CPP Investments Gains in Q1, Promotes Caitlin Gubbels to Head of Private Equity

Michael Katz of Chief Investment Officer reports CPPIB ekes out 1% gain in Q1, promotes Caitlin Gubbels to Head of Private Equity:

The Canada Pension Plan Investment Board eked out a 1% investment return during the first quarter of fiscal 2025 (ending June 30), which raised its asset value to C$646.8 billion (US$472 billion) from C$632.4 billion the previous quarter. The pension fund also promoted Caitlin Gubbels to global head of private equity.

The pension giant registered five- and 10-year annualized net returns of 7.8% and 9.1%, respectively, while the C$14.4 billion quarterly increase in assets was comprised of C$8.1 billion of net transfers from the Canada Pension Plan and C$6.3 billion in net income.

The CPPIB attributed the slight investment gain, which swung from a loss the prior-year quarter, mainly to investments in the public equity and private asset classes, particularly in credit and U.S.-dollar denominated holdings. The U.S. investments, according to the CPPIB, benefited from the U.S. dollar strengthening against the Canadian currency. However, the gains were mostly offset by government bond investments, whose prices were hurt by lowered expectations for central bank interest rates due to stubborn inflation.

“Our diversified portfolio is performing as designed with gains across most asset classes,” said CPPIB President and CEO John Graham in a statement. “We continue to prudently manage the fund to deliver value to CPP contributors and beneficiaries over the very long term.”

The CPPIB also promoted Gubbels, its managing director and head of private equity funds, to senior managing director and global head of private equity, effective October 15. Gubbels will also join the pension fund’s senior management team, succeeding Suyi Kim, who has decided to leave CPPIB after 17 years for new global investment leadership opportunities, according to the announcement.

“Suyi leaves with our deep gratitude, having contributed significantly to the organization’s success during her 17-year tenure,” said Graham in a statement. “She opened our Hong Kong office in 2008, establishing our presence in the Asia Pacific region, and most recently led our private equity business globally out of Toronto and New York.”

Gubbels will lead the pension fund’s global private equity program and will oversee the investment teams dedicated to seeking out investments in direct private equity (done without using an outside fund), PE in Asia and private equity funds and secondaries.

“Since joining CPP Investments 14 years ago, Caitlin has played an important role in the growth and success of our private equity investments,” said Graham. “Caitlin’s proven ability to build relationships and generate returns across private equity opportunities makes her ideally suited to take on this expanded leadership role.”

James Bradshaw of the Globe and Mail also reports CPPIB names Caitlin Gubbels as next global head of private equity:

Canada Pension Plan Investment Board has promoted Caitlin Gubbels to be its next global head of private equity, replacing Suyi Kim who plans to leave the pension fund two months from now.

Ms. Kim has led CPPIB’s private-equity division for the past three years and will stay on until Oct. 15. Over her 17-year tenure at the pension-fund manager, she opened its Hong Kong office in 2008 and led its investments in the Asia-Pacific region. She is leaving to pursue “new global investment leadership opportunities,” according to a news release.

Ms. Gubbels most recently led CPPIB’s private-equity funds business. In mid-October, she will take over responsibility for the $136.8-billion private-equity unit, including direct and Asia investments. She joined CPPIB in 2010, after working as an investment banker at CIBC World Markets Inc.

In a statement, chief executive officer John Graham highlighted Ms. Gubbels’s “proven ability to build relationships and generate returns across private equity opportunities.”

Private equities were CPPIB’s largest asset class as of March 31, making up about 31 per cent of the total fund. Last fiscal year, the unit earned a 9.6-per-cent return, which was lower than what private-equity investors typically seek as high interest rates created uncertainty about company valuations and deal-making, and liquidity slowed to a crawl.

On Wednesday, CPPIB reported a 1-per-cent return on investments in its first fiscal quarter, which ended June 30. Total assets increased to $646.8-billion, adding $6.3-billion of investment income and $8.1-billion of new contributions transferred from the Canada Pension Plan.

Investments in public stocks, credit and assets denominated in U.S. dollars performed well, as the U.S. dollar strengthened against the Canadian dollar. But investments in government bonds were hurt by persistent inflation that tamped down the market’s expectations for rate cuts.

Over 10 years, CPPIB has reported an average annual return of 9.1 per cent.

The CPP is the primary national retirement program for working Canadians, with more than 22 million contributors and beneficiaries, and CPPIB has managed and invested its funds on behalf of its members since 1999.

