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High pension funds are stepping again from competing head-on with non-public fairness teams to purchase up firms, as a substitute 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 Workers Retirement System (Omers) are scaling again the proportion of their funds uncovered to straight owned non-public firms, whereas Ontario Academics’ Pension Plan has mentioned it’s eyeing extra strategic partnerships.
A troublesome interval for exiting investments over the previous two years has inspired the Canadian pension teams to again extra firms alongside enormous non-public fairness managers as direct possession has turn out to be 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 tougher as we face a scarcity of viable tasks and issue in exiting from our current investments,” mentioned an government at one of many funds.
There are three essential methods pension funds allocate to non-public fairness: direct investing, the place they purchase a stake in an organization on their very own; by means of a personal fairness fund; or by means of co-investments, the place they put money into firms alongside a personal fairness fund however with out having to pay the fund charges.
Canada’s $3.2tn pension system is a significant non-public fairness investor with 22 per cent of its public sector funds’ property allotted to the asset class, in accordance with think-tank New Monetary.
At current, the 9 largest Canadian pension funds have about half of their non-public fairness publicity in buyout funds and half by means of direct holdings and co-investments, in accordance with evaluation from CEM Benchmarking.
However that stability has shifted as pension funds have come beneath strain to put money into 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 non-public fairness funds to asserting final September it will not make investments straight in European alternatives.
Ontario Academics’ has mentioned it’s “tactically seeking to make investments extra with different companions in areas the place it is smart 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 trade 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 had 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 must do extra arms on administration and it turns into more and more complicated”.
She added that pension plans allotted cash to non-public fairness funds on the understanding that they might be invited to put money into lots 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 significantly better”, one other fund government mentioned.
Martin Longchamps, CDPQ’s head of personal fairness and credit score, mentioned the rationale behind its shift in direction of extra partnerships was to “drive entry to deal circulate by means of these relationships”. Omers’ chief funding officer, Ralph Berg, mentioned the pension fund had “advanced our funding technique during the last couple of years to discover totally 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 “all the time pursued a partnership technique and proceed to be dedicated to that method”.
Extra reporting by Ivan Levingston in London
