CPP Investment Board's "$2.4 Billion Canadian PE & VC Investment" challenged

Dateline: Banff, Alberta

The Canadian Venture Capital & Private Equity Association’s annual conference is always ripe for new material, and this year was no different. Fortunately, the conference keynote speaker was none other than CPPIB CEO Mark Wiseman, who is responsible for the nation’s $183 billion retirement pile. The speech covered all of the areas that CPPIB wants the media to focus on: “long term investing horizon”, public equity investors churn their portfolios, “long term thinking is beyond the average tenure of Public company CEOs and Boards”, we are a significant supporter of Private Equity and Venture Capital in Canada, “ESG matters”, etc. Strangely, none of BNN Business News Network’s important questions were addressed, despite it being the perfect audience to get into the nitty gritty of a topic such as returns, for example (see prior post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13).

Of the key humdingers in the talk, the one that got the most attention was the statement that CPPIB is a “strong supporter” and has “$2.4 billion invested in Canadian Private Equity and Venture Capital.” There was disbelief that this figure was correct, given the extremely modest commitments the CPPIB has made to domestic managers in these two asset classes over the past half decade. As one attendee summed it up: “Don’t blow smoke.” For years, I’ve tried to track the quantum of CPPIB funds flowing into the home team (see prior representative post “CPPIB Q2 2011 General Partner performance numbers” Dec. 20-11).

Since we have the data in our blog archives, I thought I’d do everyone a favour and delve into this pressing question, using the CPPIB’s own public disclosure.

According to the CPPIB’s most recent web update, here are the agency’s limited partner commitments as of Dec. 31/12. You’ll find the fund name, vintage year (ie., when CPPIB made the commitment), and the dollar value of CPPIB’s commitment as well as the dollar value of the capital drawn. In some cases, the draws have been higher than the commitment, which will explain why the last figure is larger than the original commitment:

Birch Hill Equity Partners III (2005): $85MM, $82.1MM

Birch Hill Equity Partners IV (2009): $85MM, $32.6MM

Brookfield Special Situation I (2001): $150MM, $190.1MM

Brookfield Special Situation II (2006): $300MM, $376.6MM

EdgeStone Capital Equity Fund II (2002): $100MM, $94MM

EdgeStone Capital Equity III (2006): $100MM, $68.2MM

EdgeStone Capital Mezzanine Fund II (2000): $30MM, $29.3MM

Kensington Co-investment Fund (2002): $40MM, $40.6MM

Northleaf/CFOF Canadian Legacy Buyout Holdings LP (2002): $212MM, $157.8MM

Northleaf/CFOF Canadian Legacy VC Holdings LP (2002): $550MM, $287.7MM

Northleaf/CFOF Canadian Private Equity Holdings II (2010): $400MM, $77.8MM

Northleaf/CFOF Private Equity Holdings (2006): $400MM $351.4MM

Onex Partners (2003): $150MM, $141.1MM

Onex Partners III (2008): $400MM, $344.2MM

That’s the sum total of CPPIB’s financial commitments to external Canadian Private Equity and Venture Capital fund managers. And then there’s the math. There are several ways to splice it, and I’ll tackle a couple of them.

Since 2000, CPPIB has committed $1.652 billion to these Canadian dollar-denominated funds, with another US$550 million to the two Onex USD funds (which have in the past been publicly referred to a “U.S. fund” by CPPIB staff but, I’ll include them here nevertheless). Then you have to add the additional draws by Brookfield that exceeded the original CPPIB LP commtment. That gets you to a grand total of $2.318 billion. In a sense, CPPIB’s figure is correct; since 2000, Canada’s pension agency has committed almost $2.4 billion to domestic PE & VC managers.

But here’s where it gets interesting.

Many of these funds are more than 10 years old. Which means they are in harvest mode. To date, CPPIB has received distibutions of $1.56 billion from this collection of hard-working and largely successful GPs. And while investing a dollar in 2000 that came back, say, in 2006 technically counts as being “invested in a domestic manager” for a speech in 2013, 67% of this grand $2.318 billion sum has long since been back with profits to the CPPIB by many of these managers. The real net exposed figure is more like $757 million if you think about how much money is still invested, exposed or committed & still undrawn.

If you find that too confusing, here’s another way to look at this $2.318 billion mirage.

Since CPPIB CEO Mark Wiseman joined the agency in June 2005, how much new capital has been allocated to the home team? $1.68 billion, with $1.25 billion having been drawn to date. A meaningful figure, but no one here would agree that CPPIB should still be talking about commitments made in 2000 and 2002, for example, on funds that wound up long ago. And, when compared to the $25.2 billion that CPPIB has committed to global buyout and other external managers since 2006, 6% seems skinny to some.

One day, circa 2006, CPPIB declared that it was too much work to deal directly with Canadian VC fund managers given the vast scale of the organization (see prior post “CPPIB Canadian general partner Q4 2009 performance numbers” May 29-10). And this is when things went off the rails for Canadian VCs hoping to get support from the very agency that claims to want to “support” the sector.

To be sure, the Canadian VC guys have taken it in the chops according to CPPIB’s own figures. Before Mr. Wiseman’s arrival in June 2005, many Canadian VC managers could rely on a direct commitment from CPPIB, including Celtic House, Edgestone, Lumira, Skypoint, and Ventures West (see prior representative post “CPPIB Canadian general partner Q1 2010 performance numbers” Aug. 13-10). Founding CEO John MacNaughton believed that it was the CPPIB’s duty to create a strong contingent of local fund managers, and went about creating extremely strong relationships with groups such as Clairvest and Edgestone, and became the lead LP for Celtic House, among others in the VC landscape. CPPIB’s lead orders were often $50 million for a single Canadian VC fund.

Today, with $150 million notionally allocated for new commitments to the entire VC asset class via Northleaf’s 2010 vehicle, leading Canadian fund managers are now very lucky to get an indirect $10 million commitment from CPPIB (see prior post “Has anyone seen CPPIB’s venture bucks? part 2” Nov. 12-12). Not only has the program been outsourced, the cheque sizes hae been cut buy up to 80%, meaning managers have to find a new lead.

$10 million commitments out of a $34 billion global external priate equity and venture capital program. Some “support”.

Now, $10 million isn’t zippo, but for CPPIB, whether the fund IRR is 50% or zero, such small commitments mean that the fund managers’ ultimate performance will have no bearing on the returns of the overall $183 billion agency. Considering CPPIB used to commit $50 million to individual Canadian VC funds back when it had less than $20 billion under management, and has been increasing its allocations to firms such as Blackstone and TPG from US$100 million to US$500 million as CPPIB’s asset base grew rapidly over the past seven years, folks here are left scratching their heads about this new definition of “support”.

The Canadian VC industry is in recovery mode. Profitable exits are happening. New funds are being raised. CPPIB needs to become a key part of this progress. As the saying goes: “Lead, Follow, or Get Out of the Way.” Just don’t blow smoke.

MRM