Canadian pension funds are underinvested in the country’s public markets, starving domestic companies of capital and exposing them to foreign takeovers, said the head of capital markets at Desjardins Group.
That lack of investment “sucks a lot of liquidity out of the market, which has an impact on valuations and your ability to grow and thrive as a public company,” said Francois Carrier in an interview with Bloomberg News.
The country’s largest pension fund manager, Canada Pension Plan Investment Board, Toronto, had 12% of its capital invested in domestic assets as of March, compared with 70% in 2001, when the board was a relatively new entity and Canada had rules that capped pension funds’ investments in foreign assets. Just 8% of CPPIB’s active equities portfolio was in Canadian stocks as of March 31. CPPIB had assets of C$632.3 billion ($466.8 billion) as of March 31.
Japan’s Government Pension Investment Fund. Tokyo, allocates nearly a quarter of its portfolio to Japanese equities. Japan makes up 5.1% of global equity market capitalization and Canada 2.6%, according to data compiled by Bloomberg. GPIF had ¥248.2 trillion ($1.6 trillion) in assets as of Sept. 30.
Carrier isn’t the only one who sees a problem. In March, more than 90 business leaders signed an open letter to Finance Minister Chrystia Freeland and her provincial counterparts, urging them to change the rules for pension funds to “encourage them to invest in Canada.”
At Freeland’s request, former Bank of Canada Governor Stephen Poloz is now looking at ways to entice pension managers to do exactly that.
So far, Poloz has heard solutions such as changing regulations to allow the pension funds to play a more activist role in the companies they invest in, or creating a pooled fund that would make dealmaking easier for smaller pension funds.
Several Canadian mid-caps have been swallowed up by foreign buyers this year, including steelmaker Stelco Holdings, which was bought by Cleveland-Cliffs, and residential property owner Tricon Residential, which was acquired by Blackstone.
For Carrier, conversations around go-private transactions are “always a little bit depressing,” because he believes privatization portends a lack of participants in the public market. When Canadian companies can’t access the right kind of capital and can’t achieve proper valuations, Carrier said, the door opens to aggressive acquisition offers, often from foreign companies.
The Canadian initial public offering market has been sluggish, with less than C$750 million ($536 million) raised this year, largely for financial vehicles such as ETFs, data compiled by Bloomberg show.
Desjardins is ramping up debt markets activity for corporations, expanding beyond its traditional area of government debt. Carrier believes raising more capital “translates into better valuation, which makes for a more competitive stance on the M&A front, which then allows our Canadian issuers to thrive on global markets.”
