Ontario Teachers' and CPP Investments boost co-investment push to secure top-tier private equity deals
Canada’s largest pension funds are reducing their direct ownership of private companies and turning to partnerships with private equity firms to maintain access to high-quality deals, according to Financial Times.
The Caisse de dépôt et placement du Québec (CDPQ) and the Ontario Municipal Employees Retirement System (OMERS) have begun cutting their direct private equity exposure.
Ontario Teachers’ Pension Plan said it is focusing on more strategic partnerships as market conditions evolve.
An executive from one of the pension funds said the private equity downturn is making the direct investing model harder, as they are facing a shortage of viable projects and difficulty in exiting from existing investments.
Canadian pension funds allocate to private equity through three channels: direct investments, private equity funds, and co-investments — the latter allows them to invest alongside private equity managers without paying fund fees.
New Financial, a think-tank, reports that Canada’s $3.2tn pension system allocates 22 percent of public sector fund assets to private equity.
CEM Benchmarking found the nine largest Canadian pension funds split their private equity exposure about equally between buyout funds and a combination of direct holdings and co-investments.
However, this balance has begun to shift. Pressure to gain co-investment access — without incurring fund fees — has pushed pension funds to invest more in buyout funds.
CDPQ is in year two of a five-year plan to reduce its direct private equity investments from 75 percent to 65 percent.
OMERS, which had previously allocated little to private equity funds, announced in September that it would stop investing directly in European opportunities.
Ontario Teachers’ stated it is “tactically looking to invest more with other partners in areas where it makes sense as the portfolio and market evolves,” while maintaining direct investing as a core part of its strategy.
The evolving landscape comes amid intense competition for assets and talent in a growing private equity industry. Some Canadian pension funds are also reconsidering their US exposure.
Marlene Puffer, former chief investment officer at Alberta Investment Management Corporation (AIMCo), said pension funds must now “add more value into every holding because exits are more challenging.”
She noted that this requires more hands-on management, which is becoming increasingly complex.
She also noted that pension plans expect access to co-investment opportunities when allocating to private equity funds.
A fund executive said it was “difficult for Canadian pension funds to compete for talent with Apollo that pays much better.”
Martin Longchamps, CDPQ’s head of private equity and credit, said the move toward partnerships aims to “drive access to deal flow through those relationships.”
OMERS’ chief investment officer, Ralph Berg, explained the fund “evolved our investment strategy over the last couple of years to explore different models and use funds where it is complementary.”
Canada Pension Plan Investment Board (CPPIB), the largest pension fund in the country with $699bn in assets, said it had “always pursued a partnership strategy and continue to be committed to that approach.”
