Hey Canada, can you spare $15.7 billion?
$15.7 billion sounds like a lot of “scratch”, as a pro golfer might say. Is that the annual budget for some Provinces and States? Perhaps. In this context, we’re talking the unfunded liability currently being carried by the CPP Investment Board’s private equity program.
The CPPIB fund is sitting on assets of $123.8 billion, and 26.8% of that sum is currently committed to our private equity program (see prior post “Doubling Down on Private Equity at CPP Investment Board” February 20-09). Here are some CPPIB PE stats to noodle:
Capital committed to private equity funds: $32.66 billion
Capital called to date by fund managers: $16.98 billion
Carrying value of PE capital called to date: $17.92 billion
Capital still to be called by funds: $15.68 billion
Nine months ago (using 9/08 data), this is how it looked:
Capital committed: $28.9 billion (26.5% of CPPIB’s Dec/08 AUM)
Capital called to date: $14 billion
Carrying value of capital called to date: $17.1 billion
Capital still to be called: $14.8 billion
If you’re wondering about the impact the global financial crisis has had on CPPIB’s PE program, consider this:
Between September 2008 and June 2009, PE managers called about $3 billion of capital to fund transactions and fees (~$490MM covered 9 months of mgmt. fees). Drawn capital grew from $14 billion to $16.98 billion over the nine month period, yet the carrying value grew from $17.1 billion to just $17.98 billion. About $2 billion in value was “lost” during the nine month period.
Of note, since the CPPIB starting making PE investments in 2000, they’ve earned about $934MM on invested capital of $16.98 billion — which represents a 5% simple return for the decade (a majority of the program’s capital was committed between 2006-08, when about $18.8 billion was locked into primarily large and mega buyout funds).
I’m not suggesting for a moment that you should worry about $2 billion of value lost over a nine month period. The quarterly mark-to-market swings within PE portfolios over the past nine months were understandably large. The irony of applying GAAP fair market value accounting to the buyout world means, simply, that private investments will swing with the public market indicies. Far more correlated to the public investing world than private equity was, in theory, supposed to be.
In the meantime, we can keep our eyes on these figures. Since 2000, CPPIB’s PE program has returned distributions of $7.6 billion to the fund. For the program to reach “self-funding” status, CPPIB’s existing PE program needs to generate another $16 billion of cash over the next few years.
Otherwise, a big chunk of our weekly payroll contributions will have to be steered this way to cover the ongoing PE capital calls (see prior post “PE consumed 61% of CPPIB quarterly payroll contributions in Q4“).
MRM
Since media people might pick up your blog, lets be clear. PE has not generated a simple 5% return, rather its fund of funds segment of the portfolio it has generated a 1.05 times multiple of money over ten years. This would be a simple return over ten years of 0.5% per annum. Given the margin of error in unrealized valuations which make up the bulk of the returns, it is fair to say that CPPIB PE has generated no material investment returns since inception. Combine the fact that most of the PE program is in foreign currency, the actual returns this portfolio has generated are definitely notably negative. While one can argue currency attribution, CPPIB has chosen to be unhedged, many other institutions do at least 50% currency hedge, and in any event, CPPIB gets the net of currency outcome (even though it appears they benchmark against local currency public benchmarks for value add purposes – if no one’s responsible for currency decisions, than all are).
I am not attempting to project how this will all turn out in the long term – it may well turn out well over time. But, 10 years in, during a major bull market period albeit ending badly, CPPIB simply has nothing to show for its considerable private equity efforts, but losses.
I am all for rooting for Canada on a world stage, but I think CPPIB would better serve itself and its consituents with proper transparency, especially around the fund verses direct activities, the direct investments which are never disclosed in terms of performance (one reasonably presumes they are worse than the funds or else I would expect they would bedisclosed) and therefore the actual total portfolio losses are probably greater than that you have attempted to analyze.
Lets indeed stay positive on the CPPIB possibilities, e.g.there is an absolutely noteworthy governance structure in place, and global ambitions are not in themselves inappropriate. And a calculated and deliberate lack of transparency is not necessarily inappropriately designed to buy time until a long term investment program matures. I simply think CPPIB would serve itself better by avoiding the promotional instinct, just head on recognize the difficulty of the investment challenge, and don’t declare victory while a battle is raging.
Andy
You know of what you speak.
MRM