Solvency canary alert?: 59% of CPPIB PE $ commitments producing IRRs below 6%

Got some great feedback on yesterday’s post about the icky external private equity returns at many of the private equity funds chosen by the CPP Investment Board over the past 7 years (see prior post “20 of 37 CPPIB PE Funds performing below solvency benchmark” Dec 5-12).

Thanks to the good people at the US$240 billion California Public Employees’ Retirement System and their confrères at the Oregon Public Employees Retirement Fund, I can add the internal rates of return for another 16 funds that count both CalPERS/Oregon and CPPIB as limited partners that weren’t otherwise available yesterday via WSIB and CalSTRS. Along with yesterday’s 37 different funds, I’ve now be able to unearth the IRRs for 53 of the CPPIB’s 135 externally managed funds.

My 27% sample size is now a more robust 39%. Not determinative, but highly meaningful in the world of finance given the range of commitment periods, firms, and jurisdictions of the funds I’ve been able to pull together for you.

It would be so much easier, and certainly even more precise (given the currency changes), if the CPPIB team would do this work for you instead. But, as Kevin O’Leary would attest, this backwater blog can undertake primary research as well as anyone (see prior post “Highlights of our Kevin O’Leary Blog Posts” Sept 27-12).

I’ll save you a repeat of the much of the opinion from yesterday’s post.

The figures that follow cover three 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), 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 June 30, 2012, 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.

Below those figures are the “simple return” results released by the CPPIB as well as the more useful “internal rate of return” data provided by one of more of CalPERS, CalSTRS, Oregon and WSIB:

Advent International GPE VI (2008): E375MM, E300.7MM, E401.9MM;

CPPIB: +33.7%, CalSTRS: 12.4% IRR

Apax Europe VII (2007): E500MM, E462.8MM, E552.3MM;

CPPIB: +19.3%, CalSTRS: +6.1% IRR

Apollo V (2002): US$150MM, US$217.3MM, US$452.0MM;

CPPIB: +108%, CalPERS: 37.9% IRR

Apollo VI (2005): US$400MM, US$482.9MM, US$620.8MM;

CPPIB: +28.6%, CalSTRS: 7.9% IRR

Apollo VII (2007): US$600MM, US$590.3MM, US$783.2MM;

CPPIB: +32.7%, CalSTRS: 21.4% IRR

Ares Corporate Opportunities Fund (2003): US$75MM, US$90.3MM, US$135.8MM;

CPPIB: +50.4%, CalPERS: 13.5% IRR

Ares Corporate Opportunities Fund II (2006): US$200MM, US$214.3MM, US$342.3MM;

CPPIB: +59.7%, CalPERS: 14.1% IRR

Ares Corporate Opportunities Fund III (2008): US$300MM, US$248.3MM, US$373.8MM;

CPPIB: +50.5%, CalPERS: 25.4% IRR

Birch Hill Equity Partners III (2005): C$85MM, C$90.9MM, C$120.9MM;

CPPIB: +33%, CalPERS: 9.9% IRR

Blackstone Capital Partners IV (2002): US$185MM, US$204.9MM, US$469.4MM;

CPPIB: +129%, CalSTRS: 37.8% IRR

Blackstone Capital Partners V (2005): US$413.5MM, US$402.8MM, US$416.3MM;

CPPIB: +3.3%, CalSTRS: 2.0% IRR

Blackstone Capital Partners VI (2008): US$500MM, US$59.2MM, US$55.4MM;

CPPIB: -6.4%; CalSTRS: -23.5% IRR

Bridgepoint Europe II, LP (2001): E100MM, E102.2MM, E176.8MM;

CPPIB: +73%, CalPERS: 30.0% IRR

Bridgepoint Europe III, LP (2005): E100MM, E91.3MM, E100.6MM;

CPPIB: +10.1%, WSIB: +0.9% IRR

Bridgepoint Europe IV, LP (2007): E300MM, E189.5MM, E218.3MM;

CPPIB: +15.2%, WSIB: +5.1% IRR

Carlyle Venture Partners II (2002): US$60MM, US$64MM, US$70.8MM;

CPPIB: +10.6%, CalPERS: -2.1% IRR

Charterhouse Capital Partners IX (2008): E200MM, E79.5MM, E100.4MM;

