CPPIB's 25% Private Equity concentration
As the Yale and Havard Endowments yank back on their private equity exposure, Canada’s CPP Investment Board has a full 25% of its $123.9 billion in assets exposed to the sector.
Here’s the skinny:
Paid in Capital: $16.509 billion
Reported Value plus Distributions: $17.956 billion
Capital Calls still to fund: $14.562 billion
Total Committed: $31.072 billion
One of the difficulties in analyzing the success that CPPIB has enjoyed in the space is the question of currency. As at December 31, 2008, the Euro was trading at 1.705, and the USD was at 1.225. Fast forward to September 30, 2009, and the Euro fell to 1.5686 and the USD was down to 1.0722. Every unhedged LP investment in 90% of CPPIB’s private equity program lost value, all other things being equal. And, as easy as hedging sounds, hedging each capital call would be an unusual approach to the asset class.
Nine months ago, the program looked like this as at Dec. 31, 2008:
Paid in Capital: $16.8 billion
Reported Value plus Distributions: $18.119 billion
Capital Calls still to fund: $16.77 billion
Total Committed: $33.61 billion
Amazing, the program’s exposure and the value of the investments shrank during 2009 solely due to the drop in foreign currencies. Obviously, that’s not a useful way to look at a long term investment strategy, but in the world of mark-to-market, those are the stats.
If you transposed the Sept. currency values for the Dec. 2008 actuals, here’s what it looks like:
Paid in Capital: $15.15 billion
Reported Value plus Distributions: $16.28 billion
Capital Calls still to fund: $15.04 billion
Total invested and committed: $30.193 billion
Under this approach:
– CPPIB LPs drew about $1.4 billion for new investments and management fees during the 9 month period
– the value of the portfolio’s investments on a mark-to-market basis grew $1.2 billion
– $455 million of distributions were received (which funded a decent chunk of the $1.4 billion drawn by other LPs)
On this basis, things sound as though they rebounded just fine during the end of the world financial crisis. Only question that remains is: was it wise to commit $25.4 billion to private equity during 2005-09…the “Golden Era” of Private Equity”?
$10.8 billion of cash has been drawn by GPs from that vintage, and the carrying value of that subset is currently $9.385 billion; down almost 15%. It’s early, but it’s becoming a large hill to climb.
MRM
The CPP fund is growing due to contributions P.E. GPs also return capital. So is it really appropriate to say that CPP has “a full 25%” of its assets exposed to the sector. This would ONLY be true in the impossible case that the GPs drew all the undrawn tomorrow and distributed none; I say “impossible” because GP/LP agreements usually limit the % of the fund that can be drawn within any one year so the undrawn is likely legally required to be drawn over the next several years.
Thanks for stopping by Zon,
I agree that the uncalled capital won’t all be pulled down tomorrow by the GPs in question. Another way to look at the current exposure is to see what the carrying value of invested capital is (ignoring distributions), and then add what is still to be called. On that basis, the figure looks to be $10.6B plus $14.6B, or $25.2B of the CPPIB’s $123.9B in assets (20.3%).
If the program had been around for 25 years, one would expect distributions to fund future commitments (as is the plan at Yale and Harvard for example), but given that 82% of all PE commitments were made in 2005 and subsequently, that can’t be the case here.
Students of the asset class tell me that 2006-2008 will be some of the worst PE vintage years on record. With $19.5B committed by CPPIB to PE during those three years, let’s hope the pundits are wrong.
MRM
Clearly , very large investment pools, like CPPIB (which is not a pension plan) and OMERs (which is), have a belief in private equity going forward, relative to other investment choices – even though their own hisory, and that of other large investors like the Caisse de Depot suggest such belief is unfounded. The whole emerging “mega fund” pension savings concepts are based on the belief in private equity, and its related infrastructure cousin. Weak foundations…
Meanwhile, most substanial institutions are moving more heavily into index based and derivatives types of investing, geared to liability management, with more global reach of investment choices, mostly exposing themselves to liquid markets by design.
Therefore, there are two large experiments underway, both which reflect beliefs rather than facts at their core. Both approaches present Boards great difficulty in knowing how they are really doing, causing even more reliance on belief systems and management salesmanship skills.
My prognosis is neither approach will generate long term performance any different than old style long equities and bonds in proper proportion. This need not end in tears, but the hubris coming from these institutions, plumped up by misleading media coverage focussing on deal making of the day, is the guarantor of massive capital misallocation underway.
The implications of this are not visible – like few manufacturing plants being built, no venture capital money allocated, and increasing flight of capital to overseas/overheated markets, which are set up for a major fall. Canadian’s need more analysis on CPPIB, and others, much like broad and deep analyst coverage of public companies, to at least encourage a move away from an unnecessarily promotional business model.
Just received a report from Preqin that puts CPPIB at the fifth largest (in the world) PE investor (CDP is number 7).
This from zero in 2001. That’s growth.
We should all hope that CPPIB were able to build a world class team when their offer letters had to compete during that golden age of Private Equity.
By the way Yale’s endowment, a yardstick of sorts for illiquid assets, doesn’t even make the list.
Most of the mega-allocations to PE are from governments (6 of top 10 are public pension funds and one is a sovereign wealth fund).