CPP Investments retains its top place in Private Equity International’s Global Investor 100 ranking for the third year in a row, with more than $130 billion allocated to private equity.

A big part of the growth of its private equity portfolio came from investment returns, senior managing director and global head of private equity Suyi Kim tells PEI, noting the big run up in the market in both private and public equities.

Suyi Kim of CPP Investments

“We don’t have a crystal ball… but we can run [scenarios] to have higher conviction in our investments”

Suyi Kim
CPP Investments

“A bigger portion of that came from the appreciation of our investments on the ground [rather] than new investments, which I’m feeling pretty good about,” Kim says. “This isn’t surprising as we build our capability and track record. We’ve also been very disciplined in how we deploy capital, which has become increasingly important over the last 12 months.”

CPP Investments’ PE portfolio returned 18.6 percent in the financial year to 31 March – its best performing asset class – driven by improved portfolio company earnings and outlooks in the information technology, financial and healthcare sectors in the US and in Europe, according to the pension’s latest annual report. The PE portfolio was also resilient to the regulatory tightening in China that negatively impacted some of the public equity market indexes within PE’s overall benchmark, which further contributed to its positive outperformance, the report noted.

Private equity now makes up close to a third of the Canadian investor’s total portfolio, from just 22 percent in 2018.

Growth equity push

Kim, who was CPP Investments’ top executive in Asia before she took up the reins as head of PE last September, is the brains behind the pension’s expansion into growth equity. This is a strategy, she says, that was missing in their portfolio of assets.

“We have funds, secondaries and direct investments,” says Kim. “We cover growth equity in Asia, but we didn’t have a dedicated team, mandate or processes to cover growth equity investments in North America and ­Europe.”

While the pension plan has invested in growth equity for years, it now has a team dedicated to the segment. This specialised team, which was formally launched in April, includes CPP Investments’ venture capital fund investment team, which was formed about two years ago, as well as the thematic investment team, which was formerly part of active equities.

Kim adds: “[The VC team was] planting some seeds that were at the early stages of evolving. And then I put them together with the thematic team from our public markets team, which has been doing more long-term structural changes and growth investing across the private and public side.”

The growth equity team invests in healthcare, fintech, climate change opportunities and automobility, according to CPP Investments’ website. Target companies are primarily in North America and Europe, and the investment size ranges from C$25 million ($20 million; €18.6 million) to more than C$200 million. Its most recent deals include London-based fintech company 10x Future Technologies, biotech Eikon Therapeutics, and KoBold Metals, an artificial intelligence-powered mineral exploration company.

Collaboration and culture

Apart from focusing on the PE team’s competitive advantage and identifying whether there’s anything missing in their strategy, creating more synergies between teams and building a strong culture are top of Kim’s to-do list.

On the former, this means making sure the funds team and directs team can synergise with each other, in the same way that the secondaries and directs teams work together, Kim says.

She explains that one of the adjustments she has made is for the secondaries team to look at single-asset deals and continuation vehicles. “It’s a growing market and now firmly one of the ways for portfolio companies to exit. Our team has not been so active on that end.”

CPP Investments wants to participate more in this market dynamic through price setting. Kim highlights this as something the direct private equity team has been doing in the past, and continues to do today. “This is more to help GPs’ continuation fund vehicle via our secondaries team, while our DPE team can invest directly in continuation deals to price set and de-risk the entire transaction.”

“CPP Investments is a best-in-class LP,” a partner at a US-based buyout shop backed by the pension tells PEI. “In addition to being a valued investor and constructive LPAC member, they are [a] strategic capital partner to us on a range of transactions. They are highly responsive when we call and have deep industry sector expertise, which is helpful to us.”

On team and culture, Kim says she’s focused on aligning the firm’s goals and purpose as a unit via a rebooted team statement: “We care, we develop, and we empower.” This means emphasis must be placed on building a high-quality, high-performing team and ensuring processes are redesigned for efficiency.

“We have grown our portfolio from C$90 billion to C$134 billion. If we do not continue to empower the team, our processes will get longer and become more bureaucratic,” Kim says. “This means we’re delegating more work as junior professionals get more seasoned and experienced.”

Risks and opportunities

The greatest source of investment risk, Kim says, is market risk, especially with PE being a levered equity strategy. To this end, she says macro uncertainty and market adjustments provide an even stronger reason for the deal team to look at many different scenarios.

“We don’t have a crystal ball,” says Kim. “We don’t know where inflation will be, where the GDP growth will be, but we can run them in scenarios with stretched investment cases in order to have higher conviction in our investments.”

With inflation on the rise, Kim’s team is also focused on exit multiples. “Since I took over the PE department, I’ve been asking our team to look not just at current trading [multiples], but also over the next five- to 10-year average. We need to have more comfort on the exit multiples. [This means] higher conviction on the base case and then being able to run the downside and upside case, taking into account the macro uncertainties, and really focusing on the exit with a longer-term view. This is what we are focused on.”

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