Flying start: CAAT quadruples private equity assets in four years

CAAT Pension Plan grew its private equity assets more than 4x following a recent decision to run the strategy entirely in-house.

The C$18.2 billion ($13.4 billion) CAAT – for many, a new LP name – oversaw about C$4 billion in private equity assets last year, up from C$900 million in 2018, director Adam Buzanis told Buyouts. As such, private equity made up 21 percent of all assets as of December 2022, compared with 9 percent four years ago, putting the system in the same league as its largest global peers.

The greatly increased allocation owes to a 2018 move by CAAT to internalize investing, eliminating a prior reliance on third-party consultants. Buzanis, brought on a year later to manage the transition and hire staff, said the strategy has been “executing exclusively in-house” since 2021.

Among other things, this created further capacity to invest directly alongside fund partners. Co-investments, which have grown steadily over time, presently account for over C$1.1 billion across 23 deals – or about 30 percent of total private equity assets.

While it has no fixed target, CAAT’s pacing schedule suggests co-investing is on track to reach 40 percent of the portfolio by 2026.

Internalization of the private equity strategy was part of a long-term CAAT plan reflecting its “growing sophistication across all asset classes,” Buzanis said. He likens this gradual evolution to the “crawl-walk-run” method of achieving goals, noting “we’re running now.”

This is borne out in performance. In the robust market of 2021, the portfolio generated a 41.6 percent one-year net IRR. In last year’s subdued environment, it earned a more modest 11.4 percent, though this IRR still exceeded the benchmark. Annualized over five and 10 years, returns are “north of 20 percent,” Buzanis said.

How CAAT invests

CAAT’s private equity strategy targets mostly mid-market buyout and growth opportunities in North America, along with some exposure to Europe and Asia. Sectors of interest are business services, consumer, financials, healthcare, industrials and technology.

The mid-market is an essential aspect of the strategy, Buzanis said, because of its rich vein of attractive opportunities. “We think there’s more alpha there.”

This focus aligns with CAAT’s fund preferences, which take in generalist GPs as well as industry and region specialists, all of them with a history of EBITDA-led value creation and strong exits. Co-investment flow and advisory committee seats are a “priority when considering new relationships,” Buzanis said.

Today, CAAT has roughly 30 GP relationships, two-thirds of which are active and available for fund commitments, typically in the range of $50 million to $100 million. Active vehicles include BlackRock Long Term Private Capital Fund, according to the system’s 2022 annual report.

CAAT is “opportunistic” with respect to co-investing – prepared to syndicate alongside large fund partners or “step in as a co-underwriter in smaller deals where our equity check is more meaningful,” Buzanis said. The in-house private equity team, dedicated solely to sourcing, execution and portfolio management, aims to play a value-added role in this process.

Last year, CAAT committed C$350 million to funds and deployed C$150 million to co-investments, down from levels in 2020 and 2021. Buzanis expects comparable volumes this year, with three fund commitments and four co-investments made during the first half.

Active in a dry spell

Like many North American LPs, CAAT is overallocated to private equity, Buzanis said. However, due to several factors – such as the multi-employer pension plan’s on-going expansion through mergers – liquidity is “healthy.”

Even so, CAAT is stepping carefully in an environment roiled by economic uncertainty, inflationary pressures and rising interest rates. “We’re cautious on the market and highly selective right now but continue to deploy into interesting opportunities in the right industries and at reasonable valuations,” Buzanis said.

This year could end up being a good vintage, he said, “if deals start getting done at reset multiples, but we’re still waiting for that to happen.”

Weak M&A and other exit markets are a particular concern, as the private equity portfolio is “currently bloated with unrealized gains,” he said. CAAT nonetheless “remains patient,” anticipating some realizations over the next six to 18 months as bid-ask spreads begin to narrow.

At a moment of slower fundraising, caused mostly by overstretched LPs, CAAT also expects to maintain a steady stream of fund commitments, in part to avoid vintage-year concentration. Supply shortages, Buzanis said, have resulted in a “ton of inbounds from sponsors, bankers and placement agents we didn’t previously hear from.”

Apart from the 2018 decision to internalize operations, CAAT’s private equity strategy has been largely consistent over time, Buzanis said. Going forward, the intention is to “stick with what’s worked for us” with a focus on “scaling and developing more specialization.” To this end, one or two professionals will be added each year to the existing Toronto-based team of six.

Before joining CAAT, Buzanis headed the investment group at multi-family office Prime Quadrant, overseeing funds, co-investments and direct minority investments.