CPPIB: +26.3%, WSIB: +9.5% IRR

Coller International Partners IV (2002): US$75MM, US$64.5MM, US$98.7MM;

CPPIB: +53%, CalPERS: +14.8% IRR

Coller International Partners V (2006): US$150MM, US$113.7MM, US$148.1MM;

CPPIB: +30.1%, CalPERS: +7.3% IRR

CVC European Equity Partners IV (2005): E200MM, E190.2MM, E338.2MM;

CPPIB: +77.6%, CalSTRS: 15.7% IRR

CVC European Equity Partners V (2008): E350MM, E247.2MM, E324.5MM;

CPPIB: +31.3%; CalSTRS: 10.8% IRR

Diamond Castle Partners IV (2005): US$150MM, US$140.7MM, US$160MM;

CPPIB: +13.7%, Oregon: +4.6% IRR

First Reserve Fund XI (2006): US$300MM, US$305.9MM, US$342.2MM;

CPPIB: +11.9%, CalSTRS: 4.8% IRR

First Reserve Fund XII (2008): US$500MM, US$380.3MM, US$377.2MM;

CPPIB: -1%, CalSTRS: 3.9% IRR

FountainVest China Growth Fund (2007): CNY1,500MM, CNY943.2MM, 1,041.1MM;

CPPIB: +10.4%, CalSTRS: 9.3% IRR

Hellman & Friedman Capital Partners V (2004): US$75MM, US$67.4MM, US$164.2MM;

CPPIB: +143.6%, CalSTRS: 28.2% IRR

Hellman & Friedman Capital Partners VI (2006): US$400MM, US$388.8MM, US$472.1MM;

CPPIB: +21.4%, CalSTRS: 5.6% IRR

Hellman & Friedman Capital Partners VII (2009): US$600MM, US$130.7MM, US$116.5MM;

CPPIB: -11%; CalSTRS: -10.2% IRR

Hony Capital Fund 2008 (2008): US$75MM, US$76MM, US$77.6MM;

CPPIB: +2%, CalSTRS: 6.6% IRR

KKR 2006 (2006): US$475MM, US$464.2MM, US$593.1MM;

CPPIB: +27.8%, CalSTRS: 3.7% IRR

KKR Asian Fund (2007): US$350MM, US$256.9MM, US$381.7MM;

CPPIB: +48.9%, WSIB: 11.4% IRR

KKR European Fund II (2005): E188MM, E202.7MM, E212.8MM;

CPPIB: +5.0%, WSIB: 1.0% IRR

KKR European Fund III (2008): E109.6MM, E54.3MM, E56.3MM;

CPPIB: +3.7%, WSIB: -6.1% IRR

KKR Millennium Fund (2002): US$282.5MM, US$329.6MM, US$507.5MM;

CPPIB: +54.0%, WSIB: 16.8% IRR

KSL Capital Partner II (2006): US$107MM, US$109.4MM, US$133.8MM;

CPPIB: +22.3%, WSIB: 10.8% IRR, Oregon: 10.8% IRR

Lexington Capital Partners V (2002): US$75MM, US$74.6MM, US$122.6MM;

CPPIB: +64.3%, CalPERS: +20% IRR

Magnum Capital (2007): E100MM, E64.8MM, E59.3MM;

CPPIB: -8.5%, CalPERS: -4.7% IRR

MatlinPatterson Global Opportunities (2001): US$100MM, US$94.4MM, US$166.6MM;

CPPIB: +76%, Oregon: +16% IRR

MatlinPatterson Global Opportunities III (2007): US$250MM, US$269.5MM, US$298.8MM;

CPPIB: +10.9%, Oregon: +4.2% IRR

Onex Partners (2003): US$150MM, US$141.5MM, US$394.4MM;

CPPIB: +178.7%, CalSTRS: 39.6% IRR

Onex Partners III (2008): US$400MM, US$225.2MM, US$219.7MM;

CPPIB: -3%, CalSTRS: -3.8% IRR

Permira IV (2006): E150MM, E136.9MM, E173.1MM;

CPPIB: +26.4%, WSIB: 4.6% IRR

Providence Equity Partners VI (2006): US$400MM, US$408.3MM, US$478.8MM;

