BCI's Jim Pittman on Staying Liquid, Focused and Agile in Private Equity
an illiquid market:
Liquidity is at a premium in 2023 as LPs the world over grapple with a comparative dearth of private equity distributions and a congested fundraising environment. It is for this reason that Canadian pension giant BCI finds itself in a rather enviable position.
Under the leadership of global head of private equity Jim Pittman, the C$233 billion ($172.8 billion; €158.2 billion) public pension fund has spent much of the past decade using the secondaries market to cultivate a comparatively liquid portfolio of illiquid assets.
“What we’re seeing is a knock-on impact with less liquidity coming back in terms of sales. Those pension plans [that have] allocated heavily to private equity are less liquid themselves, so they don’t have as much money to recommit to new funds,” Pittman tells Private Equity International.
“The one thing that we’ve been doing for the past seven years since I [joined] is making sure that we have a continuum of capital coming back. So we’ve used a secondary market to sell funds that were what we consider to be non-core or lower performing – just not beating strategic or performance benchmarks.”
BCI has offloaded C$4 billion to C$5 billion of private equity stakes via the secondaries market since Pittman’s appointment. The most recent of these transactions took place in June, with another expected to close by year-end, Pittman says, noting that the pair will generate “up to a billion-and-a-half” of liquidity. He declined to share the specifics of the two transactions. “One of the things that… myself and the executive team often say is: ‘In an illiquid market, we don’t want to be illiquid ourselves’,” Pittman adds. “So we always want our own dry powder of a few billion dollars to sort of take advantage, and you never want to be forced to sell.”
BCI isn’t alone in utilising secondaries to generate liquidity. LP-leds accounted for about 61 percent of the $44 billion of secondaries transactions completed in H1 2023, per data from Greenhill. According to affiliate title Secondaries Investor, notable sales included Kaiser Permanente’s $6 billion portfolio sale, New York State Teachers’ Retirement System’s sale of a portfolio valued at around $6 billion, and Norinchukin Bank’s process to sell a portfolio that is around $1.5 billion or more in size.
LP portfolio pricing across asset classes rebounded to 84 percent of net asset value – down 2 percentage points on H1 2022 figures – and up considerably from the 78 percent of NAV seen in the second half of last year, according to Jefferies.
“It not an ideal market to sell,” Pittman says. “But you’ve got to take a view as to, is the NAV inflated? Is that the true value of the portfolio? In our view, we’ve been taking somewhere in the order of magnitude 15 percent discounts, but we believe our portfolio is 10 percent overvalued in general.
“We don’t think we’re taking a very large discount, we just think we’re reflecting what’s going on in the market. And liquidity is an important factor just to be able to have C$2 billion available to continue to do deals.”
BCI deployed a record C$9.8 billion into private equity last year, per its 2022-2023 Corporate Annual Report. Of that total, C$3.7 billion went to 14 direct investments, including additional funding for existing assets. One particularly noteworthy deal was space intelligence business Maxar Technologies, its largest-ever direct private equity investment.
The institution’s mammoth deployment was funded in part by cash distributions received from “timely” direct exits and secondaries sales in late 2021 and early 2022, the report said.
“In the more recent sales, we are selling good performing assets, but strategically we want more liquidity to do more directs,” Pittman says. “So we’re selling some layers of the funds in order to reutilise it in directs.”
Directs have been an increasing focus in recent years, and now account for around 42 percent of BCI’s private equity C$28.3 billion portfolio. “The benefit of that is the fee load that we carry,” Pittman notes. “There’s 500 basis points difference between investing through a fund scenario versus direct, and if we’re running 42 percent of our book directly, we’re saving a lot of that sort of fee burden.”
This rationale appears to have been justified: over the last five years, BCI’s private equity programme delivered an 18.2 percent annualised return, almost double its five-year benchmark of 9.2 percent. The programme returned 4.7 percent last year against a benchmark of -1.8 percent. The US is BCI’s largest target market for private equity, representing 47.8 percent of its portfolio. As part of its focus on the US, BCI opened a New York office in 2022 and hired an additional 13 investment professionals. It is gearing up to do something similar in Europe this year, affiliate title Buyouts reported in January.
Asia-Pacific represented 9.7 percent of the portfolio as of 31 December, though Pittman says the institution allocates around 15 percent to the region. BCI and its Canadian peers have come under increasing government scrutiny in recent months over their exposure to the region’s largest market, China.
“Asia’s shifting,” Pittman notes. “Obviously, China is a much more difficult arena to do deals, given the sort of friction that’s not just US-China, but also Canada-China to some degree. And so we’ve been very active in Korea and somewhat active in Japan; less active in Southeast Asia and we’re not really that active in India in a private equity sense… We still think, you’ve got to invest in countries that have positive GDP, and it tends to be Asia’s got higher GDP than North American markets.”
This is an excellent interview with Jim Pittman, BCI's global head of Private Equity.
Before giving my thoughts, some material below from BCI's 2022-2023 Corporate Annual Report on their Private Equity program:
BCI's Private Equity program is very mature, returns did come down last year to 4.7% annualized (outperforming many peers) but it remains their best-performing asset class over the long run, delivering an 18.2% annualized return over the past five years,
almost double its five-year benchmark of 9.2%.
