‘I un­der­stand lots of other things, but I don’t un­der­stand Canada’

The Globe and Mail (Prairie Edition) - - REPORT ON BUSINESS - JAC­QUE­LINE NEL­SON NEW YORK

That’s prob­a­bly not what you’d ex­pect to hear from the man in charge of se­cur­ing your pen­sion. But Mark Machin is dif­fer­ent from any­one who has run the Canada Pen­sion Plan In­vest­ment Board be­fore. The fund’s first for­eign-born CEO is a for­mer doc­tor and Gold­man Sachs banker who has spent most of his ca­reer in Asia. Now he’s in charge of $300-bil­lion of our money. Job No. 1? Ex­e­cute a strate­gic plan to score big­ger re­turns – even if it means more risk

Mark Machin has made a ca­reer out of mak­ing bold bets that have paid off. As head of CPPIB, he’s lead­ing the fund into an era of global ex­pan­sion and chas­ing big­ger re­turns

Mark Machin is sit­ting in a bustling mid­town-Man­hat­tan res­tau­rant not long af­ter sun­rise, show­ing off the first of, as he puts it, “55,000” cell­phone pho­tos of his grin­ning daugh­ters, when he’s in­ter­rupted by a sharp rap on the win­dow.

Be­hind the glass is a fa­mil­iar face: Mark Wise­man, the man Mr. Machin re­placed last sum­mer as head of the Canada Pen­sion Plan In­vest­ment Board. A mo­ment later, the other Mark is spin­ning through the re­volv­ing door, ex­u­ber­antly shak­ing hands over the ta­ble and chid­ing us for be­ing lag­gards at day­break. “You know, this place only opens at 7:30 – I’ve al­ready had break­fast!” Mr. Wise­man boasts.

It’s a chance en­counter that makes a bistro in New York feel like a small-town diner. But it also serves to high­light some key dif­fer­ences be­tween the old and new Marks.

Mark Wise­man, who led CPPIB for four years, is lo­qua­cious, warm and can get car­ried away when dis­cussing a topic he’s pas­sion­ate about – and he’s pas­sion­ate about a lot of top­ics. Mark Machin, on the other hand, does not seem like the kind of man to in­tro­duce him­self by way of a knock on the win­dow. He is more un­der­stated when he speaks, and seems per­fectly con­tent con­duct­ing busi­ness out of the spot­light. In the seven months since tak­ing over as the first for­eign-born chief ex­ec­u­tive of­fi­cer of Canada’s largest and most im­por­tant pen­sion fund, his pub­lic ap­pear­ances and in­ter­views with me­dia have been few.

For Mr. Machin, one of the three big­gest sur­prises of 2016 came from his chatty col­league: Mr. Wise­man some­how man­aged to keep se­cret his plan to leave CPPIB for a se­nior po­si­tion at as­set man­ager Black­Rock Inc.

“The se­cond sur­prise to me was that the board se­lected me as the suc­ces­sor,” he says be­tween bites of bagel with sal­mon, pick­les and English cu­cum­ber. “I un­der­stand lots of other things, but I don’t un­der­stand Canada and I thought that was pretty im­por­tant for the role. So that was a big sur­prise.” The third sur­prise, he says, was that his wife em­braced the idea of up­root­ing their lives in Asia, where they had lived for the past two decades.

The Bri­tish-born Mr. Machin is no stranger to un­fa­mil­iar sit­u­a­tions, nor to risk. CPPIB’s new boss is a man who has built a ca­reer – and a life – on a se­ries of bold bets that have a way of pay­ing off. From med­i­cal school at Cam­bridge to a less-for­mal ed­u­ca­tion in fi­nance at the school of Gold­man Sachs. From London to Hong Kong. And Hong Kong to Toronto, where he’s set­tling into his first Cana­dian win­ter.

He ar­rived at a crit­i­cal mo­ment. In the past five years, CPPIB’s man­aged as­sets dou­bled to $300.5-bil­lion as the fund weath­ered chal­lenges posed by un­ex­pected geopo­lit­i­cal events, low in­ter­est rates and volatile eq­uity mar­kets. Amid that growth and un­cer­tainty, CPPIB put its in­vest­ment strat­egy un­der the mi­cro­scope.