CPPIB: +17.3%, CalSTRS: 6.0% IRR

Silver Lake Partners II (2004): US$100MM, US$96.7MM, US$146.4MM;

CPPIB: +51.4%, WSIB: 9.9% IRR

Silver Lake Partners III (2006): US$500MM, US$394.1MM, US$546.6MM;

CPPIB: +38.7%, WSIB: 17.4% IRR

Terra Firma Capital Partners III (2006): E300MM, E278.6MM, E159.8MM;

CPPIB: -42%, Oregon: -21.5% IRR

TPG Asia Fund V (2007): US$350MM, US$304.4MM, US$284.3MM;

CPPIB: -6.5%, CalPERS: -3.9% IRR

TPG Partners IV (2003): US$100MM, US$108.2MM, US$183.3MM;

CPPIB: +69%, CalSTRS: 15.2% IRR

TPG Partners V (2006): US$500MM, US$511.9MM, US$437.0MM;

CPPIB: -13.6%, CalSTRS: -4.7% IRR

TPG VI (2008): US$750MM, US$494.6MM, US$525.5MM;

CPPIB: +6.3%, CalSTRS: 1.5% IRR

Triton Fund III (2008): E175MM, E128.2MM, E143.5MM;

CPPIB: +11.9%, WSIB: 2.0% IRR

Welsh, Carson, Anderson & Stowe X (2005): US$200MM, US$202.7MM, US$238.5MM;

CPPIB: +17.7%, CalSTRS: 3.3% IRR

Welsh, Carson, Anderson & Stowe XI (2008): US$300MM, US$174.3MM, US$197.4MM;

CPPIB: +13.3%, CalSTRS: 7.4% IRR

These tables are updated from yesterday to include the 53 investments:

30%+ IRR: 4 funds
20-30% IRR: 4 funds
10-20% IRR: 12 funds
7-10% IRR: 7 funds
0-6% IRR: 17 funds
negative IRR: 9 funds

30%+ IRR: $615 million committed
20-30% IRR: $1.05 billion committed
10-20% IRR: $3.0 billion committed
7-10% IRR: $1.5 billion committed
0-6% IRR: $5.8 billion committed
negative IRR: $3.1 billion committed

Despite the additional information from CalPERS and Oregon, it turns out we CPPIB beneficiaries aren’t much better off based upon the IRR information for these 16 additional funds. We’re still suffering with a negative IRR on more funds (9) than the eight which have met or exceeded the original 20%+ PE return profile that our managers at CPPIB were sold on. The percentage of weak to strong performers has improved a bit (except for the negative impact that comes from the fact that we made our USD and Euro fund investments with unhedged Canadian dollars). With the new data, we can report that 26 of the 53 funds are producing an IRR below the CPPIB’s solvency threshold of 6ish%.

That’s the threshold that CPPIB managers need to achieve over the medium term so as not to have to ask for an increase to your payroll deductions.

20 of the 53 funds have achieved an IRR of at least 10%, to date. That’s the good news.

But, there’s some bad news, too.

33 of the 53 CPPIB PE funds (62%) I’ve been able to analyze failed to earn an IRR of even a modest 10%, based upon the published financial reporting of CalPERS, CalSTRS, Oregon and WSIB. For my pals, followers, allies (even the copycats) in the mainstream media, that could be your headline.

The 53 funds tracked above represent $15 billion of the ~$29 billion committed to CPPIB’s entire external PE Fund program. That’s a highly representative sample, don’t you think? Sadly, $8.8 billion of that $15 billion (59%) is tied up in funds that are currently reporting an IRR below the CPPIB’s required solvency threshold of 6ish%.

There’s your 48 point headline, MSM types.

And those horrible results are before the one-way negative impact the strength of the Canadian dollar has had on the 51 funds above that are denominated in either USD or Euros. As in, we invested in most of the vehicles when the USD and Euro were high compared to the Canadian dollar. CPPIB shows the individual PE fund performance (sans the IRR) in the funds’ home currency, unlike its four peers, which masks the impact of the currency moves over the past decade.

