CPPIB should take a page from Oregon's book

Without a doubt, we can all learn from someone else. Parenting, friendship, fund management, even golf. Take the pension fund managers at the Oregon Public Employees Retirement Fund, for example. They could give a tutorial on transparency to most in the pension fund world, including Canada’s CPPIB.

As we’ve highlighted previously, our stewards at CPP Investment Board have committed almost $30 billion to the world of private equity over the past decade, most of which was signed up during the buyout sector’s peak over the past four years. Unfortunately, it is impossible for Canadians to determine how the strategy is faring, as internal rates of return are not disclosed (see prior post “Currency Gods aren’t shining on CPPIB” Aug 22-10).

According to the CPPIB’s website, this shouldn’t be the case:

Our accountability

While the CPP Investment Board operates at arm’s length from governments, we are subject to very rigorous accountability requirements. Accountability is deeply ingrained in the CPP Investment Board’s legislation, governance and in the policies and practices of the board, officers and employees.

Specific examples of the ways we are by law, accountable to the stewards and the public include:

We provide regular and timely information on our website helping interested Canadians monitor the activities and investment performance of the CPP Investment Board.

“Helping us monitor…performance”? Not so far as our private equity investments are concerned. If you are looking for a “Best Practice”, look no further than the State of Oregon, which made its first material private equity commitment back in 1981. Much like other pension funds, they publicly disclose the individual commitment, amounts drawn, fair market value, and the multiple returned of the original investment drawn. But they also disclose the internal rate of return (IRR), which is essential in analyzing any investment.

Why is that? Simply, doubling your money over 5 years is dramatically more valuable to a pension fund than doubling it over 10 or 15 years. On the CPPIB website, they present each investment multiple in the same manner, whatever the time horizon, even though one (shorter) is so much more attractive than the other (long).

Oregon makes it crystal clear.

We invested $100 million with Fund Manager XYZ, and they made us an IRR of 10% over the life of the investment. Over at the CPPIB, all Canadians have to work with is the rudimentary analysis that we try to provide each quarter (see prior post “CPPIB U.S.A. general partner Q1 2010 performance numbers” Aug 19-10). But there are no IRRs on CPPIB’s PE site, which (mis)leads Canadians into thinking that a GP that returned a 1.17x multiple of capital over a nine year period made 17% for us on the investment. Over at Oregon’s web site, we can learn that although a 2001-vintage fund did return 1.17x the US$257 million of Oregon’s capital it deployed, Oregon “only” realized an IRR of 5.3%.

5.3% doesn’t sound quite as good as making “17%” on your money, does it? Definitely not, but it’s a far more accurate reflection of performance.

How the two firms report their investment in TPG IV (2003-vintage commitment) is a case in point:

CPPIB’s website says the US$105.8MM invested is worth US$146MM

Oregon’s website says their US$330.8MM is worth 1.37x the capital originally invested, or an IRR of 12.6%

12.6% is nothing to sneeze at, but it is a much more sober figure than the simplistic reporting of CPPIB, which leaves most Canadian’s with the impression they “made” 37% (1.37x) on their money. And that’s before the impact of currency, of course, since CPPIB doesn’t hedge this part of their mandate. Between 2003 and today, the value of the US$ has dropped from 1.566 to 1.04 per Loonie.

Did that wipe out much of “our” 12.6% IRR, once TPG IV was brought back into Canadian dollars over the years? (Not to focus on TPG, but it was one easily recognizable General Partner that both groups share). Maybe, but who can know for sure?

Oregon even goes so far as to publish the aggregate IRR for the entire program’s cash flows dating back to 1981. A handsome 16.0% IRR is worthy of note.

To their everlasting credit, Oregon also publishes everything in US$, their pension fund’s home currency; even the European and Asia fund managers. After all, the State of Oregon is investing into these international funds using USD to make good on the commitments, and they’re coverting foreign currencies to pay US$-denominated pensions once the money comes back. Why not be forthright about the true performance of the investment, rather than muddy the waters by only reporting in the currency that the asset manager utilizes?

Why won’t CPPIB take the lead from Oregon, one of the forefathers of private equity investing, and publish both the IRRs and the true CDN$ performance? It can’t be because the bloggers are right, and the overall CPPIB PE portfolio has returned an IRR of between 0% and 1.2% since 2000, can it?

So, if it’s not to avoid transparency, let’s make it easy — nay possible — for Canadians to understand how our investments are doing, as promised on the CPPIB website. CPPIB should replicate what Oregon and others are already doing.

MRM
(disclosure – hat tip to peHub for the Oregon link)