The goal? Build a more re­silient pen­sion fund that will score even higher re­turns in the fu­ture. Out of that in­ten­sive re­view came a plan to grad­u­ally, but sig­nif­i­cantly, over­haul the fund’s ap­proach to in­vest­ment risk by 2020. See­ing it through is Mr. Machin’s job.

About 19 mil­lion Cana­di­ans are count­ing on him to get it right. While he con­cedes that many par­tic­u­lars of the path for­ward have not yet crys­tal­lized, one thing is clear: The time has come to be bold. CPPIB has set its sights on ex­pand­ing fur­ther glob­ally, build­ing new in­vest­ment spe­cial­ties and putting more money into pri­vate com­pa­nies and as­sets such as in­fra­struc­ture. It’s a plan built on tak­ing on more risk, with the ex­pec­ta­tion of higher re­turns in the long run. But it’s likely to lead to some bumpy years.

Nav­i­gat­ing through it? “That’s not go­ing to be easy,” says pen­sion-pol­icy ad­vo­cate and con­sul­tant Keith Am­bacht­sheer. The strat­egy may be laid out in broad strokes “but Mark No. 2’s chal­lenge is to ac­tu­ally ex­e­cute it. In my view, it’s a peo­ple­m­an­age­ment thing. It’s a tal­ent man­age­ment thing.”

The doc­tor is out

The first time he heard about the Canada Pen­sion Plan In­vest­ment Board, Mr. Machin was less than en­thralled. He was in Beijing serv­ing as vice-chair­man of Asia, ex­clud­ing Ja­pan, at Gold­man Sachs when a re­cruiter dan­gled a job.

“She called me and said, ‘Well, it’s not the Bill & Melinda Gates Foun­da­tion, but you can wake up ev­ery morn­ing and know you’re do­ing some­thing good for 19 mil­lion peo­ple.’ And I said, ‘What is it?’ She said, ‘It’s a pen­sion fund.’ ”

His ini­tial thought? It sounded “quite bor­ing.”

His de­ci­sion to take the job stands out as some­thing of an anom­aly in a life that has largely been spent avoid­ing bore­dom at all costs.

“As with most of us, we don’t change that much,” says Stephen Peel, who has been friends with Mr. Machin since they met at a bus stop at the age of 11 and who also pur­sued a ca­reer in high fi­nance. “Mark, as he is now, walked through walls be­cause it was sort of in­tel­lec­tu­ally chal­leng­ing, fun, hard and the right thing to do. And that’s sort of where he still goes.”

The big­gest bet of Mr. Machin’s pro­fes­sional life be­gan with a bout of his trade­mark cu­rios­ity. Back in 1990, he was Dr. Machin, in­tern­ing at a dis­trict hospi­tal near the Univer­sity of Cam­bridge, where he stud­ied medicine af­ter get­ting a de­gree from the Univer­sity of Ox­ford. Tall and trim from years of row­ing and run­ning, Mr. Machin would be a re­as­sur­ing pres­ence in a crisp white lab coat. His bed­side man­ner might at first seem as­trin­gent; that is un­til a typ­i­cal dead­pan, self-dep­re­cat­ing re­mark be­trays his Bri­tish wit.

While he was study­ing the hu­man body, he had be­come in­creas­ingly fas­ci­nated by a dif­fer­ent kind of anatomy: the in­tri­ca­cies of fi­nan­cial mar­kets and how cap­i­tal moved about the world. He didn’t un­der­stand it. But he wanted to.

“I had to make a call,” he re­mem­bers. “Do I con­tinue on in medicine for as far as the eye can see, or should I take a leap and try some­thing dif­fer­ent?”

What he didn’t want was to go back to school. Get­ting paid to learn was a more at­trac­tive prospect, so he ap­plied for trainee jobs at banks that were tar­get­ing new busi­ness grad­u­ates and fi­nance green­horns from other fields. He set­tled on an of­fer from New York-based in­vest­ment bank Gold­man Sachs’s London of­fice where he was the only new an­a­lyst from the med­i­cal field.

