CPPIB's $29 billion PE program largest naked currency bet in Canadian history

There’s nothing quite like the internet.

In our last installment (see prior post “Thanks to Washington, we know how CPPIB is doing” Mar 29-11), I was able to piece together the Internal Rates of Return for eleven of CPP Investment Board’s private equity investments. With $29.4 billion exposed to the buyout industry (plus private equity co-investments), it goes without saying that this is a massive element of the long term performance profile of our $140 billion national savings program.

Courtesy of Ted Wheeler, the Treasurer of the State of Oregon, we now know the CPPIB’s IRR on an additional twelve global funds. If those investments were hedged, that is. Unfortunately, the CPPIB only reports in the native currency, so the IRRs we can extrapolate are likely much higher than what has been the CPPIB’s actual experience given the C-dollar’s appreciation over the past number of years.

The figures that follow cover four categories: CPPIB’s commitment, paid-in-capital (which tells you how much of the fund is invested in deals and/or drawn to pay management fees), reported value, and reported value + distributions (which tells you what the notional simple return of the fund is against the paid-in-capital figure). That figure is based in large part on what the manager believes the portfolio is worth as at Sept. 30, 2010, subject to GAAP fair value accounting. The year in the brackets reflects the year that the investment commitment was made by CPPIB. MM equals millions:

Apax Europe VII (2007) E500.0MM, E315.5MM (63.1%), E312.0MM, E320.0MM; +1%

Oregon Public Employees Retirement Fund’s IRR: -1.0%

Apollo VI (2005): $400MM, $470.1MM (118%), $403.3MM, $549.5MM; +17%

Oregon Public Employees Retirement Fund’s IRR: 6.7%

Apollo VII (2007): $600MM, $350MM (58%), $305.5MM, $419.1MM; +20%

Oregon Public Employees Retirement Fund’s IRR: nmf

Coller International Partners IV (2002): $75.0MM, $64.5MM (86%), $32.9MM, $93.1MM; +44%

Oregon Public Employees Retirement Fund’s IRR: 15.7%

Coller International Partners V (2006): $150.0MM, 92.1MM (61.4%), $86.1MM, $104.5MM +13%

Oregon Public Employees Retirement Fund’s IRR: 3.4%

CVC European Equity Partners IV (2005): E200.0MM, E188.4MM (94.2%), E89.5MM, E236.3MM +25%

Oregon Public Employees Retirement Fund’s IRR: 10.4%

CVC European Equity Partners V (2008): E350.0MM, E127.0MM (36.3%), E143.7MM, E146.7MM +16%

Oregon Public Employees Retirement Fund’s IRR: nmf%

Diamond Castle Partners IV (2005): $150.0MM, $124.7MM (83%), $91.3MM, $117.0MM; -6%

Oregon Public Employees Retirement Fund’s IRR: -2.0%

KKR Asian Fund (2007): $350.0MM, $179.6MM (51.3%), $218.0MM, $218.1MM; +21%

Oregon Public Employees Retirement Fund’s IRR: 5.2%

MatlinPatterson Global Opportunities Fund (2001): $100.0MM, $103.3MM (103%), $10.8MM, $175.0MM +69%

Oregon Public Employees Retirement Fund’s IRR: 15.9%

Terra Firma Capital Partners III (2006): E300MM, E196.2MM (65%), E58.7MM, E65MM; -67%

Oregon Public Employees Retirement Fund’s IRR: -41.6%

TPG Partners IV (2003): $100MM, $106.7MM (107%), $83.2MM, $158.3MM; +48%

Oregon Public Employees Retirement Fund’s IRR: 14%

With these twelve additional funds, we now have 23 IRRs (less two which were nmf) of the CPPIB’s 132 different fund investments. Not a bad sample size, and it didn’t take long to pull the data together for you.

Of the 23 funds, 21 showed IRRs. Of those 21 IRRs, 7 were negative, another 4 were below 5%, and only 5 were higher than 10% (only 1 of which was higher than 16%). So much for Private Equity generating an 18%+ return across the board, despite CPPIB having access to the highest profile fund managers in the world.

The average IRR of the 21 funds?: 1.46%. The median IRR was 3.4%. And this sample represents 17% of the entire pool of CPPIB private equity fund investments, which seems rather meaningful. More importantly, the biggest fund commitments weren’t churning out the better returns, so even if you thought 1.46% was a decent return, the smaller funds are skewing that average figure higher…and that’s before the losses we’ve experienced on the Canadian dollar.

As at September 30, 2010, I calculated that we had funded ~$18.8 billion of our $29.3 billion of private equity commitments (using a constant currency). That leaves over $10 billion of our commitments currently unfunded.

According to data from the States of Oregon and Washington (assuming the sample is representative), we are barely treading water on an Internal Rate of Return basis — 11 years in. I think it’s time the CPPIB came clean and disclosed as much information as these far smaller funds, including individual and program IRR, as well as the various values in our home currency, just as Oregon reports its Euro-denominated investment flows in US dollars. And then calculates the return on what they actually made, not just the simple multiple on capital one would have made had you invested in the home currency of the fund.

With Canadian dollar liabilities, the decision to not hedge a $29 billion PE program must surely be the largest naked currency bet by any local investor in Canadian history.

Wouldn’t you like to know where we’re at, return-wise, before we put out another $10 billion? As one industry observer remarked recently: “this is the Caisse de Depot all over again”.

MRM