Canada's Mighty PE Investors?

Kirk Falconer of PE Hub Network reports, CPPIB, Ontario Teachers’, CDPQ among world’s largest private equity LPs:
Canada’s pension funds are among the world’s biggest investors in private equity, according to a new report.

Preqin’s The Private Equity Top 100, issued today, found that three of the 10 largest PE limited partners are Canadian.

Sitting atop the list is Canada Pension Plan Investment Board.

CPPIB, which invests on behalf of Canada’s public retirement system, earned the ranking with a current PE asset allocation of about US$44 billion, Preqin said. That’s just ahead of Abu Dhabi’s sovereign-wealth fund, which oversees a pool of about US$40 billion.

Not far behind, in the No. 6 spot, is Ontario Teachers’ Pension Plan. It’s closely followed by Caisse de dépôt et placement du Québec.

Ontario Teachers’ and CDPQ are reported to have current PE allocations of US$21 billion and US$20 billion, respectively. That puts them just behind Singapore’s GIC, California Public Employees’ Retirement System and the Netherlands’ APG.

Several other Canadian pension funds also appeared on the list.

Public Sector Pension Investment Board, Ontario Municipal Employees Retirement System, Alberta Investment Management Corp and British Columbia Investment Management Corp, for example, are ranked among the world’s 50 largest LPs.

Preqin says the 100 largest PE LPs managed an aggregate investment pool of US$791 billion last year. On average, they have a PE allocation of 12.1 percent of total assets and are targeting an overall allocation of 12.5 percent.

Two-thirds of the 100 largest are located in North America. They consist of a wide variety of institutional fund types, with public pension funds accounting for the biggest share (43 percent).

Europe, North America and Asia are the preferred investment locales of the 100 largest PE LPs. They also tend to prefer funds focused on buyout, growth and venture capital opportunities.

Canada’s largest pension funds typically invest in the global PE market through a mix of fund and direct strategies. For many, direct deals account for a growing share of allocations. Directs are done either independently or as co-investments and co-sponsorships alongside fund partners.

Preqin told PE Hub Canada estimates of the current asset allocations of the 100 largest PE LPs reflect a range of direct-fund investment strategies.

The entire Preqin report can be viewed here.
Unfortunately, the link above to the Prequin report doesn't seem to be working. The correct link is here.

Canada's largest pensions have been investing in private equity for a long time and they typically do this through fund investments and co-investments. In the latter case, a form of direct investments,  the general partners (GPs) offer their big limited partners (LPs) a bigger stake on a major transaction where the LPs pay no fees (as long as they first invest in the GPs' commingled funds where they pay big fees).

Go back to read recent comments of mine on CPPIB acquiring and IT giant, Ontario Teachers' eying a new tack and Canada has no private equity game where I go in-depth on how Canada's pensions invest in private equity.

I don't want to rehash all these issues here. The key points I want you to keep in mind are:
  • Private equity is an important asset class, making up on average 12% of the total assets at Canada's large public pensions. 
  • All of Canada's large public pensions invest in private equity primarily through external funds which they pay big fees to and are then able to gain access to co-investment opportunities where they pay no fees. In order to gain access to these co-investments, Canada's large pensions need to hire professionals with the right skill set to analyze these deals in detail and have quick turnaround time when they are presented with opportunities to co-invest.
  • Some of Canada's large public pensions, like Ontario Teachers and OMERS, engage in purely direct (independent) private equity deals where they actually source deals on their own and then try to improve the operational efficiency of that private company. Apart from paying no fees, the added advantage of this approach is that unlike PE funds who try to realize gains in three or four years, pensions have a much longer investment horizon on these investments (ten++ years) and can wait a long time before these companies turn around.
  • However, the performance of these type of purely direct (independent) deals is mixed with some successes and plenty of failures. Also, we simply don't have independently verifiable information on how much is truly allocated in independent direct deals versus fund investments and co-investments, and how well these independent direct deals have done over the long run relative to fund investments and co-investments.
  • Another form of direct investing is when the life of a private equity fund comes to an end (typically after four of five years), and the limited partners bid on a company in the fund's portfolio. Since they sit on the board and know the company well, if they like it, a pension can bid on it and keep it on its books for more years because they have a longer investment horizon than the private equity funds.
  • Nevertheless, the reality is that despite their long investment horizon, Canada's large public pensions will never be able to directly compete with the large private equity titans who are way more plugged into the best deals all around the world.
  • This is why CPPIB, Canada's largest pension, focuses purely on fund investments and co-investments all around the world in their private equity portfolio. They will never engage in independent direct deals like they do in infrastructure. Their philosophy, and I totally agree with them, is that they simply cannot compete on direct deals with premiere private equity funds and it's not in the best interests of their beneficiaries.
  • Under the new leadership of André Bourbonnais, PSP Investments is also moving in this direction, as Guthrie Stewart's private equity team sells any independent direct stakes to focus its attention solely on fund investments and co-investments to reduce overall fees (again, I agree with this approach in private equity).
  • CPPIB and PSP will be the world's top private equity investors for a very long time as they both have a lot of money coming in and they will be increasingly allocating to top credit (private debt) and private equity funds that can make profitable long-term private investments all over the world. 
  • Ontario Teachers, the Caisse, bcIMC, OMERS and other large Canadian pensions will also continue to figure prominently on this list of top global private equity investors for a long time but they will lag CPPIB and PSP because they are more mature pensions with less money coming in. Still, private equity will continue to be an important asset class at these pensions for a long time.
I hope I covered the main points properly but if you have anything to add or correct, feel free to reach out to me at and I'll post your comments.

By the way, André Bourbonnais, the president and CEO of PSP Investments, will be the featured guest next Wednesday (February 15) at a Montreal CFA luncheon. You can click here for information on this event which is already sold out (everyone wants to know what Mr. Bourbonnais is thinking and I'm sure Miville Tremblay of the Bank of Canada will ask him plenty of good questions).

Below, André Bourbonnais discusses long term perspective from the Institutional investor’s perspective. This was a clip from a Deloitte Director's Series event that took place last year.

Listen to his comments, very interesting but one thing is for sure, whether it's PSP, CPPIB, the Caisse or the rest of Canada's large pensions and large global corporations, a long-term focus pays off.