Strategy overhaul: CPPIB chief executive John Graham speaks in an interview in London. Canada’s largest pension plan, CPPIB is shifting some private equity holdings into a separate group and considering taking on more passive co-investments. — Bloomberg
TORONTO: For the likes of Blackstone Inc and KKR & Co, a multibillion-dollar opportunity beckons from Canada.
Some of the country’s biggest pension funds are looking to scale back their direct private equity bets, according to people familiar with the matter.
Instead, they’re moving to invest more through established buyout giants, or partner on deals with other big investors such as endowments and sovereign wealth funds.
Already, the Canada Pension Plan Investment Board (CPPIB), the country’s largest such money pool, has shifted some private equity holdings into a separate group and is considering taking on more passive co-investments, according to public records and some of the people familiar with the matter.
The Ontario Municipal Employees Retirement System (Omers) overhauled its private equity unit, bringing in a new external head, halting direct buyouts in Europe and cutting a team focused on the asset class in Asia.
In interviews earlier this year, the chief executive officers of the Ontario Teachers’ Pension Plan and Caisse de Dépôt et Placement du Québec both said they’re trying to control risk by leaning more on partners and third-party firms to help them manage private investments.
Altogether, the large Canadian pension funds, known as the Maple Eight, have amassed more than C$400bil of private equity holdings, a sum that’s equivalent to roughly a fifth of their assets.
But with deal activity remaining muted, it has become harder for some pension managers to justify the heightened risks and extra resources needed to manage controlling stakes in companies, according to people familiar with the industry.
“Private equity investing is resource intensive and very, very complex,” said David Scopelliti, the global head of private equity and private credit at Mercer, one of the world’s largest outsourced asset managers.
Omers, a C$141bil fund that’s long been the most active in direct investing, made notable changes, including launching a global funds strategy and shutting its European direct-investment arm after some bets struggled.
It has completed only one direct buyout – the acquisition of IT-services firm Integris – in the past two years, according to its website.
The pensions may be confronting the reality that private equity’s golden age has passed, according to Ira Gluskin, former chair of the University of Toronto Asset Management Corp.
Many funds built sizeable internal buyout teams during a period defined by cheap leverage, soaring valuations and easier exits, conditions that no longer exist.
“You cannot do the same thing every year and hope to be successful in this very competitive environment,” Gluskin said in an interview.
Once seen as a path to superior performance, direct ownership has, at times, added operational headaches for Canada’s pension managers, according to people familiar with the matter.
Moreover, it’s tough for these public entities to compete with giant alternative investment firms for talent.
Still, pension firms that have been scaling back on direct ownership have stressed that they’re not abandoning the strategy.
It’s a matter of being more selective about what they do and where they do it, rather than ditching the direct model altogether.
This story is based on interviews with more than 20 people familiar with the industry, including Canadian pension plan officials and fund managers. Some of them asked not to be identified discussing matters that are sensitive.
Omers said it’s still committed to doing buyouts in North America, including having controlling stakes in firms.
“Direct investing continues to be core to Omers Private Equity’s strategy,” chief investment officer Ralph Berg said in a statement.
The manager is expanding its private equity funds programme to complement that and help with diversification, he added.
La Caisse said partnerships are an established part of its strategy, but that it remains primarily a direct investor in private equity.
Ontario Teachers’ said direct investments represent about 75% of its private equity capital today, with the other 25% in funds run by outside firms.
The pension plan believes it can get the best results by doing both, according to Dale Burgess, executive managing director of equities.
“Our approach will continue to include investing directly in businesses, particularly in areas where we have a deep track record and in-house capabilities, as well as investing strategically with leading general partners that can deliver performance, unique insights and co-investment opportunities,” Burgess said in a statement.
CPPIB declined to comment.
Ontario Teachers’ pioneered direct investing by major Canadian pensions more than 30 years ago.
For a long time, in fact, it controlled one of the country’s most beloved businesses, the Toronto Maple Leafs hockey club, and made a fortune when it was sold.
By the mid-2000s, several of Canada’s big pension plans had evolved into global private equity dealmakers, competing against buyout firms to avoid outside fees and exert more control over portfolio companies. — Bloomberg
