Mark Wiseman, chief executive officer of the Canada Pension Plan Investment Board, walked into Bergdorf Goodman in the mid-1990s looking for a suit. “I couldn’t afford anything there,” he says. While he still hasn’t bought a suit at Bergdorf’s, this year he did buy the store. Canada Pension, which represents 18 million workers and is the country’s largest pension manager, in October helped lead a C$6.3 billion ($6 billion) buyout of Bergdorf’s owner, Neiman Marcus Group. “Is that where I shop?” he asks. “No, thanks. But there are a lot of people who do. It’s the biggest mistake that you can make in investing: Don’t assume that the rest of the world is like you.”
The deal marked a shift in style for a fund more familiar with port operators than Prada purses, and it was an example of how Canadian pension funds have changed their conservative investing ways as they seek to boost returns in a low-interest-rate environment. Through October, the six largest have participated directly in $18.4 billion of mergers and acquisitions, according to data compiled by Bloomberg. That’s more than double the $7.4 billion of the three biggest U.S. buyout shops, Blackstone Group (BX), Carlyle Group (CG), and Apollo Global Management (APO). More deals are on the way. Borealis, the infrastructure arm of the Ontario Municipal Employees Retirement System, or Omers, is one of the final bidders for Fortum’s (FUM1V:FH) Finnish natural gas pipeline network, according to people with knowledge of the situation.
Many U.S. public pension plans are barred from participating directly in acquisitions. They invest instead in the private equity firms’ funds, which typically charge limited partners 2 percent of assets and 20 percent of gains. The Canadian public funds, which collectively manage more than $685 billion, have long invested in private equity firms as passive limited partners. Their shift into direct private equity transactions, which began on a small scale in the early 1990s, comes as they look to sidestep fees and improve performance to meet obligations for Canada’s aging population.
Last year the four biggest Canadian funds on average had about 11 percent of their total assets allocated to private equity, either as limited partners or in direct investments in companies, up from 3.6 percent in 2005, their reports show. “As returns from big fixed-income portfolios come down, you have to find sources of replacement returns that come at reasonable risk levels,” says Michael Sabia, CEO of Caisse de Dépôt et Placement du Québec, the country’s second-largest pension fund.
The strategy sometimes puts the funds in direct competition with private equity firms. Ontario Teachers’ Pension Plan, the country’s third-largest fund, bought a majority stake in Illinois-based Heartland Dental Care last year, outbidding buyout shops including KKR (KKR) and Madison Dearborn Partners, a person with knowledge of the matter said at the time. Earlier this year, U.K. cinema chain Vue Entertainment was bought by Omers and Alberta Investment Management, a pension fund for public-sector workers, for £935 million ($1.51 billion). The deal froze out other potentially interested buyers, including London buyout firm BC Partners, according to a person familiar with the situation.
“We’re competing against every other investor in the world,” says Gordon Fyfe, CEO of PSP Investments, the fourth-largest fund manager in Canada. “There’s a limited amount of returns, and if you’re going to win and you’re going to earn returns, you’re taking them from someone else.” The competition between the pension plans and buyout shops can result in expensive takeover battles. In November, Canada Pension and partner Dexus Property Group (DXS:AU) found themselves in a bidding war with Australia’s GPT Group (GPT:AU) to take over Commonwealth Bank of Australia’s (CBA:AU) property investment arm. In December, Canada Pension raised its offer to $2.76 billion from $2.58 billion.
It’s difficult to compare the performance of Canadian pensions’ direct private equity investments with those of buyout shops, because they don’t break out returns in the same way. The private investing arms of the four largest Canadian pension funds returned an average of 12 percent in 2012, including both direct and passive investments, according to data compiled by Bloomberg from the funds’ annual reports. The five largest publicly traded buyout firms in North America that report annual private equity performance, Blackstone, KKR, Fortress Investment Group (FIG), Carlyle, and Oaktree Capital Group (OAK), had an average gain of 19 percent. “There’s 10 times as much money flowing into private equity than 20 years ago,” says Leo de Bever, CEO of Alberta Investment. “But it doesn’t mean there are 10 times as many opportunities. You have to be pickier and find unusual opportunities, dig a little deeper.”