“It was cu­rios­ity. It wasn’t ‘I’m go­ing to pur­sue a ca­reer for the rest of my life in fi­nance.’ I didn’t even think that was an op­tion,” he says. “I thought it was some­thing I could prob­a­bly af­ford to do – take time out of the med­i­cal ca­reer and go and do it for a cou­ple of years.”

But a few years later, Mr. Machin was on the move – sent to Hong Kong as one of a hand­ful of peo­ple on the eq­uity team at Gold­man’s first Asian out­post. Mr. Machin, who’d never even been to the con­ti­nent, faced a steep learn­ing curve. And not just his own.

“I had to cor­rect peo­ple, you know, ex­plain to peo­ple what Gold­man Sachs was. Peo­ple had never heard of it. They got the name wrong, thought it was Golden Socks, or Golden Sacks – S-A-C-K-S,” he says. “And then they had no idea what an in­vest­ment bank was. A lot of it was just go­ing around ex­plain­ing.”

Mr. Machin’s en­trepreneurial at­ti­tude and his abil­ity to speak to all kinds of stake­hold­ers – from gov­ern­ment of­fi­cials to cor­po­rate clients and pub­lic mar­ket in­vestors – set him apart, says Frank Tang, who worked with him at Gold­man in the 1990s and now heads Foun­tainVest Part­ners, a Chi­nafo­cused pri­vate eq­uity fund that was backed in 2008 by CPPIB and On­tario Teach­ers’ Pen­sion Plan, among oth­ers.

Mr. Tang, who worked on the floor above Mr. Machin at Gold­man in Hong Kong, re­calls hear­ing sto­ries about his un­usual way of re­lax­ing when the work be­came in­tense. “Peo­ple worked re­ally, re­ally late, and at 11 p.m. when ev­ery­one started to or­der food and call their girl­friends, he’d pick up a med­i­cal jour­nal and study those or­gans,” he says with a laugh.

Mr. Machin didn’t in­tend to linger over­seas, ei­ther. But he was fas­ci­nated by eco­nomic de­vel­op­ment in Asia and drawn to the chance to build the Gold­man busi­ness and com­pete with the re­gion’s stal­wart Bri­tish fi­nan­cial firms, such as Jar­dine Mathe­son, HSBC Bank and Bar­ings Bank, which later col­lapsed.

“I mean, in Asia, you can never get bored,” Mr. Machin says of his years at Gold­man in Asia. “It was phe­nom­e­nal change all the time.”

Mr. Machin’s Aus­tralian wife, Melissa Mow­bray-D’Ar­bela, isn’t afraid of change ei­ther. Her ca­reer has spanned ar­chi­tec­ture, law, bank­ing, pri­vate eq­uity and en­trepreneur­ship. “She’s much more in­ter­est­ing and tal­ented than I am,” Mr. Machin says, with a mix­ture of pride and ad­mi­ra­tion.

Ms. Mow­bray-D’Ar­bela was so moved by the strug­gles of Hong Kong’s dis­tressed mi­grant women and chil­dren, that she co­founded a char­ity to as­sist them. The ex­pe­ri­ence of meet­ing one preg­nant woman in par­tic­u­lar would change their fam­ily of three for­ever. Af­ter a com­pli­cated le­gal bat­tle, they adopted the baby girl – their se­cond daugh­ter.

Pro­fes­sion­ally, Mr. Machin’s 20year ca­reer at Gold­man saw him lead cap­i­tal mar­kets, fi­nanc­ing and in­vest­ment bank­ing

busi­nesses in Asia. The team went from un­known to lead­ing multi­bil­lion-dol­lar bond is­suances for com­pa­nies such as China Mo­bile, and the pri­va­ti­za­tions of mas­sive state-owned firms such as PetroChina.

“It was not a straight line. It was a huge, huge, huge amount of hard work by hun­dreds, and thou­sands, of peo­ple. But it was ter­rific to be part of that,” Mr. Machin says. Gold­man be­came the top-ranked in­vest­ment bank in China dur­ing his time there, al­though it has since been sur­passed by other lenders.

