Canadian Pensions Climb the Global Investor 100
Canuck pension muscle: More and more, you hear about Canadian investors making a splash in global private markets. Across the spectrum of alternative assets, an array of locally-based GPs and LPs are gaining reputations as top dealmakers and innovators.
There is no better example of this than our pension funds. Canada Pension Plan Investment Board, Caisse de dépôt et placement du Québec, Ontario Teachers’ Pension Plan, PSP Investments and others are everywhere and by everyone courted as deal and fund partners.
Of course, size (of managed assets and investment programs) matters here. That is clear in Private Equity International’s 2021 edition of the Global Investor 100, released last month. CPP Investments was at the top of the ranking, the same spot it occupied the year before. Subscribers can view Private Equity International’s Global Investor 300 here.
PEI put CPP Investments’ PE allocation at nearly US$89 billion. That's almost US$38 billion greater than the portfolio of the second investor on the list – and its private equity holdings account for more than one-fifth of the overall exposure of the 10 largest investors on the Global Investor 100. This is perhaps not surprising, the magazine’s Carmela Mendoza said, when you consider how well private equity has performed for CPP Investments. In fiscal 2021, for example, PE investments generated a net return of 36.3%.
As part of this year’s Global Investor 100, Mendoza interviewed CPP Investments’ outgoing PE head Shane Feeney to get insights about the strategy’s evolution over time. Feeney, readers may recall, in 2018 led a major integration of PE directs, funds, secondaries and Asia investing into a single platform that helped expand CPP Investments’ global reach.
In second spot on the Global Investor 100 is CDPQ. This represents growth on the list as the Quebec pension system was No. 4 last year, behind Singapore’s GIC and Abu Dhabi Investment Authority. CDPQ vaulted ahead of them in 2021, probably because it, like CPP Investments and other Canadian peers, has developed a hybrid direct-indirect PE strategy that continues to broaden in scope with the market as whole. Readers will recall my June interview with Martin Laguerre, CDPQ's new PE chief, in which he detailed a menu of new growth initiatives.
Ontario Teachers' came in at No. 6, behind GIC, the Netherlands’ APG and Hong Kong Monetary Authority, but ahead of the largest US pension system, California Public Employees' Retirement System. That gives us three Canadian pension funds among the 10 largest investors on the Global Investor 100. That’s quite something when you think about it.
Among the 20 largest investors on the Global Investor 100, there is also PSP Investments (No. 16) and British Columbia’s BCI (No. 20). And among the top 40, we can add OMERS (No. 29) and Manulife Investment Management (No. 38). My guess is that we'll see these and other Canadian pension funds (and in Manulife’s case, a Canadian insurer) climb higher in the ranking in the years ahead.
You can view the full list of Private Equity International's Global Investor 100 2021 here.
Below, I put the top 12 but the website has a full list:
Not surprisingly, CPP Investments tops the list, allocating US$89 billion or 24% of its total assets in a mammoth private equity portfolio which will soon be headed by Suyi Kim (she starts her new role on September 15th).
Ms. Kim is taking over from Shane Feeney who accepted an executive role at Toronto-based Northleaf Capital Partners Ltd.
She has extensive experience serving as a Senior Managing Director and Head of Asia Pacific and she is has a great team backing her up doing direct, fund investments, secondaries, venture capital and Asian private equity.
You should take the time to go over CPP Investments' private equity portfolio holdings here to appreciate the breadth and depth of this portfolio.
Their website states: "By applying our comparative advantages – scale, certainty of assets and our long investment horizon – our teams pursue the best opportunities worldwide."
And that's what they do, scour the world for the best private equity deals which offer the best risk-adjusted returns over the long run.
Now, it's no surprise that CPP Investments tops the list and has almost US$38 billion more invested in private equity than the second largest Canadian pension fund, CDPQ, which comes in number 2 spot managing US$51 billion or 18% of its total assets in private equity.
CPP Investments has more assets than CDPQ (CAD$520 billion vs CAD$390 billion) but more importantly, the two funds have different objectives which is why CPP Investments allocates more to equities (both public and private) than other large Canadian pensions.
What do I mean by that? I recently covered CPP Investments' quarterly results where net assets topped the half-trillion mark (CAD) and noted this:
The sheer size of the assets CPP Investments manages is breathtaking and you can see by reading the press release above, the bulk of the assets (CAD$511.5 billion) remain in the base CPP account, which is partially funded, and only a small percentage of total assets (CAD$8.1 billion) are in the additional CPP account which is fully funded and growing fast.
The main difference between base CPP and additional CPP is that the partially funded account (base) can take more equity risk whereas the fully funded one (additional) needs to be more broadly diversified and has a lower risk profile (much tighter match between assets and liabilities).
The critical point is the Chief Actuary reaffirmed that, as at December 31, 2018, both the base and additional CPP continue to be sustainable over the 75-year projection period at the legislated contribution rates.
