Target Allocation to Alternatives: CPP does not specify allocations
Commitments to Private Equity: C$20 billion as of 12/06
Investments in Private Equity: C$8.8 billion as of 12/06
Performance: IRR of 15.5 percent in 2006; three-year IRR of 13.5 percent; five-year IRR of 8.6 percent
The Canadian Pension Plan Investment Board’s stature in private equity has risen at an almost dizzying pace. It made its first investment in a buyout fund just six years ago. But it’s now among the largest global players in the private markets, having committed more than C$7.1 billion ($6.2 billion) in the first three quarters of its most recent fiscal year, which ended March 31.
Believe it or not, the investment board is only getting started. Its commitments in those same three quarters already total nearly twice what it committed the year before, which in turn totalled about twice what it committed the year before that. Mark Wiseman, who directs CPP Investment Board’s private equity commitments, co-investments and infrastructure deals, predicted the trend will continue in the coming years.
Wiseman’s plan is to make the CPP Investment Board a robust, active investor, one that doesn’t just hand out checks but also takes the lead on sourcing and funding deals. He wants his team to be “incredibly diligent and incredibly analytical,” which is to say that he doesn’t want to “just invest blindly” in a market that is awash with general partners asking for money. Since Wiseman joined the investment board in 2005, the number of personnel in his department has nearly quadrupled to 39 staff members. Twelve are devoted to monitoring and maintaining relationships with general partners.
“I wasn’t interested in managing a passive portfolio,” said Wiseman, a former Sullivan & Cromwell attorney. Wiseman was lured to the CPP Investment Board from his post leading the private equity fund and co-investment program for the Ontario Teachers’ Pension Plan.
That ambition is beginning to show. In the last year and a half, Wiseman’s team has written about $2 billion worth of equity checks as a co-investor in three infrastructure deals, including the take-private last year of British utility Anglian Water and the buyout in 2005 of Chile’s electrical utility. It went side-by-side as a direct investor with the club of megafund general partners—including The Blackstone Group, Kohlberg Kravis Roberts & Co., Providence Equity Partners and Silver Lake—that delisted Sungard Data Systems in 2005. Earlier this year, it formed a joint venture with Ontario Teachers’ to establish a €250 million fund ($335 million) for investment in Turkish companies.
With this recent activity, CPP Investment Board has joined the ranks of a few other activist Canadian pension plan general partners. Similar to Ontario Teachers’, the Caisse de dépôt et placement du Québec and the OMERS, the CPP Investment Board isn’t afraid to take the lead or dish out big money for co-investments. Most recently, informed chatter suggested the CPP Investment Board would join Ontario Teachers’ and Providence Equity Partners in a bid to buy BCE, the parent of Bell Canada, in what would be the biggest LBO ever.
“Canadian institutions are a little bit different,” said Peter Gottsegen, managing partner of CAI, a New York-based buyout firm that does the majority of its deals in Canada. “They really do dig in and get involved like a private equity firm in the United States. In the United States, institutional investors rely on general partners for due diligence.” Added Gottsegen: “As an LP in our funds, CPP is what you would expect: They are very smart and very sophisticated.”
The Canadian government created the CPP Investment Board in 1997 to manage whatever money was over and above that needed to pay the pensions of 16 million retirees. Following a three-year incubation period, the investment board made its first investment in 2000 and its first private equity investment in 2001. In seven years, its total assets have grown from C$44.5 billion to more than C$110 billion.
The investment board is staring at a rare opportunity: Contributions to the pension system are expected to exceed the required payouts through 2022. That means that for the next 15 years, the Canadian Pension Plan won’t need a dime from its investment board, and even after 2022 the draw from the surplus will remain small for decades.
That’s a big reason that the CPP Investment Board has taken such an interest in buyout funds, which typically have 10-year lives, Wiseman said. “Given the extremely long-term nature of our liabilities…it was identified very early on by the management of the investment board that tilting toward alternative assets—trading liquidity for return—was something that made sense,” he said.
Since its first private equity investment in 2001, the CPP Investment Board has committed roughly C$20 billion ($17 billion) to private equity funds, about C$8 billion of which has actually been invested. Its roster of general partners brims with brand-name megafunds and mid-market specialists—from Apollo Management and Permira to Diamond Castle Holdings and MidOcean Partners.
It might come as a shock to learn that, technically speaking, the CPP Investment Board doesn’t set allocation targets to private equity. Instead, the 10-year-old institution funnels capital into a broad asset class that could be dubbed “equity”—encompassing both publicly traded and privately held securities.
This philosophy holds for other assets classes, too. Rather than focus on “preconceived buckets” like private equity, real estate or infrastructure, Wiseman said the CPP Investment Board employs what it calls a Total Portfolio Approach. It allocates money to different investments based on their expected risk and return characteristics.
“The investment philosophy that we have, boiled down to its simplest form, is that an equity is an equity is an equity, meaning that regardless of whether an equity is traded on a regulated exchange or if an equity happens to be privately held, that security is pretty much the same,” Wiseman said.
As a practical matter, this strategy leads the investment board to invest about 6.5 percent of its total capital in private equity funds, and about 9 percent in alternative assets, which include real estate and infrastructure holdings, along with private equity. This puts the institution on par with other big pension plans, Wiseman said.
By not fixing a target allocation for private equity, it’s theoretically possible, though extraordinarily unlikely, that the CPP Investment Board would put all of its equity money, about two-thirds of the investment board’s C$110 billion under management, into buyout funds and venture capital pools, Wiseman said. While that would never happen, it’s reasonable to expect that the Total Portfolio Approach will push the CPP Investment Board into committing even greater sums to private equity funds.
“We should do as much private equity as we can do, as long as we can outperform the risk-adjusted returns of the public market,” Wiseman said.