Suyi Kim on What Drives Success at CPP Investments' Giant PE Portfolio

Sarah Rundell of Top1000Funds recently interviewed Suyi Kim, Global Head of Private Equity at CPP Investments to go over what drives success at their giant PE portfolio:

Suyi Kim, global head of private equity at CPP Investments manages quite possibly the largest private equity allocation in the world. At C$146 billion, equivalent to a quarter of the entire C$575 billion pension fund for some 21 million Canadians and forecast to grow bigger every year, Kim leads a program that is also heading into unchartered territory.

In conversation with Top1000funds almost exactly two years since her promotion to the top job, she is mindful of how the portfolio’s size could impact its ability to continue to generate the pension fund’s strongest return of 15.5 per cent on a 5-year basis.

“We are a battleship not a speedboat compared to other programs,” she says.

Kim believes the primary source of the portfolio’s success derives from the quality of the private equity team; its synergy, level of communication and mission-driven culture.

“This is what is going to allow us to outperform the market,” she says.

Yet at 190 people and counting and spread across global divisions that now include an office in Mumbai, ensuring smooth communication is, she says, intellectually challenging.

“The larger the team, the harder the task of maintaining the culture that allows us to outperform and my continual focus is making sure we are working well as a team.”

For example, a key element of team functionality is that different divisions (the portfolio is divided in four departments) work together so that insights gained by one team feed into decision making in another. It provides a level of analysis that goes much deeper than just persistency of returns, she says. “We’d never just re-up with a manager without cross referencing with our other strategies to inform how the manager will perform.”

Partnerships pay

CPP Investments’ GPs are also part of the extended team and the fund’s long-term partnerships have been integral to the portfolio’s success. Back in 2007 when Kim began what would turn into a 16-year stint heading up the fund’s Asian private equity business (she was the firm’s first hire outside Toronto when the portfolio was just C$4.4 billion) partnering with expert GPs was the main strategy.

“If you are not the best investor in the market you need to work with the best, and when we first started out, we were nowhere near the best,” she recalls.

Manager relationships, across the funds and secondaries and direct investments divisions are, she insists, much more art than science and manifest in an understanding of how the other side is going to work. The relationship is based on transparency and trust in the other’s ability to deliver.

Size and scale have helped build GP relationships, but again, it is easy to see how size can become an obstacle. One of the challenges today is making sure the fund’s processes keep up with partner GPs yet this is sometimes slowed down because investment decisions go through various stages of approval.

“For a large-scale deal, we have to go to the global investment committee and even to the board in some cases,” she says. “Our job is due diligence, and for deals that require a level of speed that makes the due diligence difficult, well, we won’t do the deal. I like to be able to sleep at night.”

focus on Quality in a challenging Market

Kim is also preparing for tougher returns in the asset class ahead. Higher interest rates signpost a higher cost of doing business that will impact portfolio companies’ performance and multiples. But she doesn’t believe this will feed through into valuations until 2025-2026.

“When we look at the investment case, higher interest rates will have an impact on the multiple but so far market multiples still haven’t changed that much,” she says.

Unless interest rates start to come down soon (and she doesn’t think that is particularly likely) leverage will remain high and the free cash flow will be lower along with the return to investors. She says private equity players that went through the GFC have “learnt their lessons and built in more of a cushion” but she is concerned that an expectation gap continues to persist between buyers and sellers.

“I have to remind our senior managers and board that returns will be more challenging going forward.  Yes, private equity is the best performing asset from an absolute return perspective, but you must also look at it from a risk adjusted basis, and private equity is the most risk-taking allocation in the fund.”

She notices investors have been putting more money out than they have been getting back. It’s why she believes more exits must happen before investors put more money out the door and is the reason behind a spike in LP secondaries activity and GP’s restructuring their portfolios. For now her focus is on investing – and exiting – high quality companies only.

She reflects that if assets on the ground are performing and compounding at the expected rate, there is no rush to sell in the current market. Being a long-term investor means there is no pressure to constantly deploy so instead she is  continually re-underwriting deals to make sure they are still profitable. “If we are holding a business that still makes sense, I will always choose to hold onto rather than exit and recycle the capital to other deals.”

