CPPIB privately eyes its 75-year horizon

The $140 billion Canadian Pension Plan Investment Board participated in the largest private equity transaction globally in 2010 with its acquisition of Tomkins plc alongside Onex Corporation. Amanda White looks at the fund’s private investments.

In July 2010 the Canadian Pension Plan Investment Board announced through Pinafore Acquisitions, a company it jointly owns with Onex Corporation, the cash acquisition of global engineering and manufacturing group, Tomkins, for £2.89 billion ($4.6 billion).

The deal was the largest private equity transaction globally in calendar 2010, according to CPPIB chief executive, David Denison – the second year in a row the fund has participated in the premier global private equity transaction (the investment in IMS Health alongside TPG Capital was the largest in 2009).

Private equity plays a big role at CPPIB, with 15.1 per cent of total assets allocated (or $21.2 billion).

Testament to its importance and the overall prominence of private investments generally is that the current executive vice-president, investments, Mark Wiseman, was formerly head of private investments.

From a total portfolio view, the fund manages its assets under three broad categories of investments: equities, fixed income and inflation-sensitive assets.

Equities are split into private and public markets, with the private investments’ department then split into four groups: funds and secondaries; principal investing (which includes co-investments); infrastructure; and private debt.

The private market group, headed by Andre Bourbonnais, is tasked with finding opportunities that will outperform the comparable passive public alternatives.

While historically, this group was focused on making private equity investments through external managers – a multi-year transformation that began in 2006 – it has now expanded its capabilities to also investing as a principal investor.

CPPIB now employs almost 100 investment professionals in its private market group which is located in offices in Canada, London and Hong Kong.

Private equity funds still represent the core of the CPP Investment Board’s private equity portfolio.

About $34 billion has been committed to more than 145 private equity funds since it entered the market in 2001. But it is also a reasonable player in the secondaries market, with more than $4 billion invested in the past 10 years.

And since it introduced the principal investing group, which works alongside its fund partners to invest in a broad range of private equity transactions around the world, the fund has made direct investments in 37 companies.

At the heart of this commitment to private markets is the fund’s unique positioning as a long-term investor. Even compared with many assumed long-term horizons, such as those of US public pension plans, its time horizon is notoriously long: investment returns are amortised over 75 years.

The last report by the Chief Actuary of Canada, in October 2009, found that CPP contributions are expected to exceed annual benefits paid until 2021, providing a 10-year period before a portion of the CPP fund’s investment income would be needed to help pay CPP benefits.

This means a higher proportion of the portfolio can be invested in assets that require patient capital, such as real estate and infrastructure, and areas that require several years to generate returns, such as private equity and venture capital. The inflows also mean that cash, rather than divestments, can be used to fund new initiatives.

All this means private investments are ideal for the fund, which is not affected by liquidity constraints in the same way as other investors.

In a speech at the Conference Board of Canada and Towers Watson 2010 Summit on the Future of Pensions, Denison said “a useful descriptor of the long-term investor is someone who is never obliged to sell assets because of prevailing market conditions”.

He says because the triennial valuations are done over a 75-year time horizon on a steady state versus full funding basis, and the fund is not required to meet any solvency tests. From an investment perspective, “we have much greater flexibility to deal with the volatility of market returns than almost any other pension fund or pool of capital”.

He also says the total portfolio approach to portfolio construction, where asset labels are essentially ignored, means there is flexibility in constructing and managing portfolios.

To this end he points to some of the pre-conditions of acting as a long-term investor as an appropriate business model, governance structure, and an investment process that incorporates long-term valuation factors.

CPPIB has announced a number of sizeable and complex investments in private equity, real estate and infrastructure through the first nine months of its current fiscal year, in addition to the Tomkins deal, they include:

• completion of the $3.4 billion acquisition of Intoll which includes a 30 per cent stake in 407 ETR and a 25 per cent interest in Australia’s Westlink M7;
• purchase of a 10 per cent stake in 407 ETR from Cintra Infraestructuras S.A. for $894 million;

• equity investment of $487 million for the acquisition of a 25 per cent interest in Westfield Stratford City, a major retail and entertainment development adjacent to the 2012 London Olympics site

• commitment of $607 million as part of a consortium bid to acquire the ING Industrial Fund, a portfolio of prime industrial properties primarily in Australia;

• joint venture with US REIT Vornado Realty Trust to invest in two prime office buildings in Washington, DC, for $93 million; and

• acquisition alongside LaSalle Investment Management of Hürth Park Shopping Centre, CPPIB’s first direct real estate investment in Germany, representing an equity investment of $69 million.