Canada's Large Pension Funds Feeling the Private Equity Drag

Mary McDougall of the Financial Times reports private equity portfolios underperform at big Canadian investors:

Disappointing returns from private equity investments meant Canada’s big pension funds underperformed last year, as a downturn in the buyout sector weighed on some of the world’s largest investors in private assets.

Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan and Caisse de dépôt et placement du Québec have all lagged their benchmarks over the past year, according to their latest reports.

A rise in global borrowing costs in 2022 and 2023 ushered a more difficult period for private equity, with fundraising and exits sluggish, while public equity markets benefited from a long bull market that lifted many pension funds’ benchmarks.

Despite a rocky period for private equity, the managers of the pension funds say their portfolios have performed as expected on a long-term view and are designed to rise less than wider stock markets in years of high growth while benefiting from limited losses in more difficult periods.

CPPIB, which manages C$714bn ($516bn) pension assets for 22mn Canadians, reported this week that its allocation to private equity — which makes up 23 per cent of the core portfolio — had been the biggest relative drag on its performance over the past five years.

Canada’s state pension fund manager said it was “not immune to short-term market shifts” and that on a 10-year basis it had performed as designed, with private equity delivering more than its reference measure. The total performance of the fund was also ahead of its benchmark over the past decade, CPPIB said.

Other Canadian Pension funds have also faced a period of weaker private equity returns relative to benchmarks and previous years.

The private equity portfolio of Ontario Teachers’ Pension Plan, which has C$266bn of assets, delivered about half that of its benchmark portfolio of largely listed equities — dominated by big US tech stocks which soared last year. The previous year, the gap between the fund’s private equity returns and the benchmark was even larger.

However on a five-year view, OTPP’s private equity returns have been in line with its benchmark portfolio at 12.4 per cent.

OTPP said private equity had been “a highly profitable asset class for Ontario Teachers’ and remains an area of focus for the plan”.

Charles Emond, chief executive of the C$473bn (£253bn) Caisse de dépôt et placement du Québec, said that across five years the fund’s private equity portfolio had outperformed.

“2022 and 2023 was a bit of a pause in valuation, deal flow and money not coming back at the same pace as usual which led to some caution before being able to redeploy in the asset class,” Emond said.

“It’s been volatile a little bit but it’s still a very successful asset class for us and we want to keep deploying into it,” he added.

Before I delve into this, go back to read a few comments:

• A Conversation With OTPP's CEO Jo Taylor on Their 2024 Results
• A Discussion With CDPQ's Head of Liquid Markets on Their 2024 Results
•  A Conversation With CPP Investments' CEO on Their Fiscal Year 2025 Results

Private equity is an important asset class for all of Canada's large pension funds, even more so for CPP Investments, one of the largest, if not the largest institutional investor in private equity.

But there's no denying that private equity is facing some serious headwinds: higher rates, higher costs, higher wages, historically low distributions,  stretched valuations, etc.

Back in April, I discussed why Canadian pension funds like OMERS and Teachers were cutting back on pioneering private equity investments to focus more on co-investments with top strategic partners (basically the CPP Investments approach).

Adding to the challenges in private equity is public market indexes which many use to measure mid market buyouts are dominated by the Mag-7 stocks and other growth stocks which have taken off in the last couple of years. 

Faced with low distributions, Canada's large pension funds have been selling private equity fund stakes in the secondaries market to generate liquidity and diversify vintage year risk.

For example, in April, CPP Investments sold a portfolio of 25 private equity fund interests in North American and European buyout funds for $1.2 billion in net proceeds (read my comment here). 

And Canada's pension funds aren't the only institutional investors selling private equity stakes.

Today, Reuters reported that Yale is nearing a deal to sell $2.5 billion of private equity stakes, according to Bloomberg News reports: 

Yale University is finalizing the sale of up to $2.5 billion of its private equity and venture capital assets, Bloomberg News reported on Wednesday.