BCI's PE program is split almost evenly between funds and directs which now make up roughly 42% of the PE assets.
Ever since Jim Pittman joined BCI in 2016, the focus has shifted on building great relationships with top private equity firms and gaining better access to co-investments (a form of direct investing) to lower fee drag.
As Jim states in the interview above: “There’s 500 basis points difference between investing through a fund scenario versus direct, and if we’re running 42 percent of our book directly, we’re saving a lot of that sort of fee burden.”
As far as selling fund stakes in the secondaries market, yes, they're sold at a discount but selling allows them to increase their cash position to fund direct investments which is where their focus is.
As Jim states: “We don’t think we’re taking a very large discount, we just think we’re reflecting what’s going on in the market. And liquidity is an important factor just to be able to have C$2 billion available to continue to do deals.”
It all comes down to knowing your assets well and knowing the type of discount you're willing to take to fund other better opportunities that come your way, especially in directs where you pay no fees.
Jim and his Private Equity team have a lot of experience and they understand this market very well.
Earlier today, I sent him an email stating I covered mid-year results at OTPP, OMERS and CDPQ last week:
A few things struck me:
- Diversification across public and private markets and across geographies is very important
- With yields north or 4%, bonds are back in vogue
- Private credit remains an important asset class as banks retrench from lending
- Most of Canada's large pension investment managers have a value/ quality tilt in their Public Equities and most of are underweight technology shares in public equities, preferring to invest more in tech in private equity.
- Costs are up in US private equity as wage inflation picks up steam which is is EBITDA growth is slowing.
- Cap rates are rising weighing down on real estate asset values.
In private equity specifically, OTPP's CEO Jo Taylor told me valuations remain "healthy" and they walked away from some deals, OMERS CFO & CSO Jonathan Simmons told me operations are doing well but "costs are up" as wages are going up in their US investments and CDPQ's Head of Liquid Markets Vincent Delisle told me "profits remain solid" but the cost of financing is going up and that is impacting deal activity.
Jim was kind enough to share his insights on the state PE markets:
Basically GP partners are stuck in an unusual place. They cannot sell easily. It’s hard to buy because debt is expensive and lower quantum so it makes the LBO model much tighter. It forces GPS with money to focus on growth assets that don’t need as much debt or can’t support it. They are trying to get liquidity for three reasons; take carry as possible, give some liquidity to LP investors and maintain as high an IRR level as possible for future fund raising.
Valuations are definitely a somewhat high as few transactions are happening due to bid ask spread and cost of debt. More capital is being held in fewer GP groups; basically the fundraising machines and not necessarily the top performing investor groups.
Advisors are focusing on value creation and eventually turnaround activity since M&A is down so much. I expect the rest of year to be slow again unless the Fed commences easing. This will continue to put more pressure on LP investors to consider their over allocations and how to allocate money going forward.
Asset allocators continue to put money into credit given the base rate and lower risk compared to equities. However they would allocate more if they could get more distributions from GP partners in PE.
Having available cash to be proactive in this market is important. It’s a patience game and we all have dialed risk down and return expectations up. Makes for an interesting dance into the rest of this year and start of next.
These are great insights from one of the best institutional private equity managers who really has a good sense of what is going on out there.
Jim relocated to BCI's new New York City office to be closer to the deal makers and I'm sure when the time is right, he and his team will be putting a ton of capital to work.
Below, take the time to watch an older clip from last September where Jim Pittman and OMERS CEO Blake Hutcheson took part in a Milken Institute panel discussion in Asia on the long and short of patient capital.
I love this clip because the insights here from all investors are truly excellent but I want you to focus on Jim's comments particularly when he states:
I spent most of my time in private markets. The viewpoint we have in Private Equity is we've been able to get 20-30% returns over the past 5 years. And you don't get that with low risk, you get that with high risk, a lot of leverage. And so one of the issues we have to look at today, especially when we look at our own teams, oftentimes our team expects that if we got 25% returns in the past, we should be able to get that in the future. That's unlikely to happen. We have to retrain our people, in terms of equities, in an environment where you no longer have quantitative easing, you have quantitative tightening and rising rates, there has to be an impact on exit values and there is also an impact on entry values. Therefore you have to learn how to invest in a new environment and that is an expertise that many of us have to learn.
But one of the things we didn't talk about so far in the panel, and you have to look at from a patient capital perspective, as a pension fund over the past 15 years because of all this QE, we've had an amazing ability to be over-funded. Most of our pensions which we represent are at 105% or 110% in terms of funding, so we can take more of a shock in terms of volatility in terms of what is going on in underlying markets and not have to respond. I think other pensions which are underfunded and less liquid will be much more impacted.
He also stated the "debt markets are frozen" and that is impacting private markets:"Right now, it's a freeze, nobody knows how to actually get distributions, how do you sell something to give back to LPs so you raise more money."
And he added: "There is an amazing pause we are seeing over the past 2 months and maybe over next 4 months. We were very slow to get into venture capital and growth ... now we are actually waiting to participate. I think times are getting very interesting and someone who was under-allocated will see more opportunities."
No doubt in mind that BCI and other large Canadian pension funds will see better opportunities in private equity over the next three years.