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ResearchJune 1, 2023

Paper From Japan’s GPIF Proposes New Way to Compare Alts With Traditional Assets

The authors claim their Spread Based Direct Alpha method is more accurate than current measurements.

A working paper published by Japan’s Government Pension Investment Fund details a new method that claims to more accurately compare the performance of private equity funds and traditional assets.

The authors of the paper intend the method to be applicable not only to private equity funds, but also to other alternative assets such as infrastructure and real estate.

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Currently, investors use what is known as the public market equivalent to measure a private equity fund’s performance relative to the listed market. PME metrics benchmark the performance of a fund, or a group of funds, against a public market index. According to the paper, the so-called “direct alpha method” for PME is often considered by many to be the best available method among the various PME methods.

“On the other hand, it is not always clear whether the direct alpha method is appropriate from the perspective of finance theory,” the paper argued.

The issue with the direct alpha method, according to the authors, is whether it is appropriate to obtain the internal rate of return, which is used to measure alternative assets, “by converting the cash flows generated at each year to present value at the benchmark return and then considering these as having occurred at the year in question.”

The authors propose what they call the Spread Based Direct Alpha and a method for deriving the alpha amount based on SBDA. They said the inspiration for the SBDA comes from the concept of credit spreads in the bond market, specifically the credit spread over the spot rate of bonds with the relevant maturity.

According to the paper, the SBDA method can compare the performance of a private equity fund “fairly accurately” with those of traditional assets by splitting the performance of private equity funds into the beta part and the alpha part, i.e. the performance of the benchmark on one side and the pure performance of private equity funds on the other.

The SBDA and the alpha amount based on the SBDA, according to the paper, were created to measure the performance of private equity funds in order to satisfy two requirements: that the alpha portion, which “expresses the pure skill” of the private equity fund, should be extractable, and that the performance relative to the GPIF’s policy benchmark for foreign equities should be measurable.

“Whether or not the double mandate is actually met in practice will need to be examined from various perspectives in the future,” the paper stated. “In the process, it will also be essential to improve the SBDA and the corresponding alpha amounts.”

Norway Pension Board Puts Indonesian Firm Under Observation

Indonesia’s largest cement producer allegedly presents a risk of damage to prehistoric cultural heritage sites.

By Michael Katz

Norges Bank has placed Indonesian cement producer PT Semen Indonesia Tbk under observation for three years due to an alleged “risk of damage to prehistoric and especially important cultural heritage sites.”

The executive board of Norges Bank, which manages Norway’s $1.3 trillion Pension Fund Global sovereign wealth fund, said its decision was based on a recommendation from the fund’s Council on Ethics, which monitors the portfolio to determine whether companies should be excluded. It submits recommendations for the exclusion and observation of specific companies to Norges Bank.

PT Semen Indonesia is Indonesia’s largest producer of cement and operates a limestone quarry, a clay pit and four cement factories through subsidiary PT Semen Tonasa in the Maros Pangkep area of the Indonesian province of South Sulawesi. According to the Council on Ethics’ report, some of the world’s oldest rock art is located in the Maros Pangkep region. It noted that a cave discovered there in 2017 contains a 44,000-year-old hunting scene considered to be the world’s oldest figurative cave art.

Just last week, UNESCO added Maros Pangkep to the UNESCO Global Geoparks Network. The designation recognizes geological heritage of international significance and is intended to combine conservation with public outreach and sustainable development. [Source]

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The Council said that with the help of experts, it has investigated the risk of Semen Tonasa’s activities damaging the rock art and identified 40 locations containing rock art and archaeological sites inside or adjacent to the areas where Semen Tonasa holds mining concessions.

“The rock art is in the process of deterioration,” said the report. “Climate change, driven by human activity, seems to be an important factor. There is no clear evidence that the company’s activity is harming the rock art, but the company’s activity increases the risk.”

The report alleges that Semen Tonasa has no systematic method of monitoring rock art sites to provide a basis for assessing the company’s impact on the rock art. The Council attributed the lack of assessment to weak underlying data and inadequate monitoring of the sites.

“The Council considers that a lack of oversight over the impact of the company’s operations constitutes a significant risk, given the outstanding cultural heritage which the rock art represents,” the report said. “Without adequate steps to identify risks and implement necessary measures, the Council considers the risk that the company’s operations may damage examples of irreplaceable cultural heritage to be unacceptable.”

PT Semen Indonesia did not immediately respond to a request for comment.