Still, Mr. Machin felt there was po­ten­tial to do more. That’s when the re­cruiter called with the CPPIB of­fer. There was some­thing about the idea of work­ing for a good cause, do­ing a job “more worth­while in the world,” that stuck with him. Plus, his would-be boss, Mr. Wise­man, came with good rec­om­men­da­tions from trusted as­so­ciates.

So, in 2012, Mr. Machin came aboard as se­nior man­ag­ing di­rec­tor and pres­i­dent of CPPIB Asia Inc., run­ning the pen­sion fund’s first in­ter­na­tional of­fice, which was ramp­ing up with a small real es­tate pres­ence and some other fund in­vest­ments.

There were about 20 CPPIB staff on the ground, com­pared with the hun­dreds at Gold­man. At the time, about 60 per cent of the fund’s as­sets were in­vested out­side of Canada. Just over a year later, Mr. Machin gained over­sight over CPPIB’s in­ter­na­tional in­vest­ment ac­tiv­i­ties and its global ad­vi­sory re­la­tion­ships, as well as the Asian op­er­a­tions.

The pro­mo­tion meant a gru­elling new travel sched­ule. When he wasn’t in the air, the phone beck­oned. “Calls would start 8 p.m. through mid­night, four nights a week. Fri­day nights at 1 a.m. – that’s where my con­cen­tra­tion is re­ally fad­ing. But I was pretty dili­gent with this stuff,” he says.

To­day, less than 20 per cent of the pen­sion fund’s as­sets are in Canada, and that fig­ure is set to de­crease even fur­ther in the com­ing years. China, in par­tic­u­lar, will likely be a hot­bed for new in­vest­ments, thanks to its ris­ing mid­dle class and eco­nomic-growth pro­jec­tions. Based on those pro­jec­tions, the pen­sion fund bought a se­ries of Chi­nese malls for its real es­tate port­fo­lio last year.

“We’ve gone from [be­ing un­known], to now be­ing un­der­stood and rec­og­nized and be­ing, you know, very high on the call list for ma­jor sit­u­a­tions in Asia and in­ter­na­tion­ally, as well as also in our home North Amer­i­can mar­kets,” Mr. Machin says. “That’s not im­por­tant just to make us feel good. … It’s im­por­tant that we’re high on that list so we get to see the best in­vest­ment op­por­tu­ni­ties so we can cre­ate the best value for our 19 mil­lion peo­ple.”

Chart­ing a new course

There’s a lot of work ahead.

With al­most 1,300 em­ploy­ees in seven of­fices across the world, CPPIB is among the top-10 pen­sion funds glob­ally. It strikes a deal or makes a trans­ac­tion prac­ti­cally ev­ery other day, with 180 in its fis­cal 2016 year.

The fund is now in­vested through more than 25 dif­fer­ent in­vest­ment strate­gies, up from just six a decade ago. Still, Mr. Machin fore­sees adding a few more spe­cial­ties as the fund grows. A re­port from Canada’s chief ac­tu­ary projects as­sets will climb to $476-bil­lion by 2025.

To keep track of the mov­ing parts and miss­ing pieces, he has “The Chart.”

“Lit­er­ally, one of my favourite charts is a big Gantt chart with ev­ery­thing that’s hap­pen­ing and how it’s fixed to go,” he says, ref­er­enc­ing the type of hor­i­zon­tal bar graph of­ten used to show the time­lines and sta­tus of a large project’s com­po­nents. “There’s some things we might think of as a per­fect plat­form that might not come around for five-plus years. We just want to watch it and move when the op­por­tu­nity arises. We’re de­ter­min­ing that sort of strate­gic long-term lens of where we want to be.”

It must be a big chart. “It’s printed in very small font,” Mr. Machin says dryly.

In the 2014 fis­cal year, CPPIB’s board and man­age­ment team, in­clud­ing Mr. Machin, drew up the broad strokes of an in­vest­ment strat­egy for the next decade. The plan was based on an idea that the fund could stom­ach more volatil­ity and risk in its in­vest­ment port­fo­lio be­cause of its size, the cer­tainty of con­tri­bu­tions from work­ing Cana­di­ans and the long-term na­ture of the CPP fund.