Last week, CPP Investments issued a press release stating net assets total $646.8 billion at first quarter fiscal 2025:

First-Quarter Performance¹:

• Net assets increase by $14.4 billion
• 10-year annualized net return remains strong at 9.1%

TORONTO, ON (August 14, 2024): Canada Pension Plan Investment Board (CPP Investments) ended its first quarter of fiscal 2025 on June 30, 2024, with net assets of $646.8 billion, compared to $632.3 billion at the end of the previous quarter.

The $14.4 billion increase in net assets for the quarter consisted of $6.3 billion in net income and $8.1 billion in net transfers from the Canada Pension Plan (CPP).

The Fund, which consists of the base CPP and additional CPP accounts, achieved a 10-year annualized net return of 9.1%. For the quarter, the Fund’s net return was 1.0%. Since its inception in 1999, and including the first quarter of fiscal 2025, CPP Investments has contributed $438.6 billion in cumulative net income to the Fund.

“Our diversified portfolio is performing as designed with gains across most asset classes,” said John Graham, President and CEO. “We continue to prudently manage the Fund to deliver value to CPP contributors and beneficiaries over the very long term.”

The quarter’s results were driven primarily by investments in public equity and across private asset classes, particularly in credit and U.S.-dollar denominated assets, which benefited from the strengthening U.S. dollar against the Canadian dollar. These gains were partially offset by investments in government bonds, which were negatively impacted as markets around the world reduced their expectations of rate cuts by central banks due to persisting inflation.

Performance of the Base and Additional CPP Accounts

The base CPP account ended its first quarter of fiscal 2025 on June 30, 2024, with net assets of $603.6 billion, compared to $593.8 billion at the end of the previous quarter. The $9.8 billion increase in assets consisted of $5.9 billion in net income and $3.9 billion in net transfers from the CPP. The base CPP account’s net return was 1.0% for the quarter, and the five-year annualized net return was 7.8%.

The additional CPP account ended its first quarter of fiscal 2025 on June 30, 2024, with net assets of $43.2 billion, compared to $38.5 billion at the end of the previous quarter. The $4.6 billion increase in assets consisted of $0.4 billion in net income and $4.2 billion in net transfers from the CPP. The additional CPP account’s net return was 0.9% for the quarter, and the five-year annualized net return was 4.7%.

The additional CPP was designed with a different legislative funding target and contribution rate compared to the base CPP. Given the differences in its design, the additional CPP has had a different market risk target and investment profile since its inception in 2019. As a result of these differences, we expect the performance of the additional CPP to generally differ from that of the base CPP.

Furthermore, due to the differences in its net contribution profile, the additional CPP account’s assets are also expected to grow at a much faster rate than those in the base CPP account.

Long-Term Financial Sustainability

Every three years, the Office of the Chief Actuary of Canada, an independent federal body that provides checks and balances on the future costs of the CPP, evaluates the financial sustainability of the CPP over a long period. In the most recent triennial review published in December 2022, the Chief Actuary reaffirmed that, as at December 31, 2021, both the base and additional CPP continue to be sustainable over the long term at the legislated contribution rates.

The Chief Actuary’s projections are based on the assumption that, over the 75 years following 2021, the base CPP account will earn an average annual rate of return of 3.69% above the rate of Canadian consumer price inflation. The corresponding assumption is that the additional CPP account will earn an average annual real rate of return of 3.27%.

CPP Investments continues to build a portfolio designed to achieve a maximum rate of return without undue risk of loss, while considering the factors that may affect the funding of the CPP and its ability to pay benefits as they become due. The CPP is designed to serve today’s contributors and beneficiaries while looking ahead to future decades and across multiple generations. Accordingly, long-term results are a more appropriate measure of CPP Investments’ performance and plan sustainability.

Operational Highlights

Executive announcements

• Priti Singh was appointed Senior Managing Director & Chief Risk Officer (CRO). In this role she is responsible for our global risk management functions, including incorporating risk perspectives into all investment and operational processes. She previously served as Senior Managing Director & Global Head of Capital Markets and Factor Investing.

• Heather Tobin was appointed to Senior Managing Director & Global Head of Capital Markets and Factor Investing. In this role, she is responsible for leading the External Portfolio Management, Systematic Strategies, Investment Engineering & Analytics, and Strategy, Risk & Operations groups. Most recently, she was Managing Director, Head of Investment Portfolio Management in the Office of the Chief Investment Officer. She has joined the executive team.

