Private Equity Executives Flocking to Canadian Pensions
Private equity professionals are on the lookout for a new home.
Big pension funds are scooping them up as they seek refuge from a downturn in the sector that has restricted the carried interest payments that traditionally made up most of their pay, write Alexandra Heal and Mary McDougall.
Professionals from mid-market buyout groups in particular have been flooding pension plan recruiters with their résumés in a bid to escape the private equity fundraising squeeze.
“We are finding it easier to attract talent — not super easy, but much easier than three or four years ago,” said Ralph Berg, chief investment officer at the Ontario pension fund Omers.
“I suspect a lot of the private equity firms are struggling to hold on to people or maybe they want to manage . . . headcounts too.”
British Columbia Investment Management Corporation, which manages assets for public sector pensions, hired about 20 people in the past two years from buyout firms due to “fundraising issues” at those groups, a person familiar with the matter said. BCI’s private equity team has 70 people in total, according to its website.
The experience of the Canadian pension plans is the latest sign of how a prolonged downturn, initially ushered in by 2022 interest rate increases, is rippling through the financial sector.
The higher cost of borrowing hampered dealmaking and left firms with less cash to return to their institutional backers. This in turn reduced how much money those backers could recycle into new buyout funds.
Private equity groups raised just $592bn in the 12 months to June, their lowest tally for seven years, data from Preqin shows.
Alexandra Heal and Mary McDougall of the Financial Times also report pension funds scoop up ex-private equity executives:
Big pension funds are scooping up private equity professionals seeking refuge from a downturn in the sector that has restricted the carried interest payments that traditionally made up most of their pay.
Professionals from mid-market buyout groups, in particular, have been flooding pension plan recruiters with their résumés in a bid to escape the private equity fundraising squeeze.
“We are finding it easier to attract talent — not super easy, but much easier than three or four years ago,” said Ralph Berg, chief investment officer at the Ontario pension fund Omers.
“I suspect a lot of the private equity firms are struggling to hold on to people or maybe they want to manage . . . headcounts too.”
British Columbia Investment Management Corporation, which manages assets for public sector pensions, hired about 20 people in the past two years from buyout firms due to “fundraising issues” at those groups, a person familiar with the matter said. BCI’s private equity team has 70 people in total, according to its website.
The experience of the Canadian pension plans is the latest sign of how a prolonged downturn, initially ushered in by 2022 interest rate increases, is rippling through the financial sector.
The higher cost of borrowing hampered dealmaking and left firms with less cash to return to their institutional backers. This in turn reduced how much money those backers could recycle into new buyout funds.
Private equity groups raised just $592bn in the 12 months to June, their lowest tally for seven years, data from Preqin shows.
Tougher fundraising has led to lower revenue streams for buyout firms from management fees, leaving them with less cash to hire talent. Smaller firms have struggled the most with fundraising as buyout fund backers have flocked to larger groups which are seen as more reliable.
Berg of Omers said that the red hot mergers and acquisitions market in 2021 had made that a tough year for pension funds to retain staff.
But the more subdued dealmaking environment that has endured since meant that “people — especially juniors — have seen that there [have] been fewer deals to work on”, Berg said, adding that “they fundamentally worry that they are not . . . building up their CVs”.
“All of a sudden,” he added, “those employers that have their own capital and don’t depend on fundraising in order to make new investments and have more sustainable [compensation] structures with a higher level of predictability now look attractive.”
BCI declined to comment.
Great interview with OMERS' CIO Ralph Berg explaining why the subdued dealmaking environment in private equity is making it easier to attract and retain industry people at Canada's large pensions, especially juniors who need to build their resume.
Why are they "flocking" (and I take that verb with a grain of salt) to Canada's large pension funds?
A lot of reasons, the macro environment isn't right for private equity, rates remain stubbornly high, there's too much competition, small to mid sized firms are struggling, apart from tech, exits are tough, fundraising is tough, LPs aren't re-uping as fast as before and they're far more stringent on valuations and what they expect.
All this to say, if you want to make big bucks, try sticking it out with a GP but chances are you'll lose your job as assets dwindle, or join a top LP (ie a Canadian pension fund), make a decent living building a nice private equity portfolio without the pressure of delivering returns every three to four years.
And Ralph Berg is right: “All of a sudden, those employers that have their own capital and don’t depend on fundraising in order to make new investments and have more sustainable [compensation] structures with a higher level of predictability now look attractive.”
As far as BCI, Jim Pittman who heads that group pitched an idea to CEO Gordon Fyfe a few years ago to open an office in New York City and run the private equity team out of there and it's been working great (OMERS has an office there too).
He's been able to attract quality staff at all levels (not just juniors) and he's in a city where he can easily meet with top strategic partners and be closer to dealmaking activity.
In short, it's a win-win for everyone especially BCI's members as their private equity team has a pulse on activity real time and it's a highly qualified team of professionals that understands value creation, how to structure a proper portfolio diversifying across sectors, geographies and vintage years and the proof is in the pudding (BCI's private equity team has some of the best long-term returns in the pension industry).
Now, how long will tough times last in private equity? Nobody really knows, rates are coming down in the short run as central banks cut but the inflationary environment remains a wild card, and that means things might remain tough for a lot longer.
All this to say, it doesn't surprise me that Canada's large pension funds are able to attract quality people away from private equity firms.
OTPP's CEO Jo Taylor told me a long time ago that when the cycle turns in PE, it's easier to go hunting for talent and that's what is happening.
Below, fewer deals, long wait times for returns on investments. Struggles with fundraising. Even with an interest rate cut, private equity, which thrives on flipping and selling companies for a profit, is in a slump. What would it take for the industry to bounce back?
On The Big Take podcast (from last month), Bloomberg's private equity reporter Allison McNeely discusses what’s contributing to an existential slowdown that has private equity firms scrambling to find a path forward.
Listen carefully to her comments, she's spot on, great insights.
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