TORONTO - The Canada Pension Plan Investment Board is going after private equity in a big way.
Mark Weisdorf, vice president of private market investments at the board, hopes to have a total of C$2.4 billion (US$1.5 billion) allocated to private equity deals by March 2002.
The board is about one-third of the way there, already having committed C$745 million to private market investments.
Commitments (all shown in Canadian dollars) within the last four months include:
* A 10% stake in NB Capital Partners, a merchant banking business started in 1999 and affiliated with National Bank of Canada and National Bank Financial. As part of the deal, the board also committed $180 million over five years to private equity, venture capital and mezzanine debt funds managed by NB Capital Partners.
The board acquired its 10% ownership interest for $18 million and has a four-year option to increase its ownership to 17% upon committing a further $185 million to funds managed by NB Capital Partners. At that time the board will be an equal shareholder with National Bank Financial, while management will own the remaining shares.
* A $190 million commitment to the Canadian merchant bank Borealis Capital Corp., consisting of $20 million to buy a 26% ownership interest in Borealis, plus commitments over five years of $150 million to its buyout fund and $20 million to its venture capital fund. Additional commitments may be made to Borealis infrastructure projects.
The board will be an equal owner in Borealis with the Ontario Municipal Employees' Retirement System, Toronto. The $500 million Borealis Buyout Fund will acquire equity in Canadian private companies, and the $100 million venture capital fund will invest in North American technology companies that serve the financial community. The Ontario employees' system also is an investor in these funds.
* A $135 million commitment over four years to Paul Capital Partners VII LP, sponsored by Paul Capital Partners, a San Francisco-based private equity firm. The new $1.2 billion fund will acquire U.S. and European limited partnership interests in the secondary markets. Other investors include U.S. and European pension funds, foundations, banks and individuals. Paul has $3 billion under management with investments in 200 private equity funds.
* A $150 million commitment over five years to GM Capital Partners, New York, which will be used for buyouts and venture capital.
* A $22 million investment in Clairvest Group, for a 15% ownership stake, plus a $50 million commitment to Clairvest's buyout fund.
The downturn in the equity markets doesn't bother Mr. Weisdorf, because he believes some great opportunities for finding good investments at low prices exist in the current market.
"The fact that values are down is good for us," he said. "When you're a long-term investor with a long-term horizon and have the size to withstand short-term downturns, you'll get a premium for investing in equities, including private equity."
The Toronto-based CPP Investment Board is the equity investment unit of the Canada Pension Plan, a government-sponsored organization providing pensions to all workers. The Canada Pension Plan has $40 billion in market value in bonds, and $12 billion in equities.
The investment board has a mandate to invest 10% of its assets in private equity. It plans to commit $1.8 billion to new private equity funds as well as $600 million to secondary purchases by March 2002.
"We're trying to outperform public equities," said Mr. Weisdorf.
The board invests money the Canada Pension Plan doesn't need to pay current pensions. It is governed and managed independently of the Canada Pension Plan, and at arm's length from government. Within 10 years, the investment board expects to have more than $130 billion in assets.
Mr. Weisdorf pointed out that "when you invest in a fund, it draws down the money over a four- to five-year period. It will take the managers that long to invest the funds." He added that "managers notice that values are coming down and put money to work over three to five years. Values will be low. When returns are realized seven to eight years from now, we'll have the opportunity to earn a superior return."
`Doing our homework'
Given the difficult times recently in the private equity markets, Mr. Weisdorf said, "We are doing our homework to make commitments to the better (private equity) managers out there. We're looking at managers who've invested in other recessionary cycles."
Mr. Weisdorf said the current round of private equity commitments will be balanced among Canada, the United States and Western Europe.
"It may look like we're heavily weighted to the Canada and the U.S. now, but if you look a year from now it will be balanced with investments in Western Europe as well," he said. Mr. Weisdorf said the investment board will make more commitments to funds in the United States and Europe in the next few months.
Mr. Weisdorf said with the lag time between the commitments to private equity and the actual investments being made, "it will take a minimum of four to five years before we get 10% of our invested capital in private equity investments."
He added that in a couple of years, the board might start looking at making some private equity commitments to funds in Latin America and other emerging markets.