 

The Ivy League school's endowment is in advanced talks on the portfolio sale, code-named "Project Gatsby," with an overall discount expected to be less than 10%, Bloomberg News reported citing people familiar with the matter.

 

In April, Reuters reported that Yale was exploring a sale of private equity fund interests and was being advised by investment banking firm Evercore. 

 

The sale discussions includes a so-called mosaic deal that allows buyers to cherry-pick specific investment funds they would like to acquire, and multiple buyers, including Lexington Partners and HarbourVest Partners, have assessed the portfolio, Bloomberg said.

 

Yale University and Lexington did not immediately respond to a request for comment. HarbourVest declined to comment. 

When the mighty Yale endowment is selling $2.5 billion in PE stakes in the secondaries market, you know things are tough (read the full Bloomberg article here to gain more insights).

With private equity facing stiff headwinds, segments of real estate still reeling from the pandemic shock, and the S&P 500 humming along after the Trump tariff tantrum, led by the Mag-7 and other AI related stocks, it gave more firepower to Andrew Coyne to criticize CPP Investments' active management, but they addressed his critique head on. 

Still, there is an uneasiness as many fear the good years are over in private equity, there's too much money that invested in the asset class over the last ten years and going forward, returns will be more muted as rates stay persistently higher for longer.

Moreover, the rate environment favours private credit over private equity and more liquid alternatives (ie. hedge funds).

Is there something structural going on in private equity? Maybe but I've seen these periods of slowdown before and when everyone thinks it's dead, it comes roaring back.

There are other concerns. Today I read that  Apollo warned Australian regulator against taking 'broad brush' approach to private markets rules.

Add regulatory scrutiny to the list of challenges the industry is facing. 

Having said all this, the most important thing to remember in private equity is it's a long-term asset class, you really need to measure success over a 5 or even 10-year period. 

Lastly, coming back to the FT article above, Alex Beath left his comment on the FT:

I think there is an error in the article in that CPP as far as I can tell does not publish a one-year benchmark return for anything other than total fund return. I think the 2024 fiscal year return of 9.6% appearing alongside the 2025 fiscal year return of 8.7% was used in error. Otherwise, I can't make heads or tails of it. Can the writer / editor comment as to where the one-year CPP PE benchmark comes from?

He also posted this on LinkedIn:

I’m working on something substantial on the performance of the private equity portfolios of Canadian Maple 8 institutional investors,. which I’ll release soon on alexbeath.com, but this story linked below from Mary McDougall of the FT came to me first. “Private equity portfolios underperform at big Canadian Investors” sort of tells itself – three of the four CDPQ, CPP Investments, OMERS, and Ontario Teachers’ Pension Plan is said to have underperformed their benchmark in 2024 with only OMERS outperforming but with the lowest return and benchmark which fits with the title in a way (if we look at the annual report 9.5% return vs. 8.7% benchmark). At an extreme, Ontario Teachers underperformed by 12 percent! (11.7% return vs. 23.7% benchmark return.)

I mention this as I work on my own research because the numbers don't match mine in at least one respect. CPP, as far as I know, didn’t underperform in 2024 as reported. In fact, CPP doesn’t publish a one-year benchmark return at the asset class level at all. It appears that whoever gathered the data for FT made a simple error, and mistook the 2023 one-year private equity return for the 2024 one-year benchmark – the returns, 8.7% in 2024 and 9.6% in 2023 are published side by side on page 60 of CPPs 2025 annual report and so it’s the kind of mistake you could make if you’ve been looking at lots of these things, which after a while start to look the same. I spoke to several people at CPP who agreed with me that the data was wrong. (However, if I had to guess, the CPP private equity performance was in fact even worse, but again, more to say on that soon.)

