Keep knowledgeable with free updates
High pension funds are stepping again from competing head-on with non-public fairness teams to purchase up corporations, as an alternative opting to take a position alongside them to safe entry to the very best offers.
Caisse de dépôt et placement du Québec (CDPQ) and the Ontario Municipal Staff Retirement System (Omers) are scaling again the proportion of their funds uncovered to straight owned non-public corporations, whereas Ontario Academics’ Pension Plan has mentioned it’s eyeing extra strategic partnerships.
A tricky interval for exiting investments over the previous two years has inspired the Canadian pension teams to again extra corporations alongside large non-public fairness managers as direct possession has turn into more and more difficult, requiring huge in-house groups and the next danger urge for food.
“The non-public fairness downturn is making the direct investing mannequin more durable as we face a scarcity of viable initiatives and issue in exiting from our present investments,” mentioned an govt at one of many funds.
There are three foremost methods pension funds allocate to personal fairness: direct investing, the place they purchase a stake in an organization on their very own; by a personal fairness fund; or by co-investments, the place they spend money on corporations alongside a personal fairness fund however with out having to pay the fund charges.
Canada’s $3.2tn pension system is a serious non-public fairness investor with 22 per cent of its public sector funds’ property allotted to the asset class, in keeping with think-tank New Monetary.
At current, the 9 greatest Canadian pension funds have about half of their non-public fairness publicity in buyout funds and half by direct holdings and co-investments, in keeping with evaluation from CEM Benchmarking.
However that stability has shifted as pension funds have come underneath stress to spend money on buyout funds to safe entry to the very best co-invest offers, the place they get to take a position alongside the companies however with out having to pay fund charges.
CDPQ is within the second 12 months of a five-year plan to decrease the proportion of direct non-public fairness investments from 75 per cent to 65 per cent, whereas Omers pivoted from allocating little or no to personal fairness funds to saying final September it will not make investments straight in European alternatives.
Ontario Academics’ has mentioned it’s “tactically trying to make investments extra with different companions in areas the place it is sensible because the portfolio and market evolves”, although direct investments are nonetheless a core a part of its technique.
The shift comes because the non-public fairness business has ballooned in dimension, leading to fierce competitors for each property and expertise — and as some Canadian pension funds are additionally rethinking their US publicity.
Marlene Puffer, former chief funding officer at Alberta Funding Administration Company, mentioned Canadian pension funds have been “within the boat of getting so as to add extra worth into each holding as a result of exits are more difficult now — they should do extra fingers on administration and it turns into more and more complicated”.
She added that pension plans allotted cash to personal fairness funds on the understanding that they’d be invited to spend money on most of the co-investment alternatives that come up with them.
It was “troublesome for Canadian pension funds to compete for expertise with Apollo that pays a lot better”, one other fund govt mentioned.
Martin Longchamps, CDPQ’s head of personal fairness and credit score, mentioned the rationale behind its shift in the direction of extra partnerships was to “drive entry to deal circulate by these relationships”. Omers’ chief funding officer, Ralph Berg, mentioned the pension fund had “advanced our funding technique over the past couple of years to discover completely different fashions and use funds the place it’s complementary”.
Canada Pension Plan Funding Board, the nation’s largest pension fund with C$699bn (US$504bn) in property, mentioned it had “at all times pursued a partnership technique and proceed to be dedicated to that strategy”.
Extra reporting by Ivan Levingston in London