Mov­ing along the spec­trum of risk might cause fi­nan­cial re­sults to see-saw in the short term, CPPIB rea­soned, but in the long run the fund should earn higher re­turns for pen­sion­ers. That would al­low the fund’s stew­ards to de­crease con­tri­bu­tion rates, in­crease paid ben­e­fits or just safe­guard the plan against fu­ture un­known forces.

This di­rec­tion was hashed out while Mr. Machin was over­see­ing the in­ter­na­tional busi­ness, but his pro­mo­tion to CEO now puts him in con­trol of how to shape the finer de­tails. Right now, the tar­gets and plans are “very short state­ments, but we end up with a huge num­ber of knock-on con­se­quences,” Mr. Machin says.

“All the plumb­ing that goes on be­hind that, and how do you ac­tu­ally do that? We’re just in the thick of it. It’s go­ing to take a cou­ple of years to get that done prop­erly,” he says, his dul­cet ac­cent strain­ing slightly over the din of the din­ing room. “I need 22 screens work­ing away on our new in­vest­ment frame­work. That’s the type of thing I’m spend­ing all my time on.”

He thinks of the task as hav­ing two parts. The first, is to de­velop a bet­ter way to see the re­sults of in­vest­ment de­ci­sions and ad­just ac­cord­ingly. “We’re a long-term in­vest­ment or­ga­ni­za­tion, but we need to be able to de­cide, okay we struc­tured the port­fo­lio this way, is it work­ing well? What were the con­se­quences of those de­ci­sions?” The se­cond goal is mak­ing sure all the in­vest­ment teams are work­ing to­gether when the pen­sion fund takes a po­si­tion on a move­ment in the mar­ket, some­thing Mr. Machin refers to as “strate­gic tilt­ing.” That means when a top-of-house view is made that Euro­pean credit is cheap, or that U.S. eq­ui­ties are ex­pen­sive, the whole fund is work­ing to­gether in a cost-ef­fec­tive, sys­tem­atic way to in­vest along those themes.

In the last decade, CPPIB has dra­mat­i­cally ex­tended its range of in­vest­ments, from far-flung busi­nesses to build­ings. In the past few months alone, CPPIB has spent hun­dreds of mil­lions of dol­lars on of­fice space in New Zealand, shop­ping malls in China, a solid-waste dis­posal firm and a va­ca­tion cruise com­pany with ships sail­ing to 44 coun­tries. This ex­panded range comes with some com­pli­ca­tions. In­fra­struc­ture, real es­tate and pri­vate in­vest­ments are tougher to buy and sell quickly. These as­sets are val­ued less fre­quently than the in­stant ups and downs of the pub­lic mar­kets, and re­quire mak­ing some as­sump­tions.

“As they move into more pri­vate eq­uity – and this is true for ev­ery­body – you in­crease the op­er­a­tional risk of mis­es­ti­mat­ing the per­for­mance of those as­sets,” says Ja­son Mercer, an an­a­lyst with Moody’s In­vestors Ser­vice who rates the pen­sion fund’s fi­nanc­ing arm, CPPIB Cap­i­tal Inc. He has noted in re­ports that CPPIB doesn’t have a ded­i­cated chief risk of­fi­cer, un­like fi­nan­cial-sec­tor peers.

Nav­i­gat­ing by Mr. Machin’s road map will re­quire fill­ing in some holes where the fund could in­vest more, as well as re­or­ga­niz­ing staff and find­ing a new chief fi­nan­cial of­fi­cer. Benita Warm­bold, who also over­sees in­vest­ment risk, said this week that she plans to re­tire in June. The pen­sion fund also re­cently put its in­fra­struc­ture, real es­tate and agri­cul­ture-in­vest­ment groups to­gether af­ter the de­par­ture of a third Mark – Mark Jenk­ins – who left the role of global head of pri­vate in­vest­ments.