Another fact is that many big pension funds are getting absolutely raked in the media for recent underperformance. Stories making mistakes don’t help. Indeed, many friends of mine not working in the industry have been happily sending me links to stories like this one from our national newspaper the Globe and Mail published this weekend, “Overstaffed, overpaid and underperforming, the CPP investment fund is in need of a sharp course correction”. With a title like that, I don't feel the need to read it. I'd wager there isn't much proof of "overstaffed", "overpaid", or even "underperforming".

The problem with all of this is that the nuance in the performance data is completely lost on journalists. Maple 8 funds are huge private market investors, and if the benchmarks aren’t perfect, short-term value added is just noise. One way around this is to wait out the storm and only publish a five- or ten-year performance number, like what CPP does at the asset class level. But they have to publish a one-year total fund performance number anyway, and that’s dominated by the exact data they didn’t really trust in the first place. The answer is of course better benchmarks, but how do you do that?

Great insights there and he's right, CPP Investments only publishes its relative performance in PE over a 5 and 10-year period (see link to my interview with CEO above):

Over the past five years, PE delivered a net return of 14.7%, an increase from the prior five-year period. The increase was driven by positive net returns in fiscal 2025 and the rolling off of fiscal 2020 between the comparative periods. PE’s externally managed fund investments, and direct assets in the information technology, financials and consumer discretionary sectors contributed to its absolute results over the five-year period. Over the same period, PE generated a net value added of negative 5.5% against its benchmark, excluding the impact of foreign currency, which was lower than the previous five-year period. This was primarily due to the rolling off of fiscal 2020, where PE delivered double-digit positive net value-add above its public market index benchmark during the COVID-19 pandemic market downturn. Over the past 10 years, PE delivered a net return of 13.5%, with a net value added of 2.6% above its benchmark, excluding the impact of foreign currency. The department’s access to the full value chain in private equity globally, scale to compete at the larger end of the direct market, well-developed relationships with general partners, and investment selection positively contributed to its results over the 10-year period.  

And CEO John Graham shared this with me:

I think what's important over the last five years is the portfolio underperformed the benchmark portfolio because of decision we made. The biggest source of underperformance is because the Private Equity portfolio is largely a mid cap portfolio and it's US centric too, and it's benchmarked against a levered  public equity large cap index.  So it's benchmarked against a levered S&P 500 and you're not going to be invested in mid caps and beat a levered S&P 500 especially with what has happened with the Mag-7. 

But when I look at the performance, that was a deliberate decision. We don't think we should have that level of concentration in a handful of companies and for a pension plan, who we are and what our identity is -- we are not a wealth maximizing vehicle -- we are a pension plan that is there to make sure every week or month or biweekly when money is taken off a Canadians' cheques, in return they get a promise that when they retire they have a benefit that they earned every dollar of for the rest of their life and protect it against inflation. And our job is to build a portfolio and make sure that promise is kept. 

What is critically important to understand is the approach CPP Investments and others use in private equity -- funds investments and co-investments -- works and generates added value over a longer period.

Private equity isn't going away, there are plenty of good private companies out there to invest in.

And large pension funds are looking to build a resilient and highly diversified portfolio so they will continue to invest in this asset class despite the headwinds it currently faces.

Alright, let me wrap it up there.

Private Equity investors and GPs are all meeting in Berlin for the SuperReturn International conference.

Below, Mark Jenkins, head of global credit at Carlyle (formerly worked at CPP Investments) joins CNBC from the sidelines of the SuperReturn conference to discuss the firm's expansion into Europe and how Trump's tariffs are impacting the private.

Also, Blair Jacobson, co-president of Ares Management, joins from SuperReturn to discuss what he is seeing at the conference, the future of Private Equity, and whether the industry has seen its peak already.

Third, James Reynolds, global co-head of private credit at Goldman Sachs Asset Management discusses the state of private credit and what he expects from European markets.

Lastly, Fabio Osta, head of the alternatives specialists team in EMEA Wealth at BlackRock joins from the sidelines of the SuperReturn conference to discuss the 50/30/20 portfolio, and why private markets are an essential parts of their clients' investment strategy.