Currency Gods aren't shining on CPPIB
As promised, here’s the lowdown on how our external private equity investments are doing at the CPP Investment Board (see prior post “CPPIB U.S.A. general partner Q1 2010 performance numbers” Aug 19-10).
The overview (December quarter in brackets, in current currency exchange rates):
Paid in Capital: $16.333 billion ($16.649B)
Reported Value: $11.498 billion ($11.419B)
Distributions Received: $7.410 billion ($7.353B)
Reported Value plus Distributions: $18.905 billion ($18.772B)
Capital Calls still to fund: $12.776 billion ($13.042B)
Total Committed: $29.108 billion ($29.691B)
That looks to be a 16% increase in the net asset value of CPPIB’s PE investments over the life of the program. But there’s more to it than that.
CPPIB’s exposure to the private equity world is dropping, and that has all to do with the appreciation of the Canadian dollar. Here’s the drop in the currencies between December 31st and March 31st, for example.
The difference:
US$ 1.0156 (versus 1.04)
Euro 1.3737 (v 1.50)
CNY 0.1488 (v 0.153)
JNY 0.01087 (v 0.011)
The swing is far more dramatic if you look back to December 2008, when the PE program had $33.611 billion committed to it. The Euro at 1.70 and USD at $1.225 will do that.
And that’s the tricky part. On December 31, 2008, we had $16.841 billion invested in private equity funds (and another $16.77B still to fund). Of which $10.277 billion was invested in US dollar denominated funds, and another $5.154 billion was sitting as paid-in-capital in Euro-denominated funds. As it understand it, CPPIB doesn’t hedge investments of these nature. Which makes it very hard to actually analyze how we are doing with our program.
What we do know is this:
The $10.277 billion invested in US dollar PE funds as at December 31/08 is static, and yet the current value of that same capital is now worth 17.1% less, leaving aside what may have happened to the underlying value of the capital invested during the subsequent five quarters (ie, increase or decrease of individual NAVs); what we know anecdotally is that PE investments have bounced back to pre-crisis levels. If you use the average exchange rate of 1.1214 for 2005-08, we are down 9.4% assuming the lion’s share of US dollar commitments were funded during that period.
The Euro’s performance has had a similar impact: down 7.8% on $5.154 billion of money that was already out the door (using the avg. exchange rate of 1.4905 for 2005-08).
The Yuan and Yen investments are so small that we can ignore them for this currency analysis.
In aggregate, our U.S. and Euro capital calls from December 31/08 are down ~8.9% as the C$ has stengthened. What that also means is that Distributions we received during that period are also understated today, so we’ll have to solve for that.
At the CVCA AGM last May, a CPPIB executive made the point that hedging currencies for PE investments was not in the cards. What this means is that the apparent 16% rise in the program’s value (which is based upon reported NAVs plus Distributions received), is more like an 8.9% increase.
I know at least one senior Ontario pension fund manager who would say that on a program that has been in place for the past decade, the IRR on a return profile of this nature is infintessimal. Somewhere between zero and one percent. That’s not all to do with the strong C$, mind you, but it is just another reminder of the perils of putting 95.8% of the capital committed to external private equity and venture capital managers outside of your home country.
There’s no way around that, of course. Canada doesn’t have enough investment opportunities to satiate a fund of this size. What the CPPIB could do, however, is also publish their returns as they actually are, in Canadian dollars, and not solely based upon the home currency of the General Partner in question.
This currency analysis is rudimentary, but what it does imply is that there may have been a $1.14 billion swing on capital we’ve put into the PE marketplace. That’s a significant unrealized mark-to-market loss. Given that the CPPIB financial statements lump the entire PE program into “Foreign Developed Markets” or “Emerging Markets”, we really have no idea how things are going. The PE program returns themselves are reported in the quarterly financial report as such: “Investment results by asset class are reported on an unhedged Canadian dollar basis.”
Which means the CPPIB needs to be more clear on one simple thing: how much did we put into the program, and what’s it worth now, in Canadian dollars? And what’s the IRR after our first ten years at it?
With $29 billion (made up of capital drawn plus $12.8B still unfunded) of CPPIB’s $130 billion of assets tied up in these vehicles, it is a large enough investment allocation to warrant more transparent disclosure. CPPIB executives seem proud of the strategy to date; it would be fabulous if we all could understand why.
MRM
You are raising an important idea, that CPPIB is supposed to actually make a profit. Every investor in foreigfn markets has to make a currency call, and to delink this from investment performance as some sort of unique externatlity is just intellectually lazy.
IRR is the measure of relevance for private equity. The scaling up of PE and the timing of doing so is among the most important decisions CPPIB has made. Suggesting average annual returns (a terrible practice started by Teachers and perpetuated by its followers), excluding currency are simply not bringing to account how they and their staff are actually doing. Funds aside, how are the vaunted direct investments going? Anything other than Skpe to talk about here?
The poor disclosures make it is obvious that the CPPIB program has not, PE in particular, and no doubt its direct investments, at this juncture, made any money!! The truth is hard, but that’s what people are paid (well) to deal with – isn’t it? Why not face up to this, no one wants CPPIB to do poorly, but I don’t want literally hundreds of billions to be managed by people who make no money after a decade of trying. If anyone is listening: Break it up into managable chunks, diversify the asset management please.