For Canada Pension Plan Investment Board, when it comes to co-investing alongside GPs, the percentage ownership stake is more important than the amount of dollars deployed.
Speaking on a panel at the British Private Equity & Venture Capital Association Summit in London on Thursday, Delaney Brown, head of private equity funds at the C$400.6 billion ($302 billion; €274 billion) pension, said CPPIB’s co-investment team rarely takes more than a 5-10 percent stake in a company.
“We are very hands off,” Brown said. “Most of it is around reducing fees and effectively just getting more capital deployed behind some of our best managers. That’s the driving intention.”
The challenge for CPPIB’s private funds team is evaluating whether investing C$150 million, for example, for a 25 percent stake in a company is a good use of resources versus projected return, Brown added.
“We would err on normally not doing that [type of] deal, whereas if it was a C$150 million for a 5-10 percent stake, we would likely do that deal.”
Brown said that some of CPPIB’s GPs have taken novel approaches to allocating co-investment opportunities to their LPs. One GP the pension works with previously offered co-investment opportunities to LPs pro rata to the dollar value of a given LP’s fund commitment. The GP has since changed its approach to offer co-underwriting opportunities on some deals to some of its large LPs, while offering other deals to a wider group of LPs who can write smaller tickets of $10 million-$50 million.
“On a case by case basis it doesn’t sound like it works, but when you overlay 15 to 20 companies in a fund and everybody has had three to five shots on goal, they all feel pretty happy,” Brown said. “The next fundraise becomes easier because everybody feels like they’ve been looked after in an appropriate way.”
On governance issues in co-investments, Brown said that in the larger deals CPPIB typically has the same sized equity stake, exit rights, board seats and rights to change management as the GP does.
“I see it as us replacing what historically would have been another GP,” Brown said, referring to how co-investments have largely replaced club deals.
On so-called “mid-life” deals where capital is used to invest in a company mid-way through its holding period, Brown said CPPIB prefers situations where an asset is moved into a separate fund at a new valuation, rather than held in the existing fund where the potential for valuation misalignment is too great.
“We feel far more comfortable coming in at that point because it feels like it’s a clean break,” Brown said, adding that while the GP may happen to be selling the asset to itself, there is an appropriate process that occurs to value the asset.
Increasing fund sizes has meant that GPs have typically not charged for co-investments, due to the increasing management fees from ever-larger vehicles, Brown said, adding that this may change.
“If there was a flattening out of fund sizes there might be a different conversation.”
In the year to 31 March, CPPIB’s direct private equity and private equity funds teams closed 26 co-investments, representing C$3.1 billion of invested capital, according to its latest annual report. This was more than double the C$1.4 billion across 12 investments the previous year.
The pension’s private equity funds portfolio grew 17 percent to C$32.7 billion as of end-March, driven by C$7 billion in fresh invested capital, C$3.2 billion in valuation gains and C$0.5 billion in foreign exchange gains, according to the report.