Large Canadian pension funds can create and capture value in financial markets by achieving scale in strategic markets, vertically integrating parts of the value chain and reducing fee drag, coordinating key stakeholder groups and creating internal synergies within their organization, according to a new report published in the Journal of Alternative Investments.
It found venture capitalists, private equity funds and other early-stage investors provide financing to entrepreneurs and developers launching new projects, leaving pension funds and other institutional investors at the end of the value chain, allocating capital to the specialized intermediaries.
“One consequence of being at the end of the value chain is that pension funds miss out on much of the value creation captured by upstream players,” the report said.
The report focused on a series of transactions by the Caisse de dépôt et placement du Québec, the Canada Pension Plan Investment Board, the Ontario Teachers’ Pension Plan and the Public Sector Investment Board that streamline the value chain to capture a greater proportion of the upstream value creation and to earn greater returns for beneficiaries.
It found these deals allowed each investment organization to see meaningful scale in markets that bring strategic value to the funds, minimized fees going to upstream players, coordinated the critical buy-in of local stakeholders and allowed the development of internal synergies.
However, the report noted investors taking these approaches are at risk of government interference that would require the funds to be short-term focused and either modify or exit the projects early. A vertical integration investment model can also introduce a “blurring the lines” effect within an investment organization that can create risk in the corporate governance section.
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