

On page 22 of the LIV.UN quarterly report current assets totaled $174.895 million of which $161.624 million were receivables. A large receivables account in difficult financial times is normally thought to be the very manifestation of imprudence. The rest of the assets comprised of $13.645 million of property, plant and equipment and two
very large amounts of $146.986 million as “goodwill” and $71.292 million as “intangible assets”.

 

Now, I do not know how you feel about hypothetical assets but they bother me a lot. In the liabilities section current liabilities totaled $165.520 million and long term debt $91.034 million.

So what the CPP IB has done is settle for $256 million of certain liabilities against $175 million of dubious receivable assets and a per unit losing income outlook for a payment of nearly $270 million. The CPP Fund will hardly prosper if you keep allowing the CPP IB to carry on like this.

So who are the beneficiaries of this transaction if not the owners of the CPP Fund?

 

Certainly the present Unit holds will escape a big loss and of course so will the lenders who have provided Livingston with its operating credit line and long-term debt. Naturally there will also be some good fees paid out as well.

I like to think the next enclosure will serve to stiffen any resolve the preceding remarks might have generated. Enclosed is an article titled 'Rich Harvard, Poor Harvard,' published in the August issue of Vanity Fair. The journalist presents a very thorough examination of the financial disaster that has befallen the Harvard University Endowment Fund. According to the latest fiscal year end financial statements this Fund stood at US$36.9 billion on June 30, 2008. In August of this year (09) unidentified officials were admitting to investment loses of $9 billion (about 25%).

 

It is now October and there is still no year end published and presented on the university’s official site. Could it be that the auditors are having trouble valuing the private investments as is hinted at in the article? 

 

The investment loses of the Fund are not the entire story and I am certain you will find that the other reasons the university has a serious operating budget shortfall have parallels in Canada.

As described, the “blame game” is in full stride at Harvard but as yet no one has figured it all goes back to a culture of greed that trumps good judgment. That is the problem at the CPP IB as I see it and that is why I am asking you to intervene to restore common sense and prudence.


Sincerely,

Erik Andersen,

Economist

cc. Standing Committee on Finance

 

Jean Crowder, MP
Robert Oliphant, MP