• Caitlin Gubbels is promoted to the role of Senior Managing Director & Global Head of Private Equity, effective October 15. In this role she will lead our Private Equity program globally, including the teams dedicated to investments in Direct Private Equity, Private Equity Asia, and Private Equity Funds and Secondaries. Most recently, she was Managing Director, Head of Funds. She will join the executive team.

• After 17 years with CPP Investments, Suyi Kim has decided to take on new global investment leadership opportunities outside of the organization. Suyi has been a valuable partner and contributor to CPP Investments’ success: she opened our Asia Pacific regional office in Hong Kong in 2008 establishing it as an important hub for our global investment strategy and most recently led our Private Equity business globally out of Toronto and New York, which is one of the largest in the world.  She will remain with the organization until November to ensure a smooth transition.

• After more than 30 years in risk management, Kristen Walters will be leaving CPP Investments to be closer to home. Walters has made a significant contribution in establishing the CRO role as a standalone function and setting the enterprise risk strategy and we thank her for her service to CPP Investments.

Corporate developments

• Hosted our first two in-person public meetings for fiscal 2025 in April, which provided an accessible forum for CPP contributors and beneficiaries to ask questions of our senior leaders. Additional meetings, including a national virtual meeting, will be held in the fall to reflect our continued accountability to the CPP’s more than 22 million contributors and beneficiaries. Public meetings are held every two years across Canada.

First-Quarter Investment Highlights

Active Equities

• Realized a partial interest of our stake in Viking Holdings for net proceeds of C$714 million through the company’s initial public offering. Viking Holdings is a global cruise operator and travel company. Our initial investment in the company was made in 2016 and we continue to own a 15% stake.

Credit Investments

• Invested approximately €200 million in mezzanine financing to support Sosteneo’s acquisition of a 49% interest in Enel Libra Flexsys S.r.l., which owns and operates a portfolio of 23 battery energy storage system projects and three open-cycle gas turbine projects in Italy, with a total capacity of 2.6 gigawatts.

• Invested US$250 million in a loan facility to support the merger of two Indian pharmaceutical contract development & manufacturing organizations, Cohance Lifesciences and Suven Pharma, which are owned by Advent International.

• Invested US$100 million in a mezzanine loan secured against The Diplomat Beach Resort, a 1,000-room full-service luxury resort located on Hollywood Beach in Fort Lauderdale, Florida.

• Invested US$100 million in a mezzanine loan secured against 640 Fifth Avenue, a 315,000-square foot mixed-use property located in Manhattan, New York City.

• Expanded an existing relationship with Affirm for a committed capacity of up to US$1.4 billion in outstanding loan portfolio balance. A leading U.S. payments provider, Affirm originates unsecured loans that enable consumers to pay over time without late or hidden fees.

• Invested US$250 million in a loan facility to support CoreWeave, Inc. to purchase contracted Nvidia Graphics Processing Units (GPU) servers for cloud computing. Based in the U.S., CoreWeave provides cloud infrastructure at scale to support artificial intelligence and machine learning workstreams and is one of the largest purchasers of Nvidia GPUs.

• Invested C$185 million in an Indian Rupee-denominated loan facility to Enfinity Global to build 1.2-gigawatts of solar and wind power plants in India. Based in the U.S., Enfinity Global is a renewable energy and sustainable services company with a 22.4-gigawatt portfolio of solar, onshore wind and battery storage assets.

• Completed the sale of Amitra Capital Limited to Arrow Global Group Limited. Established in 2018, Amitra Capital specializes in managing European non-performing loans and real estate investments. We retain a majority direct economic interest in all the portfolios managed by Amitra Capital. Subsequent to the sale, we committed an additional €300 million to refinance existing loan facilities.

• Invested US$100 million in the preferred equity of Excelitas, a leading U.S.-based photonics technology company specializing in sensing, detection, imaging and illumination solutions.

• Invested US$353 million in an amend-and-extend of a senior secured term loan for Straive, a business process outsourcing company focused on education, data and publishing verticals, with operations primarily in India and the Philippines.

Private Equity

• Committed US$200 million to Clearlake Capital Partners VIII, L.P., which will deploy capital across private equity, credit and other related strategies primarily in North America.

• Committed US$600 million to Thoma Bravo XVI, L.P., which will target control-oriented software buyouts in the application, infrastructure and cybersecurity sub-sectors within North America and Europe.

• Committed US$100 million to Brookfield Capital Partners VI, which will primarily make control investments in industrials, business services, and infrastructure services companies globally.

• Committed approximately €77 million to Barley (No. 1) Limited Partnership, a single asset continuation vehicle for a leading European specialty ingredients distributor.

