CPPIB’s PE net income more than halved in last fiscal year

The pension giant’s PE portfolio suffered an almost $5bn annual drop in net income due in part to the impact of the coronavirus pandemic.

Canada Pension Plan Investment Board’s net income for private equity investments more than halved in the latest fiscal year due to the impact of the coronavirus crisis.

The Toronto-headquartered pension reported C$5.2 billion ($3.9 billion; €3.6 billion) in net profit for the asset class for the year ended 31 March, from C$12 billion in the previous financial year, according to its fiscal 2020 annual report published this week.

“The covid-19 pandemic in the fourth quarter [January-March 2020] resulted in delayed deals, volatility and weakened buyer appetite in the private equity market,” CPPIB said.

A weakened Canadian dollar, which has fallen as much as 3 percent against its US counterpart in the 12 months from April 2019, largely drove the net income drop, a spokesman for the pension told Private Equity International.

The private equity department’s strong investment gains and income flows recorded in the first three quarters of the year were mostly offset by the valuation write-downs in the three months to end-March 2020, the spokesman said, adding that private equity has generated a net return of 12.3 percent and net income of C$38 billion over the past five years.

“The write-downs were taken as as a result of the macroeconomic and business uncertainty introduced by covid-19,” he said. “The effects of the pandemic, including social-distancing measures, impacted sectors like information technology and consumer discretionary businesses.”

IT and consumer discretionary investments in CPPIB’s direct portfolio were the worst hit in the last quarter.

Despite this, the pension’s private equity assets stood at C$94.6 billion at the end of fiscal 2020, a 7.9 percent increase from the C$87.7 billion at fiscal-end 2019. Growth was primarily driven by new investment activities totalling C$17.2 billion and foreign exchange gains of C$6.2 billion, CPPIB noted. This was partially offset by distributions of C$16 billion and valuation losses of C$300 million.

In addition, CPPIB applied a top-of-house write-down on its fund valuations provided by its GPs to “adjust the lagged GP values and to mitigate the increased valuation risk”, it said in the report.

Even with significant write-downs, the pension’s PE portfolio performed well in fiscal 2020 relative to other asset classes, generating a net annual return of 5.8 percent. However, that is significantly lower than the previous year’s 16.5 percent.

CPPIB also noted in the report that fiscal 2020 was a challenging macro environment for its PE portfolio in the Asia-Pacific region. Investments, exits and fundraising all decreased from the prior fiscal year.

Greater China suffered the most, although the impact was partially offset by growth in other markets, including India, South Korea and Japan. The fund’s portfolio in the region grew to C$15.3 billion from C$13.6 billion in carrying value during the fiscal year. More than 60 percent or $9 billion is invested in funds, with recent commitments including $500 million to MBK Partners Fund V and ¥13.8 billion ($128 million; €117 million) to Japan’s Polaris Capital Fund V.

PE made up 24.7 percent of CPPIB’s investment portfolio as of end-March, almost in line with the previous year’s 23.7 percent.

For the year ended 31 March, the pension posted C$12.1 billion in overall net income, C$5.5 billion in net contributions and delivered a 3.1 percent return on investments, down from 8.9 percent in the previous year.

CPPIB’s assets rose 4.5 percent to C$409.6 billion at the end of fiscal 2020.