The Canada Pension Plan Investment Board is looking to cash in on the recovering U.S. economy. In a major $6-billion U.S. deal, the CPP Investment Board is partnering with American private equity firm Ares Management to purchase luxury retailer Neiman Marcus.
If you’re one of the millions of Canadians who expect to collect CPP when you retire, this is a deal you need to be aware of. Let’s take a look at whether it seems to be a solid investment and explore the strategy of investing in retail at a time when the U.S. is poised for economic growth.
Buy Low and Sell High
The CPP Investment Board is looking to follow one of the cardinal rules of investing – buy low and sell high. On the surface this appears to be a solid deal, especially at a time when the U.S. economy is finally starting to show signs of recovery. The Case–Shiller Index, which measures house prices in the U.S., continues to recover in housing markets like Phoenix and inland Florida, hardest hit by the 2008 financial crisis. Meanwhile, bond rates are increasing, as the Federal Reserve looks to relax quantitative easing. This all leads to good news for investors – consumers, which have the majority of their net worth tied up in real estate, will have more money to spend on luxury goods, while corporations will finally start spending the excess cash built up on their balance sheets, as the U.S. economy finally returns to normal levels.
“People feel more and more confident that the recovery is going to continue, and of course it’s much better to make an acquisition in the retail sector in that kind of environment,” says Andre Bourbonnais, vice president of Private Investments. “When you combine the brand with the growth prospect and the sector and the positioning they have in the market, we think that it’s poised for continued growth. And it’s rare that those kinds of assets come to the market so we think it was a timely acquisition for us.”
Following a Trend
Solid investment returns are hard to come by in a low interest rate environment. Just tell that to Canadian retirees, struggling to eke out decent investment returns. With traditional safe investments like government bonds no longer providing solid returns, pension funds are being forced to turn to the equity market.
This isn’t the first time a large pension fund has invested in U.S. retail. The CPP Investment Board is following a growing investment trend; the Ontario Teachers Pension Plan recently teamed up with Hudson’s Bay Co. in a $2.9-billion U.S. deal to acquire U.S. luxury retailer Saks. With 79 retail outlets in the U.S., Neiman Marcus represents one of the largest luxury retailers in the United States.
With the largest Canadian pension fund purchasing a major U.S. retailer, are we likely to see Neiman Marcus stores north of the border in the coming years? Don’t count on it. Although a Canadian expansion could be in the cards one day, the CPP Investment Board is focusing on maximizing investor returns. “The company will decide if and when it’s desirable, but there’s nothing in the works right now,” says Bourbonnais.
With over $183 in investment assets, the CPP Investment Board represents the largest single-purpose pension fund in Canada. It manages investments on behalf of eighteen million working Canadians who contribute to CPP and retirees who collect benefits. The CPP Investment Board was a crown corporation created in 1997 by the federal government with the mandate to invest in the best interests of Canada Pension Plan contributors and beneficiaries and to maximize investment returns without undue risk of loss. The CPP Investment Board recently reported a 1.1 per cent return for the first quarter of 2013.