• Invested US$86 million alongside Silver Lake in Vantage Data Centers (Vantage). Based in the U.S., Vantage provides data center campuses to cloud providers and large enterprises globally.

• Invested US$110 million for a minority stake in Adevinta, a leading online classifieds platform in Europe, alongside Blackstone and Permira.

• Invested US$100 million for an approximate 14% stake in The Rawlings Group, a U.S.-based provider of cost containment services for health insurance clients, alongside New Mountain Capital.

• Invested US$220 million to acquire interests in two funds and two healthcare co-investments managed by Avista Capital Partners, which invests in high-growth middle-market product and technology healthcare companies in North America and Europe.

• Committed US$450 million to Ontic, a provider of specialized parts and repair services for established aerospace technologies. Ontic is headquartered in the U.K.

• Committed US$50 million to Scale AI, a U.S.-based platform which combines advanced machine learning algorithms with human intelligence to accelerate the creation of high-quality training data for AI models.

• Committed US$100 million to Kedaara Capital Fund IV, which will focus on mid-market buyout and minority growth investments in India.

• Agreed to sell our ownership stake in Dorna Sports, an international sports management, media and marketing company, which holds the global rights to organize the MotoGP and WSBK Championships. Net proceeds from the transaction are expected to be approximately C$1.9 billion, of which approximately 75% is in cash and 25% in Series C Liberty Formula One tracking stock. Our original investment was made in 2013.

Real Assets

• Committed €500 million to Blackstone Real Estate Partners Europe VII, which invests in under-managed, well-located real estate assets across Europe.

• Entered into a definitive agreement to jointly acquire ALLETE, Inc. alongside Global Infrastructure Partners for US$6.2 billion, including the assumption of debt. Headquartered in Duluth, Minnesota, ALLETE is focused on addressing the clean-energy transition by expanding renewables, reducing carbon, enhancing grid resiliency, and driving innovation. Upon closing, our ownership stake in ALLETE will be 40%.

• Announced a follow-on equity investment commitment of up to US$300 million to Encino Acquisition Partners, a Houston-based oil and gas company with a diverse portfolio of assets and focus on sustainability, to support development of the Utica oil play. We have been invested in the company since 2018.

Transaction Highlights Following the Quarter

• Sold our stake in One Paramount 1, a Grade A office development in Chennai, India. Net proceeds from the sale were US$52 million. The initial investment was made in 2021 in a joint venture with RMZ Corp in India to hold and develop commercial real estate assets.

• Committed to invest up to £75 million in a mezzanine loan facility supporting ThinCats, an alternative lender to mid-sized businesses in the U.K.

• Invested US$75 million alongside Kainos in Gehl Foods, a U.S.-based developer and manufacturer of shelf-stable protein drinks, plant-based milks, soups, cheese sauces and chili to blue chip brands, retailers, and foodservice customers across North America.

• Committed US$75 million to Radical Growth I, managed by Radical Ventures, an AI-focused venture and growth manager with offices in Toronto, San Francisco, and London. The total commitment now stands at US$204 million across various fundraising cycles since the initial investment in 2019.

• Exited our approximate 6% stake in Delhivery, India’s largest integrated third-party logistics service provider. Net proceeds from the sale were C$298 million. Our initial investment in the company was made in 2019.

• Committed approximately €550 million to acquire an approximate 20% stake in team.blue, a leading webhosting services provider and digital enabler for entrepreneurs and small and medium-sized businesses across Europe.

About CPP Investments

Canada Pension Plan Investment Board (CPP Investments™) is a professional investment management organization that manages the Fund in the best interest of the more than 22 million contributors and beneficiaries of the Canada Pension Plan. In order to build diversified portfolios of assets, investments are made around the world in public equities, private equities, real estate, infrastructure and fixed income. Headquartered in Toronto, with offices in Hong Kong, London, Mumbai, New York City, San Francisco, São Paulo and Sydney, CPP Investments is governed and managed independently of the Canada Pension Plan and at arm’s length from governments. At June 30, 2024, the Fund totalled $646.8 billion. For more information, please visit www.cppinvestments.com or follow us on LinkedIn, Instagram or on X @CPPInvestments.

I generally do not focus on CPP Investments' quarterly results but as you can read, the Fund was extremely busy in all major investment areas.

The Fund continues to do well over the long run and is very well diversified to confront the macroeconomic environment we are settling in.

