How CPPIB, MassPRIM and CalPERS approach co-investing

Here’s how three limited partners are incorporating the strategy into their portfolios.

This article appears in the February issue of Private Equity International as part of our LP co-investment report.

Canada Pension Plan Investment BoardToronto, Canada

Canada Pension Plan Investment Board more than doubled its private equity co-investment activity in the fiscal year ending 31 March 2019 after integrating its direct and fund investing processes.

It closed 26 co-investments representing C$3.1 billion ($2.4 billion; €2.1 billion) of invested capital in the period, up from 12 investments totalling C$1.4 billion the previous year, according to its annual results on 16 May.

“The integration of the passive co-investments strategy with Direct Private Equity (DPE) and Private Equity Funds has increased the number of opportunities for passive direct investments,” the fund said.

Assets under management

Number of co-investments in fiscal year ending 31 March 2019

Speaking on a panel at the British Private Equity & Venture Capital Association Summit in London in October, head of private equity funds Delaney Brown 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.”

On governance issues in co-investments, Brown said that in 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.


Paul revere Statue and the Old North Church, Boston, MassachusettsMassachusetts Pension Reserves Investment Management Board

Massachusetts Pension Reserves Investment Management Board expanded its co-investment programme in 2019, doubling its annual co-investment pacing to 20 percent of its private equity allocation, increasing the maximum size of co-investments from $30 million to $75 million, and delegating additional authority to staff when recommending co-investments to the executive director and chief investment officer.

As of 30 June, MassPRIM’s $300 million co-investment portfolio, which started in 2014, accounted for 3.5 percent of the pension plan’s $8.55 billion private equity programme.
Director of private equity Michael Bailey told Private Equity International last year that the co-investment programme helps MassPRIM get closer to its highest-conviction managers and to work alongside them on performing due diligence on investments at the time they go into the portfolio.

Assets under management

Size of co-investment portfolio

MassPRIM has a bench of about 30 high-conviction managers with which it is comfortable co-investing in a total GP portfolio of 100 managers. Firms on the co-investment bench include Thompson Street Capital Partners, Providence Equity Partners and Waterland Private Equity.

The decision to take up a co-investment opportunity is influenced by the tools MassPRIM uses for its manager selection. “Context is critical to evaluating manager skill, so we try to bring a lot of investment opportunities to our internal group discussions so we can compare investments against each other and make a good decision based on the most robust opportunity set,” said Bailey.

MassPRIM does not separately report co-investment performance. However, in aggregate, private equity generated net-of-fees returns of 12.6 percent over one year, 18.7 percent over three years, 16.2 percent over five years and 16.5 percent over 10 years, as of 30 September.


Welcome to California signCalifornia Public Employees’ Retirement System

The California Public Employees’ Retirement System’s new co-investment programme was set to roll out at the end of 2019 or in 2020, according to the pension plan’s investment advisor, Steve Hartt of Meketa Investment Group.

Co-investments enable CalPERS to allocate capital in an “LP-friendly fee way” – referring to the fact that co-investment is usually fee-free and carry-free – and help it expand relationships with its GPs, Meketa’s Stephen McCourt said at CalPERS’ 18 November board meeting.

CalPERS’ co-investment programme was suspended in 2016. A lack of speed had prevented the pension from executing on co-investment opportunities, board member Dana Hollinger told a 15 April investment committee meeting.

Subsequently, a revision on prudent person requirements in the total fund policy provided staff with additional flexibility to respond rapidly to co-investment opportunities, according to Meketa’s report for the 18 November meeting.

Assets under management

Year co-investment programme was suspended

According to the policy revisions, no prudent person opinion is required for co-investments under $100 million, and discretion rests with the managing investment director; for co-investments under $200 million, discretion rests with the managing investment director but an investment requires chief investment officer approval or prudent person opinion.

CalPERS is focused on opportunities sourced from its core managers, Hartt said at the board meeting, which is comprised of 30 GPs.

The pension system committed $6.7 billion to private equity in fiscal 2018-19, up from $5.3 billion the previous year, and $3.3 billion in fiscal 2016-17, but will need to increase the annual pacing to $10 billion to reach its target allocation, Meketa’s report said. To that end, CalPERS must expand its core managers group and add more separate accounts to reach the target allocation of 8 percent. Exposure was 7.1 percent as of 30 June, according to a staff presentation for the 18 November meeting.

CalPERS’ $27.6 billion private equity programme has generated $34 billion in net cashflow since 2011, delivering the strongest returns among all asset classes in the three-, five- and 10-year time periods. It is expected to remain an important contributor to CalPERS going forward, according to Meketa’s report.