CPP Investments Balks at Paying Co-Investment Fees in Private Equity
Institutional investors will not allow alternative asset managers to start charging them for large deals despite the emerging competition from retail money, according to Canada Pension Plan Investment Board, one of the world’s largest retirement funds.
Large pensions and sophisticated investors like CPPIB have for decades jointly invested with buyout firms in marquee transactions on a no-fee, no-carry basis. An influx of capital from wealth channels now threatens to change that dynamic.
Any moves by alternative asset managers to levy co-investment fees “will undoubtedly have an impact on our appetite for the asset class, because that’s the model we run,” CPPIB chief executive John Graham said in an interview on Wednesday. If the firm can’t keep the traditional structure “we actually will tend not to partner with them,” he said.
Private equity firm EQT, for one, has been working to quell concerns that it might start charging investors to do those transactions after its chief executive officer described it as a potential new source of revenue. Institutions are “economic animals” and if the fee model changes they will reevaluate their allocations to the sector, Graham said.
The shift in the investor base in private equity is playing out even as institutions get more selective about where they park their money after waning performance from the asset class in recent years. Larger investors are also worried they’ll get smaller allocations for deals amid the competition from wealthy individuals.
CPPIB had net assets of $777.5 billion at the end of September. About 29 per cent of the portfolio is made up of private equities, it reported earlier this year. It’s also a big investor in real estate, infrastructure and credit.
It’s still too early to tell how the influx of retail money will impact the industry and co-investments like those favoured by CPPIB, Graham said.
“Institutional investors are still the bedrock investors,” he added. “Retail might be the shiny new thing, but for 20-plus years, institutional investors have helped build these franchises.”
Still, he said, the influx of retail brings in other considerations, like regulatory scrutiny. Investments like junk leveraged credit “are buyer beware markets,” he said. “These are not public equity markets, which is a gentleman’s game.”
CPPIB is also taking a differentiated approach to public markets, deliberately choosing to be underweight the Magnificent Seven megacap technology stocks, which means the manager currently underperforms the S&P 500.
“Diversification is an act of humility,” he said. “The concentration level in the United States equity markets is not a risk we want to take.”
I'll get back to the Mag-7 below, first on the subject of potentially levying fees on co-investments.
Put simply, CPP Investments' active management strategy which was introduced back in 2006 relies heavily on the partnership model, meaning, they invest in private equity funds but they expect big co-investment opportunities in return where they pay no fees to reduce fee drag.
Co-investments serve two purposes: to reduce fee drag and to allow them to maintain a heavy allocation to the asset class.
If they are forced to pay fees on co-investments because of intense competition from wealth management and other retail outfits, then they will be forced to rethink their hefty allocation to this asset class.
It's that simple, I personally don't see this happening, big institutional pension funds, sovereign wealth funds and insurance funds make up the bulk of the assets private equity manages so they'd be shooting themselves in the foot imposing fees on co-investments for this group.
But this example and John Graham's comments show us that the landscape in private markets is changing, there is intense competition in private equity, infrastructure, real estate, private credit and structural changes there are forcing big pension funds to rethink their strategy.
Below, recent market volatility and geopolitical uncertainty have raised questions about the US' status as a safe haven. But there are still no strong alternative 'safe harbours', says John Graham, President and CEO of CPP Investments, Canada's largest pension fund. Graham says the fund is underweight AI in the US, but seeking more opportunities in large-scale infrastructure. It also remains committed to private equity. He spoke with Francine Lacqua on 'Bloomberg: The Pulse'.
John raises excellent points on the symbiotic relationship between them and private equity and how that model has been a win-win over the past 25 years.
He also mentions they're underweight Mag-7 stocks and here a couple of points. First, there seems to be a bifurcation going on in the Mag-7 where Google and Nvidia are leading the rest (same with Broadcom if you expand to Mag-10). Second, no doubt about it, cyclical stocks like financials and industrials and defensive pharmaceuticals have outperformed technology shares in the last quarter. Whether this continues in 2026 remains to be seen.
On that topic, Ed Yardeni, Yardeni Research president, joins 'Squawk Box' to discuss the latest market trends, why he's moving away from being overweight on Magnificent 7 stocks, sectors he's in favor of, the Fed's interest rate outlook, and more.
Third, in a wide-ranging interview with Yahoo Finance Executive Editor Brian Sozzi, Apollo Global Management CEO Marc Rowan discusses the Federal Reserve's rate cut decision, the rise of private credit markets, and data centers (Note: Apollo Global Management is the parent company of Yahoo Finance).
Lastly, earlier today, Bloc MP Christine Normandin expressed disapproval for Prime Minister Mark Carney's rumoured pick for Canada's ambassador in the U.S., Mark Wiseman, during question period.
Mark Wiseman is the former Chair at AIMCo and CEO of CPP Investments and it's clear his rumoured appointment is making opposition parties howl.
Poor Mark, he's getting no respect but he's a born politician and very smart guy so let's give him a shot (and for the record, I don't agree with the Century Initiative, if we increase immigration at the expense of housing, education and health care, we are doomed. We need better coordination).
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