Doubling Down on Private Equity at CPP Investment Board

Being King (or Queen) must be a wonderful thing.  There is plenty of bowing and scraping, and a lovely absence of criticism in most corners. Your reign is invariably long enough that any mistakes are usually washed away with the passage of time.  Except perhaps when you run a pension fund, as the Caisse de Depot is rumoured to have found out with their recent $38 billion haircut (see prior post “Is CPPIB now on top?” February 9-09). But even there, management turnover leaves the prior administration holding the bag.

Over at the CPP Investment Board, a more conservative public market investment strategy appears to have worked very well.  As of the December 2008 quarter end, the CPPIB’s nine month YTD performance was off 13.7%.  Over the prior four years, the CPP is up an annualized rate of 3.5%. 

Almost as good as the 3.66% yield of the Canada 5 year bond that was available for purchase on December 31, 2004.

But long term investors know that bonds are not the sole way to go, which ensures that private equity (PE) is a sensible allocation for most pension funds. As we’ve discussed before (see prior post “Supersized private equity allocations at CDP and CPPIB?” February 10-09), the CPP Investment Board has backed up the truck on PE over the past three years or so.

Using the most recent stats and a Sept. 30th currency, the CPPIB’s current private equity commitments ring in at C$28.9 billion; 26.5% of their Dec/08 AUM. C$14 billion has been drawn, and another C$14.8 billion of promised capital calls are still outstanding. From a performance standpoint, they appear to be making good money. The C$14 billion drawn has a reported value (inc. distributions) of C$17.1 billion. Return on invested capital and other stats will take another post or two.

(Since we don’t know the currency rates at the time of each non C$ commitment and draw, I’ve assumed the Sept. 30th rate for commitments, draws, distributions and reported values.)

As a fee-payer, the CPPIB is making serious waves around the globe. Assuming that every fund commitment comes with a “2 & 20” model, CPPIB will pay $577 million in management fees each year based upon their current PE allocation. (That’s why everyone in our industry wonders why I ever, ever dare to mention the CPPIB name in a blog.)

The increasing pace and concentration of PE investments by Canada’s own pension fund is fascinating to track. For the first 9 months of 2008, C$6.2 billion of commitments were made (21% of their entire PE program), with an average commitment of $365 million per fund. That average fund commitment represents a 71% increase over the average individual fund commitment made in 2005; 2008 was a great year to have been a Mega Buyout GP it would appear.

In 2007, C$5.5 billion of commitments were made, at that average was C$321 million per.

For 2006, commitments came to C$7.1 billion, with an average fund commitment size of C$297 million.

2005? The year that the current generation private equity management team began to be assembled that summer at CPPIB? C$4.5 billion, with an average fund throw of just $213 million.

The aggregate commitment to the entire private equity program in 2003 and 2004 was C$1.7 billion…about C$200 million a quarter. For 2008, commitments were being made in excess of C$2 billion a quarter.

Let’s hope we future pensioners luck out, and that the 2008 vintage year returns exceed those of 2003/04! I’m not entirely relying on my CPP pension to get by at 65, but its the principle of the matter.

I still enjoy Kraft Dinner, but it tastes better when you’re eating it by choice, not circumstance.

MRM