The Canada Pension Plan Investment Board is committed to private equity. Not only does it have a significantly larger allocation to the asset class than its institutional investor peers on a dollar basis, it’s comfortably within the top 10 of the ranking when it comes to allocation percentage.
The $324 billion pension has an almost 25 percent allocation to private equity. Managing such a large global portfolio takes the efforts of 167 professionals across five offices.
Canada Pension Plan Investment Board
Private equity allocation: $80.8bn
Allocation as percentage of AUM: 24.9%
Overseeing it all is Shane Feeney, managing director and global head of private equity. So, how does one go about managing and investing the largest private equity portfolio out there?
“One of the core tenets of our investment strategy in the PE group has really been around to try and focus on diversification and quality,” Feeney tells us. “We think that works best.”
CPP Investments’ private equity portfolio is split roughly 50-50 between fund investments and direct exposure, which is primarily partnering with GPs on a co-underwriting basis.
“It’s a very close relationship between our funds business and our direct business; you might refer to it as a ‘hybrid model’,” Feeney says. While the pension plan is “not de-emphasising fund investing”, Feeney does anticipate the directs portion to continue to grow at a faster rate.
“We’re constantly, every year assessing what balance we want between our funds programme and our directs programme. The equation is seeking to balance scale and returns. Obviously, the funds programme still generates attractive returns for the fund, and it’s more scalable than our direct programme, which requires more people resources because it’s involved in sourcing and executing transactions, in addition to active portfolio management.”
On the funds side, CPP Investments counts CVC Capital Partners, TPG, Sequoia Capital and Thoma Bravo among its relationships, according to PEI data. On the directs side, notable recent transactions include investing in Merlin Entertainments alongside Blackstone and KIRKBI and investing in cloud-based revenue cycle technology provider Waystar alongside EQT.
Around 15 percent of the overall portfolio is in Asia, predominantly in China and India, a proportion Feeney also expects to increase.
“We’ll continue to add resource there and grow that programme to gain further emerging markets exposure.”
Where the money goes
Providing global exposure, particularly to emerging markets, is a key part of the role PE is playing in CPP Investments’ overall investment portfolio. Of course, delivering strong risk-adjusted returns that “exceed public market indices with an appropriate spread” is another. (Feeney declined to share what that appropriate spread is.) But that’s not all a significant private equity programme brings to the pension plan.
“We maintain close to 75 core relationships with private equity funds through our fund investing programme, our Asian private equity programme, and we’ve recently launched a venture capital strategy out of San Francisco. A lot of those relationships bring very specialised partner knowledge that we can leverage across our organisation to generate increased alpha and investment opportunities across the entire platform.”
Despite the challenges faced in 2020 and beyond as a result of the covid-19 pandemic, Feeney is not concerned about private equity’s ability to deliver the returns CPP Investments is seeking.
“I think the private equity model is pretty tested and has a long history of delivering, in my view, strong performance. Certainly our results would support that.
“Having said that, clearly we have been investing the last couple of years with, as we all know, very elevated purchase prices and a lot of capital in the system chasing transactions. But I think as an industry we’ve been appropriately prudent and selective. I see a bright future for the industry.”
In the five years to 31 March, CPP Investments’ PE portfolio has generated a net return of 12.3 percent, per the pension plan’s latest annual report.
That’s not to say Feeney is completely without concern: like many, he is keeping a close eye on the health of the private equity portfolio.
“We have certainly spent a lot of time triaging our portfolio, stressing it, and we’ll maintain a very strong focus on our portfolio going forward,” he says. “Speaking to certainly some of our closest relationships, we feel our partners have responded very quickly, very proactively to the downturn. And we think all the right measures are being taken to try and react and position portfolios, certainly from a liquidity perspective, but also just more broadly from an operational and efficiency perspective.
“I actually think the industry is pretty well positioned as well, in terms of portfolio companies being able to potentially take market share in this downturn.”
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