All of this change comes at a time when the spot­light seems to be in­ten­si­fy­ing, forc­ing Mr. Machin into a more pub­lic role than he’s used to. In early Novem­ber, the CEO was called be­fore the House of Com­mons fi­nance com­mit­tee – the first such re­quest of a CPPIB leader in 14 years – to ex­plain the fund’s in­vest­ment strat­egy, its need for in­de­pen­dence and evolv­ing ap­proach to risk. Just two weeks later, he was sit­ting along­side Prime Min­is­ter Justin Trudeau and other fed­eral min­is­ters dis­cussing the po­ten­tial to cre­ate an in­fra­struc­ture bank in Canada.

And the pub­lic toll will only rise as the fund ad­justs its ap­proach to risk, says Mal­colm Hamil­ton, a pen­sions ex­pert and se­nior fel­low of the C.D. Howe In­sti­tute.

“The hard thing here is that as right as the new so­lu­tion is, it will make them look less like all of the pen­sion funds to which we now com­pare them,” he said, adding that CPPIB has prob­a­bly been un­duly con­ser­va­tive and should never have been com­pared to the in­vest­ment ap­proach of other more ma­ture or fully funded pen­sion plans. “There will come a year when they’re go­ing to have a year with dra­mat­i­cally worse or dra­mat­i­cally bet­ter re­turns than the other plans … and ev­ery­one should get their head around why that makes per­fectly good sense.”

The pen­sion plan has faced more scru­tiny from Cana­di­ans and law­mak­ers ahead of the planned in­crease to the Canada Pen­sion Plan con­tri­bu­tions that work­ers and em­ploy­ers will make to fund their re­tire­ment years, in or­der to boost the ben­e­fits they will re­ceive. That is set to be­gin in 2019 – around the time Mr. Machin’s re­tool of the fund’s cur­rent in­vest­ment ap­proach is set to wrap up. This sep­a­rate pool of con­tri­bu­tions will re­quire its own in­vest­ment­man­age­ment strat­egy.

Mr. Am­bacht­sheer is in favour of bring­ing the think­ing of the Gold­man Sachs “profit ma­chine” to the world of pub­lic ser­vice.

But there are op­er­a­tional chal­lenges that come with such a tran­si­tion, he says. There’s the con­trol ques­tion that comes with man­ag­ing so many dif­fer­ent in­vest­ment lines: “Are you get­ting the di­ver­si­fi­ca­tion that you think you’re get­ting?” he says. “And then you’ve got a mo­ti­va­tion ques­tion, an in­cen­tives ques­tion, around can you get the kind of peo­ple that you need to run this kind of an or­ga­ni­za­tion – will they stick around long enough to ac­tu­ally make a dif­fer­ence? You have to have a strong-enough cul­ture that peo­ple have to buy into.”

As he con­sid­ers the changes CPPIB needs to make, Mr. Machin pic­tures a de­cath­lete that’s still de­vel­op­ing his abil­i­ties. “I think of us as fairly grown up. We have a lot of mus­cle and a lot of abil­ity to do dif­fer­ent things, but we’re an ath­lete with a good long pe­riod of de­vel­op­ment ahead,” he says.

Mov­ing from pas­sive to ac­tive as­set man­age­ment, and lo­cal to global in­vest­ing, CPPIB’s evo­lu­tion has been rapid and ex­pan­sive. Mr. Machin is the coach now charged with mak­ing the fund a tougher, more dis­ci­plined com­peti­tor.

“There’s not go­ing to be ex­plo­sive growth from here,” he warns. “This is about ap­ply­ing the strength we have in lots of in­tel­li­gent ways and mak­ing sure we do so more and more ef­fec­tively.”

VIK­TOR MILLER-GAUSA/THE GLOBE AND MAIL

MARK BLINCH/GLOBE AND MAIL

Mark Machin, the CEO of CPPIB who wants a less con­ser­va­tive in­vest­ment strat­egy, walks in its of­fices in Toronto on Thurs­day.

MARK BLINCH/GLOBE AND MAIL

Mr. Machin is op­ti­mistic about his in­vest­ment plan but warns that ‘there’s not go­ing to be ex­plo­sive growth from here,’ but rather an in­tel­li­gent ap­pli­ca­tion of re­sources to bet­ter serve the pen­sion fund.

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