Plans in the $100-million range that are ready to diversify into private market assets are limited by the minimums required for direct investment. But Dowdell says a growing number of recordkeeper platforms are coming to market with pooled global infrastructure funds that offer small plans a path into infrastructure investing at lower levels of financial commitment while also providing liquidity. There are real estate options, too, including real estate investment trust (REIT) funds and pooled direct investment. Dowdell prefers to direct his clients to the latter.
“If you’re looking to have something that’s relatively uncorrelated, a pooled real estate fund with direct investment is accomplishing more than a REIT fund,” he says.
Rabovsky adds that the smallest plans tend to look to real estate first when approaching private market investments, “given that they provide some level of current income and inflation protection,” and access to a pooled fund can be had for a relatively small minimum investment. That said, she cautions against REITs: “REITs are about 80% correlated to the market, on average.”
Overall, she sees access to private market opportunities improving for smaller pension plans, as investment managers recognize the increasing demand among plans of this size.
Rabovsky says there has been an increase in products such as pooled fund opportunities in real estate and infrastructure. She’s also seeing a decline in fees, as well as minimum investment requirements for some private market co-investing opportunities.
She says the costs associated with infrastructure funds are starting to come down to levels that are more palatable to the average small or mid-size plan, due to what she terms a “professionalization” of the industry.
“Fees are being adjusted downward to reflect the realization that investors shouldn’t be made to pay the same fee for a core fund delivering 8% returns as a fund that is expected to return 12%,” explains Rabovsky.
Strength in numbers
For some small and mid-size plans looking to invest directly in private market opportunities without going through a fund, co-investing can provide a solution. Such was the case in 2011, after the Canada Pension Plan Investment Board syndicated a portion of its $3.8-billion, 40% ownership in Ontario’s 407 ETR (Express Toll Route).
The Halifax Regional Municipality Pension Plan (HRMPP) acquired a piece of that stake by working through Toronto’s Kindle Capital Management Inc. to build a consortium of smaller plans and other institutional investors.
“To be considered as a potential syndication partner, I needed a minimum of $100 million and had to demonstrate that I could close the deal quickly, pending satisfactory due diligence,” explains Terri
Troy, CEO of HRMPP. “For a plan my size, $100 million for one deal is out of the question. However, it could work if I aggregated capital from like-minded investors who could act fairly quickly.”
Rogers, formerly head of private equity with OMERS, founded Caledon Capital Management in 2006 in an effort to help small and mid-size pension plans access quality private investment opportunities. He says that as his firm has grown, part of the team’s focus has been on bringing client plans together to co-invest.
“We find situations where it makes sense to put two or three clients into an investment. Individually, they might be small, but together it could be a meaningful commitment.”
Rogers says that, due to limitations they face in time and resources, most smaller plans looking to get into private markets have typically been restricted to selecting a portfolio of fund managers, with little ability to add co-investments or acquire secondary positions in funds.
But Troy says the appetite for co-investing among institutional investors is growing. “It is an extremely competitive space, and I am amazed at some of the prices deals are being done at. Some investors are willing to pay a lot more than I am.”
Eventually, Canada’s largest pension plans could be in a position to offer smaller plans a chance to invest through them—at least in Ontario, following the passage of Bill 162 in 2009, which granted OMERS and the Ontario Teachers’ Pension Plan the ability to provide third-party investment services. Rabovsky says the arrangement could open new investment doors to smaller plans that don’t have the in-house capacity to identify and evaluate opportunities, provided that the investments align with plan liabilities and the reporting suits their needs.
“Assuming all the right pieces are in place, it’s a lower-cost way [of investing]. It takes away one set of governance burdens, but it brings another set.”
Ultimately, says Rabovsky, plan fiduciaries need to work together to evaluate the investment opportunities available to them and make their choices based on their unique situation and needs. “At the end of the day, it depends on what the organization is, its financial position and its tolerance for variability—and that’s not necessarily size-dependent, because you can be a large company with a small plan.”
Neil Faba is associate editor of Benefits Canada. neil.faba@rci.rogers.com
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