She says her teams have grown more selective because of the challenges around forecasting the operating case for businesses and notes that the fund’s deployment on the direct side has slowed. On the funds side, because commitments are drawn down over the years trying to time the market isn’t an issue. Instead, her focus is on making steady commitments and ensuring the portfolio doesn’t have vintage concentration. “We use our secondaries to adjust the portfolio here.”

In fact, the number of deals across the entire private equity portfolio has slowed significantly in the last two years. “We have submitted bids, but we often come in far below the winning bid and in retrospect we are happy that we’ve missed these investments.”

Complexity in China

Kim lived in Toronto before she moved to Hong Kong, and because her partner is Canadian she describes her return to the city as a homecoming, even though she is Korean.

But it is her unique experience of private equity in China, where souring geopolitics, complex regulation, the increasing cost of doing business not to mention the inability to forecast exits means other Canadian funds like C$400bn ($295 billion) Caisse de dépôt et placement du Québec (CDPQ) and OTPP have pulled back on direct investing in private assets that the conversation now turns.

CPP Investments, she says, is intent on building a globally diversified portfolio of which Asia Pacific and China remains a vital pillar. Around 9 per cent of the private equity portfolio is invested in China while the total fund currently has around C$52 billion invested in the country. In private equity, a strategy focused on investing in companies that tap consumer spending has famously paid off . “Private equity Asia is one of the best performers in terms of relative performance of the whole book.”

Still, things are starting to change. Strategy in Asia is more bottom up whereby the team apply a risk return framework and then bring investments to the committee to discuss. She notes the market is becoming difficult to navigate and describes an increasingly cautious approach.

The biggest challenge is predicting a company’s operating capability. Drawing up financial models requires the team put together a fan of outcomes but predicting those outcomes has been problematic ever since the pandemic.

“Unlike in public markets, in private markets investors really need to go and see and touch and feel what they are investing in. Not being able to do this in China over the last three years due to the pandemic leads to difficulties predicting the operating case and where returns are going to come through. I can’t see the market going back to how it was in 2019.”

Yet it is precisely this ability of her team to research and dig down into an asset that she is convinced is the winning ingredient. It is also the characteristic that she believes makes it a more honest asset class than public equity.

“Public market investors have a level playing field and they can share all the information that is out there, but in private equity it’s all about how much work you put in, and how that helps you make a better decision,” she concludes.

This is an excellent interview with Suyi Kim, the most powerful lady in private equity because of the size of the portfolio she commands.

CPP Investments invests 33% of its portfolio in private equities and 24% in public equities. 

It has a lot of equity exposure as base CPP assets still make up most of the Fund and that is a partially funded plan as opposed to enhanced CPP which is a fully funded plan (more like its Canadian peers).

First thing worth noting is this interview probably took place in early August and was released in late August.

On September 1st, Reuters reported that CPP Investments trimmed its staff in Asia as it put China deals on hold:

CPP Investments, Canada's biggest pension fund, has laid off at least five investment professionals at its Hong Kong office as it steps back from deals in China, three people with knowledge of the matter said.

Most were on the fund's private equity team and were informed early last month, according to two of the people. The departures have not been previously reported.

They added that a managing director who was in charge of the firm's Greater China real estate portfolio had been told he was losing his position weeks earlier.

The fund has paused new investments in China, including direct investments as well as those in China-focused fund managers, discouraged by the country's faltering economic recovery and tensions with the West, said the people.

They were not authorised to speak to media and declined to be identified.

CPP, which employs more than 150 people in Hong Kong, its Asia hub, declined to comment.

It had flagged in its latest annual report that evolving relationships between Canada, the U.S. and China would be a factor as it reviewed its approach to emerging markets.

Political tension between Canada and China has been quite fraught over the past few years. More generally, the business climate for foreign firms in the world's second-largest economy has also chilled amid intensifying trade and political tension with the U.S. that has led to Washington imposing export controls on key tech such as some semiconductors.

U.S. Commerce Secretary Gina Raimondo noted during her China visit this week that U.S. companies have complained that China has become uninvestable, pointing to fines, raids and other actions that have made doing business in China risky.

Other Canadian pension funds are also pulling back from China.

The Ontario Teachers' Pension Plan (OTPP) closed down its China equity investment team based in Hong Kong in April, Reuters has reported. Canada's second-largest pension fund, Caisse de dépôt et placement du Québec (CDPQ), has also stopped making private deals in China and will close its Shanghai office this year, the Financial Times reported in June.

