CPPIB cautious as deal prices soar

“We are trying to be extra cautious,” said Costello, a London-based executive who focuses on funds, secondaries and co-investments. “I think that you need to be selective. It’s obvious, but, have we seen this movie before?”

Canada’s C$238.8 billion ($189.3 billion) pension plan often invests alongside large private equity firms in North American and European deals, typically as a co-sponsor or co-investor. The pension prefers to co-invest or co-sponsor deals with its existing fund managers, Costello said.

“We’re investing in deals that can weather the storm,” he said. “A big part of the analysis that goes into it for us is not only the deal, but also the people you’re partnering with. Have they gone through downturns before?”

The pension’s portfolio includes stakes in several of the industry’s largest and most troubled pre-crisis buyouts, including Clear Channel, Energy Future Holdings and Freescale Semiconductor. NXP Semiconductors NV recently announced that it would acquire Freescale in a deal that will net its private equity-backers a little more than cost.

In retrospect, many of the deals made before the crisis only made sense “if the world was great for years to come,” Costello said.

In addition to its direct and co-investment strategy, CPPIB also commits to private equity funds. The pension, which launched its private equity program in 2001, allocated $2.3 billion to the asset class through its funds strategy last year.

In February, CPPIB committed C$330 million to Northleaf Capital Partners, a Canadian fund-of-funds that invests in small and middle-market managers with less than C$1 billion of committed capital. CPPIB has a longstanding relationship with Northleaf, having committed more than C$1.6 billion to the firm since 2002.