How many of CPP's Private Equity Funds Are Underperforming Bonds?

As promised (see prior post “CPP Investment Board Private Equity IRRs” May 19-15), I’ve broken out the 54 CPP Investment Board external Private Equity funds I can analyze to give you a sense of just how much capital we have in strong or weak performers.

This analysis only covers $16.7 billion of our $45 billion of PE commitments, which is an incredible amount of money if you think about it. If you want to know the IRRs for the balance of our current $45 billion private equity allocation, you’ll have to do a better job than I of convincing the CPPIB Board of Directors to disclose the true fund returns, as many pension firms do south of the border (see prior representative post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13).

Based upon this exclusive analysis, assuming it is representative of our overall PE portfolio, we CPPIB beneficiaries may have 30% of our PE allocation committed to underperformers: that’d be $13.5 billion all told. Without a doubt, we currently have $5.0 billion of this $16.7B subset captive in underperforming funds. The $5 billion of committed investment dollars is managed across 16 different funds. The 16 figure is happily down from the grand total of 27 underperforming funds two years ago (see prior “61% of CPPIB Private Equity Commitments sampled are currently below solvency threshold” May 21-13).

Disappointingly, according to the data released by transparent U.S. pension plans regarding our PE funds, Canadians have just $1.8 billion committed to managers that are producing returns of at least 20% (via 7 different funds).

That 20% figure is very investment return that the global buyout industry is targeting to earn its investors:

IRR Performance of 54 CPPIB Private Equity Funds

30%+ IRR: 3 funds
20-30% IRR: 4 funds
14-19.9% IRR: 11 funds
10-13.9% IRR: 11 funds
7-9.9% IRR: 9 funds
0-6.9% IRR: 13 funds
negative IRR: 3 funds

Those IRR figures do not take into consideration the impact of currency swings. This is due to the fact that CPPIB discloses our investments in the currency of the fund, and doesn’t share with us the performance impact of the C$ over the course of the fund’s life. For example, if we make 20% on a U.S. dollar-denominated fund investment, but lose 20% on our currency exchange, CPPIB’s website only discloses the underlying fund performance and not the fact that our gains were wiped away.

Regardless of the currency swings, we have big money in many weaker funds, and more modest sums in the strong ones (at current exchange rates):

IRR Performance of 54 CPPIB Private Equity Funds by Fund Commitment

30%+ IRR: $544 million committed
20-30% IRR: $1.235 billion committed
14-19.9% IRR: $3 billion committed
10-13.9% IRR: $3.642 billion committed
7-9.9% IRR: $3.1 billion committed
0-6.9% IRR: $4.6 billion committed
negative IRR: $425 million committed

If you ever wonder why the CPPIB continues to quickly flip good investments, when its mandate is supposed to be all about buying long term assets and holding them forever — ala Warren Buffet — the answer may well be that for every 7 great funds, we have 16 that have not lived up to expectations. That reality may drive CPPIB to sell good “direct investments” and crystalize our paper gains in an effort to mitigate this apparent near term performance shortfall. There may well be another explanation for the recent sales of Suddenlink, Gates Corp., Air Distribution Technologies, or the early exit from a 7 year loan to the Formula One racing circuit. But ask yourself: if a global private equity firm is buying an asset from CPPIB, why are we selling in the first place? Obviously, when Blackstone or Apollo buy a great company from us they plan to make a good return on their acquisition; and given the weekly flows that the CPPIB receives from our paycheques, they have to turn around and quickly reinvest the profits they make on these exits in an even more appealing asset.

One hopes that as the individual underlying PE portfolios continue to mature, individual fund performances will brighten. While there has been some directional improvement as compared to two years ago, many of the larger-commitment funds above are of the 2005-2007 vintage. One assumes there’s not much left on the operational improvement front after almost 10 years of active fund management. There could still be harvesting to do, but, again, there won’t be as many businesses left to sell compared to our more recent PE commitments (2009-).

A fund such as ours should have a decent allocation to the private equity asset class, there’s no question about that. But that doesn’t mean we aren’t left with lots of questions, just the same.

MRM