Moreover, the Fund, combining both the base CPP and additional CPP accounts, achieved 10-year and five-year annualized net real returns of 9.3% and 9.4%, respectively.
That's the type of long-term performance that I like to see and that's what ultimately counts the most.
Did you get that part of the bulk of the assets being in base CPP (like 98%) which is why for the base CPP, CPP Investments has adopted a Reference Portfolio of 85% global equity/15% nominal bonds issued by Canadian governments (see details here).
Alternatively, for the additional CPP account which makes up less than 2% of assets but is growing fast, CPP Investments has adopted a Reference Portfolio of 50% global equity/50% nominal bonds issued by Canadian governments (see details here).
The difference is due to the fact that base CPP isn't fully funded (it’s partially funded) whereas additional CPP is fully funded and requires less risk taking from a portfolio construction perspective (more bonds and real assets, less equities).
This is why it drives me bananas when people compare the performance across our large Canadian pensions without understanding the level of risk they take to meet their objectives.
It's pure nonsense and from members' point of view, all they really need to worry about is whether their pension has sufficient assets to pay out liabilities over the next 75+ years.
Having said this, private equity is a very important asset class for all of Canada's large pensions and they all have a healthy allocation to it. Maybe not 24% like CPP Investments, but if you scroll down the list of this year's Global 100, you'll see the following:
- (#1) CPP Investments: US$ 88 billion or 24% in PE assets
- (#2) CDPQ: US$51 billion or 18% in PE assets
- (#6) OTPP: US$33 billion or 19% in PE assets
- (#16) PSP Investments: $US19 billion or 14% in PE assets
- (#20) BCI: US$17 billion or 11% in PE assets
- (#29) OMERS: US$12 billion or 14% in PE assets
- (#44) HOOPP: US$9 billion or 11% in PE assets
So, all of Canada's large pensions allocate 11% to 24% of their total assets to private equity and for good reason, over the long run, that's where they get the best risk-adjusted returns (Real estate people will quibble with this but after the pandemic hit, it's a done deal, PE is the most important asset class to capture long-term risk-adjusted returns).
However, and this is the critical point, in order to allocate sizable portions of your pension assets to private equity and maintain a healthy allocation as assets grow, you need to develop a great fund investment/ co-investment program with top private equity funds all over the world.
A little known secret in the pension industry is that from a performance attribution perspective, the returns on private equity funds have come down considerably over the last 20 years to the point where you're probably better off investing in public markets than investing in PE funds (high fees eat away at returns),
But the best bang for your pension buck comes from gaining access to large co-investments, a form of direct investing where pensions pay no fees.
The kicker? In order to gain access to co-investments, you need to invest in PE funds (paying big fees) but if the co-investments are large enough, you can significantly reduce fee drag.
This is where Canada's large pensions excel, they have developed a great fund investment/ co-investment platform to the point where for the big funds, their co-investment program is bigger than their fund investment program (most are 50/50 or close between fund investments/ co-investments).
In order to do this properly, however, you need to hire, pay and retain a qualified staff which can quickly analyze co-investments and turn around fast to capitalize on opportunities as they arise.
Here is where Canada's large pensions truly excel, they have the independent governance to get compensation right and manage a huge chunk of their assets across public and private markets internally.
Earlier this week, I discussed how CDPQ acquired Medical Solutions, one of the largest providers of total workforce solutions in the healthcare industry, and OTPP acquired a majority interest in Acorn Health, a leading national provider of Applied Behavior Analysis (ABA) therapy for children diagnosed with Autism Spectrum Disorder (ASD). Take the time to read that comment here.
The CDPQ-Medsol deal is valued at US$2.3 billion including debt (my guess is CDPQ and Centerbridge each put in $500 million each and financed the rest through debt). This is a classic co-investment.
There are no financial details on the OTPP-Acorn health deal but they acquired it from MBF Healthcare Partners II, L.P. (“MBF”), a middle market healthcare focused private equity firm.
My best guess is OTPP invested in this fund, got board seats on this company and decided to acquire it outright to hold it on its books longer (as MBF sold it to realize gains once their second fund came to end of its life). This isn't a co-investment but it too is a form of direct investing.
In both cases, you need a qualified staff to do these type of PE deals and you need to have the right partnerships with the right funds.
One final note, you'll see a lot of US public pensions on the Global Investor 100 list and while I know there are qualified people managing these private equity assets, it's important to note they cannot rival what their Canadian counterparts are doing in terms of direct investing (purely direct and co-investments).
In private equity, just like all private markets, you need to get the approach right or else your program will not deliver the required long-term returns.
Alright, let me wrap it up there, if you have anything to add, email me at LKolivakis@gmail.com.
Below, Steve Balaban discusses what makes a good private equity investment for your portfolio.
Take the time to watch both clips, they are packed with insights and I'd say Canada's large pensions excel in their value creation plans when they buy private companies or any private asset.