The really big news last week was the promotion of Caitlin Gubbels to replace Suyi Kim as Senior Managing Director & Global Head of Private Equity:

TORONTO, ON (August 14 2024): John Graham, President & CEO, Canada Pension Plan Investment Board (CPP Investments) announced today a senior executive leadership appointment, effective October 15, 2024.

Caitlin Gubbels has been promoted to Senior Managing Director & Global Head of Private Equity and will join the Senior Management Team. In this role she will lead our Private Equity program globally, including the teams dedicated to investments in Direct Private Equity, Private Equity Asia and Private Equity Funds and Secondaries. Gubbels takes over from Suyi Kim, who has decided to leave the organization after 17 successful years at CPP Investments to take on new global investment leadership opportunities.

“Since joining CPP Investments 14 years ago, Caitlin has played an important role in the growth and success of our private equity investments,” said John Graham, President & CEO. “Caitlin’s proven ability to build relationships and generate returns across private equity opportunities makes her ideally suited to take on this expanded leadership role and contribute meaningfully to the Senior Management Team.”

Gubbels joined CPP Investments in 2010, and was most recently Managing Director, Head of Funds where she leads the Private Equity Funds business. Prior to joining CPP Investments, she worked at CIBC World Markets in investment banking, based in Toronto. Caitlin holds a Bachelor of Commerce from Dalhousie University.

“Suyi leaves with our deep gratitude, having contributed significantly to the organization’s success during her 17-year tenure. She opened our Hong Kong office in 2008, establishing our presence in the Asia Pacific region and most recently led our Private Equity business globally out of Toronto and New York, which is one of the largest and most respected in the world. She has been a valuable advisor and partner on the Senior Management Team, and we wish her all the best in the next stage of her career,” Graham added.

So here are some quick thoughts and by the way, the only reason I didn't cover this last week was because I was busy speaking to CEOs and senior investment managers covering the first half results of OTPP, CDPQ and OMERS and on Friday covered top funds' quarterly activity which is always a popular comment.

Alright, let me begin by congratulating Caitlin Gubbels for this well-deserved promotion as she has done an outstanding job managing the external fund investments which is critically important for gaining access to co-investments the Fund relies on to maintain a healthy allocation to the asset class (31%) and reduce fee drag to improve long-term performance of the PE portfolio. 

Now, I don't know Caitlin Gubbels or her predecessor, Suyi Kim, but it's clear to me John Graham is shaking things up at the executive level.

Recall, Priti Singh was recently appointed as Senior Managing Director & Chief Risk Officer (CRO) and Heather Tobin was promoted to Senior Managing Director & Global Head of Capital Markets and Factor Investing. I covered it here.

With Suyi Kim's departure and Caitlin Gubbels' promotion, I obviously don't know specifics but what I do know is private equity is in a state off flux, distributions are at historic lows, valuations at historic highs and transactions are low. 

In fact, last week, OMERS CFO & CSO Jonathan Simmons told me until rates start coming down significantly, he doesn't see activity picking up in private equity.

What I also know is other large funds are hunkering down, waiting for tough times ahead in private equity.

CDPQ's Head of Private Equity, Martin Longchamps, has been addressing overallocation in the asset class through secondaries and by investing more in the mid-market space. He's also doing this to diversify vintage year risk and prepare for hard times ahead.

It doesn't take a genius to figure out that private equity is about to go through a major reset.

Industry leaders have been warning of this and what worries many LPs like CPP Investments is that financial engineering has taken off to hide many of these structural issues.

Anyway, I am not sure why Suyi Kim left and was replaced by Caitlin Gubbs but it's crystal clear to me that John Graham's focus has shifted to tightening up risk and making sure all portfolios are delivering on their mandate as we pass through a rough patch.

I've lived through many executive shakeups on this blog and prior to it working at CDPQ, PSP and even BDC.

Sometimes CEOs need to shake things up and that's not necessarily a bad thing (but it doesn't always pay off).

Below, Graham Elton, EMEA chairman of Bain & Co, discusses the private equity market with Annette Weisbach on the backdrop of the SuperReturn conference in Berlin (June, 2024).

Second, Markets today pose a new existential question: Can there be a bubble in something if it has no price? Allison Schrager, Manhattan Institute senior fellow and a Bloomberg Opinion contributor, has more on "Bloomberg The Close." (June, 2024).

Third, more recently, Anthony Tutrone, Neuberger Berman head of alternatives, joins 'Closing Bell Overtime' to talk alternate investing in the current market environment. 

Lastly, an interview with Canada's Chief Actuary, Assia Billig, on the sustainability of the Canada Pension Plan. Take the time to watch this interview and benefit from her great insights.