PE consumed 61% of CPPIB quarterly payroll contributions in Q4

Our nation’s pension plan, the CPP Investment Board, has assets of $105 billion (3/09), and brought in about $6.6 billion of new contributions during the prior fiscal year according to a press release of late last week. That works out to be approximately $1.65 billion of contributions per quarter.

According to the my math, CPPIB’s private equity concentration (“Supersized private equity allocations at CDP and CPPIB?” February 10-09) consumed the majority of the quarterly contributions of Canadian workers during the fourth quarter. Is that the allocation we had in mind, now that the “Golden Era” of private equity is behind us?

The Paid-in-Capital for CPPIB’s private equity program was $16.8 billion at December 31st, a $1.1 billion increase over the $15.7B for the quarter ending September 31, 2008. According to CPPIB’s annual financial results, we pensioners contributed $6.6 billion to the fund over the 12 months ending March 31, 2009; $1.65B per quarter. (Appreciating that contributions via payroll deductions are more front-end loaded given how the CPP deductions are timed during the tax year.)

If the Paid-in-Capital of CPPIB’s private equity managers increased by $1.1 billion duing the quarter, a full 61% of our pension contributions went towards funding these Supersized private equity commitments (net of Private Equity distributions in the quarter of $98 million).

On a Canadian currency basis, about $400 million was drawn down by 2006 vintage funds during the quarter, and another $375 million by 2007 vintage funds. Big drawdowns during the quarter included:

Apollo VI: Paid-in-Capital rose from US$358.6 million to US$383.8 million

Apollo VII: P-I-C rose from US$73.3 million to US$129.6 million

Goldman Sachs Vintage Fund IV: P-I-C up from US$110.3 to US$132 million

Such excitement.

What is still more fascinating is that CPPIB’s current private equity commitments total $33.6 billion (32% of CPPIB’s current assets under management), of which $16.8 billion are still to be called and funded (16% of AUM).

Assuming PE managers draw down a similar amount of capital over the next three years, the CPPIB will have to fund capital calls of $13.2 billion over 36 months. Even if quarterly distributions from existing fund managers represent half of the current Paid-in-Capital of CPPIB’s commitments (ie., half of the current deals in the GP’s portfolios are sold or send back healthy dividends over the coming 36 months), that works out to be about $5.2 billion of cash coming back from the sector over the next three years; with, I assume, a long term goal of having the asset class be self-sunding.

But, for now, we have a PE funding hole of $8 billion, assuming no new managers receive any further commitments. Which is unlikely given the expectation that the $4.4 billion of fund commitments from vintage 2000 – 2002 will be coming back for “re-ups”.

Given that the reported value (plus distributions) of those “MacNaughton era” PE funds equals $6.6 billion, a 50% profit as a group, you’d expect that CPPIB staff will be looking at them seriously when these GPs next hit the fundraising circuit (if they haven’t already). Which means there is little chance that CPPIB’s team won’t be committing even more capital to the asset class over the next three years.

16% of CPPIB’s AUM are already in the sector, however. If that continues to increase by ~1% per quarter over the next period of time, CPPIB’s PE allocation will soon exceed that of industry-leading Yale University, which targets a 21% weighting and wrote the book on bumping PE allocations at the expense of domestic equity securities. Yale’s allocation was increased from 19% during the year to accomodate “the organic growth” of the asset class.

Not that a high allocation to PE was a safe haven last year. Yale also saw their endowment fund drop 25% between June 30th and December 31st 2008, a figure likely far worse that such funds as CPPIB, OMERS and OTPPB, for example. However, “since inception in 1973, [Yale’s] private equity program has earned an astounding 30.9 percent per annum.”

One can only assume this is what CPPIB has in mind when they decided to mirror Yale’s allocation. This most recent loss was the first that Yale had experienced since 1988, so Canadian pensioners-to-be can only hope that the allocation strategy that’s been pursued at CPPIB will emulate Yale’s remarkable long term returns.

CPPIB committed $14 billion to private equity in 2007 and 2008, just as the industry’s “Golden Era” came and went (see prior post “KKR Founder Henry Kravis on PE climate” May 29-07). Let’s hope we weren’t late to the party.

MRM