Let’s look at the vintages of this sample, since CPPIB’s media staff will likely attempt to blame these figures on the fact that these funds are all of a recent vintage:

2001-2003 vintage: 11 funds
2004 – 2006 vintage: 21 funds
2007-2009 vintage: 21 funds

Here’s another way to splice the data:

2001-2003 vintage: 30% IRR+: 4 funds, 20-30% IRR: 1 fund; 10-20% IRR: 5 funds; negative IRR: 1 fund

2004 – 2006 vintage: 20-30% IRR: 1 fund; 10-20% IRR: 4 funds; 7-10% IRR: 4 funds; 0-6% IRR: 10 funds; negative IRR: 2 funds

2007 – 2009 vintage: 20-30% IRR: 2 funds; 10-20% IRR: 3 funds; 7-10% IRR: 3 funds; 0-6% IRR: 7 funds; negative IRR: 6 funds

Of the 33 funds that have an IRR below 10%, 17 of them are of the 2002-2006 vintage. Let no one explain away their performance based upon the idea that those are “recent vintage year” vehicles.

Of the 20 fund investments that have achieved an IRR of 10% or better, 12 of them were made under the stewardship of founding CPPIB CEO John MacNaughton; i.e., before ex-CEO David Denison and Mark Wiseman, his successor, joined the organization.
When you analyze the PE fund investment IRRs I can track from the Denison/Wiseman era (2006-onwards, since the H2 2005 fund investments would have been already underway via prior management), a troubling 63% are currently performing below the CPPIB’s solvency threshold of 6ish%. At least according to the disclosure of CalPERS, CalSTRS, Oregon and WSIB; if only CPPIB would tell us this information themselves.

As I mentioned yesterday, this entire financial analysis can’t take into account the huge, one-way negative impact all of these unhedged US dollar and Euro-denominated funds are having on our true IRR, since CalPERS/CalSTRS/Oregon/WSIB did their IRR analysis in USD vs. USD. Whatever IRR these four U.S.-based public pension plans have enjoyed/suffered is assuredly worse for our CPPIB investment pool.

The nine funds that have a negative IRR to date total $3.1 billion. The four really strong performers equal just $615 million. We’re heavy the weak and light the strong.

Bad luck, perhaps, and partly a function of the fact that fund commitments under former CPPIB CEO John MacNaughton were far smaller than during the past seven years. The fact that the relatively small PE commitments are the ones that have shot the lights out since the PE strategy began in 2000, plus management’s decision to not hedge our foreign currency exposure, is why some observers have told me they believe the true IRR for CPPIB’s entire external PE Fund strategy amounts to “zero” since inception.

Between 2000 and 2005 (Mr. MacNaughton’s tenure), the average PE fund investment was $144 million across 60 funds or so. Between 2006 and 2011, the average commitment essentially doubled to $275 million on 75 different vehicles. Our senior CPPIB team torqued our investment appetite right at the tail end of the golden era of private equity (see prior post “KKR Founder Henry Kravis on PE climate” May 29-07), on top of putting our money into foreign currencies just as the Canadian dollar got strong.

Now that I’ve been able to dredge up the IRR results for more than 39% of our private equity investments, perhaps CPPIB’s Board of Directors will see fit to improve the agency’s disclosure. It seems odd that one of the largest public investors in the world is not following best practices as shown by the transparency of CalPERS, CalSTERS, Oregon and WSIB. All four of which are well-experienced, North American-based private equity investors managing public funds.

In my mind, this looks to be a topic for both the Audit (which is responsible for “reviewing and recommending the financial content of the annual report”) and Governance (“ensures CPPIB follows appropriate governance best practices”) Committees of the CPPIB Board of Directors to take up. According to the CPPIB annual report, the entire Board of Directors is responsible for “reviewing and approving material disclosures such as quarterly and annual financial statements….” That’s not a task they’ve delegated to management, and rightly so.

Our $29 billion of external private equity commitments, not to mention the $20 billion of direct PE co-investments we’ve made (in firms such as Avaya, Dollar General, EMI, Freescale, Skype, SunGuard and TXU) (see prior representative post “Let’s not forget our US$45B TXU nightmare” Apr 19-11), definitely pass the test of materiality. You’d have to think that the 18 million workers and retirees of Canada deserve the same kind of quarterly reporting that the 3.9 million residents of Oregon have come to rely upon.

It is our money, after all. We deserve the same disclosure as our cousins to the south.

MRM