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©Copyright 2000 Rogers Media. The following article first appeared in the August 2001 edition of
BENEFITS CANADA magazine.
INVESTMENT STRATEGIES
Private equity prospects
The CPP Investment Board is finding new opportunities in private equity markets. What does this
mean to your portfolio?
By Caroline Cakebread
The significant losses experienced on the toronto Stock Exchange (TSE) during the
past few months may seem far removed from the long-term, risk-adjusted world of pension fund
management. However, an increasing number of pension fund managers are looking for ways to navigate
through the coming era of single-digit stock market returns. More than ever before, they are sizing
up a host of new opportunities in alternative investments.
In a timely move, the Canada Pension Plan (CPP) Investment Board announced its
decision last month to commit up to 10% of its assets to private equity investments over the
next five years. This includes pooled funds providing venture capital to early-stage companies,
investment firms that offer expansion capital to established companies and merchant banks
involved in buyouts and acquisitions that improve companies.
The goal here is to enhance long-term returns above the expected earnings of
publicly traded equities. In fact, the board hopes to generate annual real returns of 10% to
11%.
Established two years ago to increase the long-term value of CPP assets
through prudent participation in capital markets, the CPP Investment Board reported an
incredible 40.1% return on its investments in public equities after its first full year of
operation. On March 31, the CPP Investment Board had $7.2 billion invested solely in publicly
traded equities, with approximately 70% invested in funds based on the TSE 300 composite
index.
$1.8 BILLION COMMITTED
In a press release put out by the CPP Investment Board, John MacNaughton,
president and chief executive officer of the board, says "[we] will commit up to $1.8 billion
to private market investments, to be drawn down over the next five years, and will make further
annual commitments as appropriate."
As fiduciaries like the CPP Investment Board get involved in private equity
investments, what effect will this have on other institutional investors looking to invest in
the same market? Will this influx of money negatively affect the value of the relatively small
Canadian market?
Mark Weisdorf, vice-president private market investments at the CPP Investment
Board, believes that it will not have a negative impact. "We'll be careful not to put too much
money into Canada if it can't be invested wisely--that would be against our own interests as
well as others," he says.
Weisdorf points out that the private equity investment marketplace in Canada
is underdeveloped. "I believe that there is lots of opportunity to be taken advantage of. We're
far behind the U.S. and European private equity markets," says Weisdorf.
As large pension funds such as the CPP Investment Board move into this area,
Weisdorf believes they will have a positive impact in encouraging Canadian fiduciaries to
carefully examine whether or not to participate in this asset class.
Indeed, the prospects for private equity investments have improved greatly
over the past few years, especially for smaller pension funds.
There are more experts available today with longer track records and,
importantly, more opportunities for access to venture capital and buy-out funds than ever
before. This means that smaller funds without the time and staff to evaluate individual
companies can still participate in this asset class.
Today, says Weisdorf, "a small pension fund can invest $5, $10, $20 million
and have a very good investment with superior returns."
As Weisdorf says, the question is not should pension funds get involved in
private equity investments, but how much should they invest.
Caroline Cakebread is the editor of benefits canada's sister publication, C anadian Investment
Review. ccakebread@rmpublishing.com.
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