Rick Nathan, managing director of Kensington Capital Partners in Toronto, also believes that private equity deals like BCE have benefits for all Canadians. And, particularly when it comes to BCE, it makes sense to have big public funds coming together to vie for ownership. “Telecom is a regulated industry,” he explains. “It requires Canadian participation for about half of the equity and because of that we’re seeing a much more urgent pull from the leaders of these transactions to draw in other institutions.” Between the size of the deal and the unique regulatory requirements, BCE is a bit of a special case.

But what about the impact on other Canadian investors if the trend towards privatizing publicly traded companies continues? Paul Halpern, professor of finance and the Toronto Stock Exchange chair in capital markets at the Rotman School of Management, University of Toronto, doesn’t see huge shrinkage in the opportunities available to other investors as a result of increased privatization of public companies. He points to the fact that investors, now that the foreign property rule has been eliminated, can look globally to invest. “If you want to buy a telephone company, you can look at other countries,” he says. Halpern also cautions against the notion that companies taken off the public equity markets will remain private permanently. “Bell Canada is not going to stay off the public markets forever,” he says. “In the context of most private equity investments that were done years ago, the idea is you go in, you produce value by selling off some of the pieces that you really don’t need and then you go back to the public markets. There has to be an exit strategy—to get back on the public markets.”

Alexander Dyck, associate professor at the Rotman School of Management, believes that the potential BCE takeover by large Canadian pension funds should be viewed in the larger context of private equity investment, which is on the rise globally. “This is nothing unusual or uniquely Canadian,” he says. “It’s reflecting a global trend where the cost of debt finance has declined along with the overall reduction in interest rates.” The question for Dyck is whether or not the consortium that ultimately buys BCE can add value to the company. “Canadians should be concerned about value creation,” he says. “In the past, BCE hasn’t made the wisest investments,” he notes, explaining that the company has a lot of hard decisions ahead of it. Whether or not the private equity players who ultimately buy the company have a game plan for the company has yet to be seen. “Is the value coming solely from their greater ability to avoid interest payments?” Or will they be able to improve the company over the long term?”

“First of all, let’s be honest. We’re not operators,” says CPPIB’s Wiseman. “Our goal is always to partner with people whether it’s management teams or strategic investors that have the capability to add value through the operation of the corporation.” Taking a company private, he says, makes for a much more flexible structure to work with and effect positive changes. “There’s a natural agency cost to public corporations,” he says, explaining that decisions can be made in away that is free from the “vagaries of the capital markets.” Rather than being tied to analyst’s reports and quarterly earnings reports, decisions can be made with long-term value in mind. “Decisions can be made that might not have a positive benefit for awhile,” he says. “It helps the company make better decisions and not have to worry about those quarterly results.”

Need for governance

The concentrated ownership of major Canadian companies by a few large pension funds does raise some concerns from a governance standpoint. Bonnar notes that “when you concentrate ownership, the smaller number of owners will exert more influence over director activity.” However, whether that’s a good or a bad thing in the case of BCE remains to be seem, he says. Randall Morck, Stephen A. Jarislowsky Distinguished Chair in Finance at the University of Alberta School of Business in Edmonton, takes the governance question further, putting it in the context of public sector pension funds taking over a company like BCE. “Managers and trustees of pension funds are in danger of opening themselves up to political pressure when they actually take full control of a company,” says Morck. “When the CPP is simply one investor among hundreds of others in a company, nobody expects the CPP will be responsible for what the company does.” But what about potential for conflicts or issues that could arise if large a large public sector pension fund was a major owner? For example, while the economy is good today, Morck explains, things could become problematic if conditions change. “Next time there’s a recession and the CPP is in charge of BCE and BCE decides to lay off 10,000 people in the Ottawa district, you can bet there’s going to be political pressure put on it,” he says. “Regardless of how independent the investment guidelines are, it’s just a reality in politics...it may happen that the trustees of these pension funds might find themselves facing political pressure.”

Whatever your take is on the potential for BCE to be owned by big public sector pension funds, one thing is becoming increasingly clear—Peter Drucker’s predication about the era of pension fund capitalism appears to be upon us. Their growing role in Canadian business has clearly sparked much debate about the role of public sector pension funds and, on a larger level, private equity as it becomes a bigger part of pension portfolios. Let the debate continue.

Caroline Cakebread is the editor of Canadian Investment Review. caroline.cakebread@rogers.com

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