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CPPIB debuts growth equity strategy, eyes winners in market ‘reset’

Of primary interest will be high-growth tech businesses that prove their mettle 'as the tide goes out,' Leon Pedersen, CPPIB's new head of growth equity, told Buyouts.

Canada Pension Plan Investment Board unveiled a growth equity strategy aimed at the best opportunities emerging from a correction taking hold in private markets.

Growth equity, recently flying high due to digitalization trends, is being tested by uncertainty and volatility caused by inflation, rate hikes and other factors. Beaten-down public tech values are expected to roil growth equity investing and portfolios over the next six to 12 months.

The result will be “a reset” that engenders compelling dealflow for firms with ready capital to invest, Leon Pedersen, CPPIB’s new head of growth equity, told Buyouts. “I really welcome that and it’s great that we have most of our capital deployment ahead of us in a market that is adjusting.”

Of primary interest to CPPIB will be high-growth tech businesses that prove their mettle “as the tide goes out,” he said. “I think we’ll have a chance to get through our partners and our networks access to the most attractive companies coming out of the other side of the correction.”

Because it will take time for opportunities to unfold, CPPIB “will be patient,” Pedersen added. “We’re going to see some good vintage years over the next couple of years in growth equity.”

Funds and directs

CPPIB, which totals C$539 billion ($428 billion), rolled out its growth equity strategy last month. It is effectively a merger of two in-house platforms: thematic investing and venture capital.

Thematic investing, formerly led by Pedersen, was set up in 2015 to capitalize on mega-trends and structural shifts that research showed would drive the economy of the future. Often utilizing growth equity as a tool, it focused on investing across asset classes and in both private and public markets.

CPPIB created a VC arm in 2019 to partner with top-tier early-stage and growth funds and co-invest in startups in a range of tech sectors. To oversee a Silicon Valley-based team, it hired Monica Adractas, the ex-global director of Facebook’s Workplace. She is now a managing director, growth equity.

With the merger, the growth equity strategy gets “strong relationships and partners” and “strong domain expertise,” Pedersen said. Its fund portfolio reflects “some of the best managers out there,” such as Dragoneer Investment Group and the growth vehicles of Iconiq Capital and Sequoia Capital.

The strategy also gains an initial portfolio of investments. They include AI-enabled drug discovery company Insitro and animal-free dairy maker Perfect Day – backed by thematic investing – as well as database management system Aerospike and digital banking solutions provider Sensibill – backed by VC.

Pedersen’s team will build on this foundation by making fund commitments and direct and co-investments. Direct investing of $25 million to $200 million-plus will target North American and European businesses in sectors like automobility, climate change, fintech and healthcare.

As the scope of growth equity investing expands to include, among other things, more globally sourced dealflow, Pedersen said CPPIB plans “to keep the funnel wide.” One opportunity he has in mind are tech companies that “went public too early” and may need “a safe harbor.”

Amped-up competition

Competition in the growth equity space recently intensified, thanks mostly to record fundraising. Pioneers like General Atlantic, Summit Partners and TA Associates today mix with multiple other specialists, the vehicles of buyout and VC shops, emerging managers and so-called “crossover” investors.

“Nowadays, growth equity is a bit of a Rorschach test,” Jon Korngold, head of Blackstone Growth, told Buyouts earlier this year. “Everyone calls themselves growth equity.”

CPPIB’s move into a crowded arena does not faze Pedersen, particularly with a correction underway. “I was more concerned six months ago than I am now.”

A key differentiator of the new strategy, he said, will be “a one-fund approach.” This allows the growth equity team to tap into CPPIB’s global resources and collaborate with other internal groups, such as direct private equity and private credit. These capabilities, plus a long horizon, support investing “through the whole growth cycle.”

The growth equity team consists of 16 investment professionals operating from Toronto and San Francisco. Along with Pedersen and Adractas, senior members are managing directors Paul McCracken and Caitlin Walsh.

CPPIB hired Pedersen in 2019 from BI Asset Management, where he was head of equities. Before, he worked for more than two decades with Nordea Asset Management, including as head of thematic investing.