China accounts for 9.8% of CPP's total investments, according to Michel Leduc, a senior CPP managing director, who was speaking before a parliamentary committee studying Canada-China relations in May.

At the time, he said China was an "important source" for CPP's portfolio. CPP managed $575 billion in assets globally as of end-June.

China-focused private equity funds have raised just $11.6 billion this year. That compares with $74 billion raised for all of 2022, according to data from research firm Preqin.

The numbers are a far cry from a peak in 2016 when more than 1,500 China-focused funds raised around $300 billion.

There have been $3.2 billion worth of acquisitions of firms in China by private equity so far this year. That's up from $2.7 billion last year but still far below the $49 billion for 2021, data from Dealogic shows.

I'm not surprised CPP Investments and others are cooling on their Chinese investments.

Let me be blunt: China is a superpower but it remains a communist country run by an autocratic leadership.

It's one thing if CPP Investments and other Canadian pensions invest in Chinese shares traded in Hong Kong, another if it's about to invest billions in Chinese private equity where a lot can go wrong over the holding period and there's zero liquidity to get out. 

When people come to me and tell me they're keen on investing in China's private markets, I wish them the best of luck.

It's a huge leap of faith and anyone who tells you otherwise is lying or doesn't understand the real risks at play.

Anyway, if you look at the performance and geographic and sector diversification of CPP Investments' PE portfolio (taken from F2023 Annual Report, page 59), you'll see the United States (57%) and Europe (24%) are where most of the assets reside and Asia Pacific makes up 17% of PE assets (with China less than 1% if I hazard to guess):

As far as returns, that 5-year annualized net return of 15.5% isn't realistic going forward and Suyi Kim is right to temper down expectations. 

Why? I expect a major global recession will hit us soon, deep and prolonged just like the 70s, and a long bear market in stocks will ensue.

This means exits will become tougher and valuations of private companies will necessarily come down (see my recent comment going over how regulators are demanding more disclosure from private equity and hedge funds).

Now, CPP Investments has a long investment horizon. As Suyi states above, they don't need to sale stakes in companies they like a lot, they can buy them and carry them of their book and ride out cycles.

Also, as she states, when they started off in private equity, they weren't the best, they invested in the best funds, leveraged off their relationships to gain access to co-investments and reduce fee drag.

They also have a very developed secondaries team to make sure they're not taking too much concentrated vintage year risk.

But to run this giant PE portfolio properly, you need to attract and retain top talent. 

Why? As she states, some of their co-investments are so large, they need to take it to them to their senior managers who run the investment committee or to the Board to gain approval.

You also need quick turnaround time on these large co-investments so all this needs to happen quite quickly and the diligence needs to be very detailed.

Interestingly, she did state they walked away from quite a few deals this year because valuations weren't right and she's not the only one who told me so (OTPP's CEO Jo Taylor told me the same thing when I covered their mid-year results).

People think private equity is easy: just invest with top funds and gain access to co-investments.

No doubt, relationships are key but you need to have a great team to evaluate co-investments or else you're flying blind and paying up for deals.

Lastly, I recently covered why critics of CPP Investments' insanely large allocation to PE are wrong.

Private equity is a really important asset class for pension investment managers but you need the right approach and governance, or else forget it, you're better off investing in the S&P 500.

As Suyi Kim states, unlike public markets where information is plentiful and a barrage of analysts cover companies, private equity requires more work to gain an edge.

She's right, you got to put in the work, or else forget about it.

Alright, let me wrap it up there.

Below, Nazir Razak, chairman and founding partner of Ikhlas Capital, said Indonesia has a lot of domestic private equity and valuations have been "on the high side, if you take a long-term horizon."

Also, Apollo Global Management is poised to sign more than $4 billion in so-called NAV loans, as the asset manager steps up unorthodox lending to private equity firms looking to raise cash in a challenging high-cost environment. Laura Benitez has more on "Bloomberg Markets: The Close."

Lastly, an excellent interview (in Greek) with Nikos Stathopoulos, Chairman of BC Partners, which took place in late April at the Delphi Economic Forum.He remains upbeat but stated higher for longer means valuations matter a lot more now and expectations need to be tempered.