Some of Canada’s largest pension funds – representing almost $350 billion in capital – are bullish about private equity investments.
Then again, after two years of steep declines, they are, in effect, managing the show. They have capital to deploy – and the means and patience to wait for returns.
By contrast, private equity fund managers – general partners, or GPs – have been stung by investments they bought at high valuations during what was called the “golden age” of private equity investing. That’s, perhaps, another term for irrational exuberance.
What’s more, not only did buyouts move from prudent valuations, investments were leveraged – hauntingly, bank debts are soon to come due.
That doesn’t deter Canada’s public pension funds. As David Rogers, a principal at Caledon Capital Management put it, if pension plans are going to achieve something close to 8% returns, they can’t rely on just the public bond and equity markets. He was speaking in Toronto earlier this week at the CVCA’s annual Private Equity Symposium.
Pension plans, he says, are looking at private equity and other alternative assets to generate alpha – something better than public market returns that is nevertheless sheltered from public market volatility.
But annual volatility may not be so much a consideration for large pension funds. Says Jim Orlando. managing director at OMERS Private Equity: “in exchange for higher returns, as a more active manager you can take advantage of the leverage and if you can find a private company and if you can have the patience to manage a portfolio across the asset class you can generate some return.”
Still, he notes, in 2009, “there was a general mismatch between sellers and buyers between what people wanted to pay and what people expected to get.” Prices fell, compared to 2007 to 2008, in part because leverage wasn’t available.
All the same, Ed Rieckelman, vice-president at Alberta Investment Management Corporation’s Private Equity Group, says: “You’ve got a tremendous opportunity every year to buy interesting companies.” He adds that AIMCo looks at private equity as a “capability.” “When we see interesting and attractive opportunities we invest in them. When we don’t, we don’t”
That said, the 2009 private equity decline did cause Ontario Teachers Pension Plan to “evaluate our exposure in terms of deal outcomes,” says Tanya Carmichael, an OTPP portfolio manager. “The bar has been raised.”
Can other funds raise the bar? Rogers notes that Canadian investors have three options: funds of funds, investing in specific funds with the possibility of co-investing, and finally, for the biggest funds, direct investing.
Access is one matter, timelines are another. They have been extended. Gone are the years when an investor could get in and out within three years. Now is the time for patient, long-term capital.
And it may be very long term. Jennifer Morais, senior principal at the CPPIB, notes that investing relationships last longer than some marriages. There’s a five or six year investing cycle of capital commitments. There’s a five or six year cycle of harvesting the returns from those investments. And, if the investments work out – 10 or 12 years hence – then there’s the possibility of extending the relationship into new deals.
Still, Canadians have been too polite about how disastrous the past two years have been in private equity, says AIMCo’s Rieckelman. Certainly there are opportunities – but they involve marriages.
Let’s hope the marriage partners are compatible.