Mark Wiseman, the chief executive officer of Canada Pension Plan Investment Board, walked into the high-end New York department store Bergdorf Goodman in the mid-1990s looking for a suit. He left empty-handed.
“I couldn’t afford anything there -- I probably still can’t,” said Wiseman, sitting in the C$192.8 billion ($183 billion) fund’s headquarters in Toronto last month. “Is that where I shop? No, thanks. But there are a lot of people who do.”
Instead of a suit, Wiseman bought the store. Canada Pension, the country’s largest pension manager, in October helped lead a $6 billion (C$6.3 billion) buyout of Bergdorf owner Neiman Marcus Group, a change in style for a fund more familiar with port operators than Prada purses.
“It’s the biggest mistake that you can make in investing: don’t assume that the rest of the world is like you,” Wiseman said.
The deal shows how Canada’s pension funds have changed their conservative investing ways, becoming private-equity deal makers to acquire companies worldwide in industries ranging from luxury retail to entertainment and health care. The strategy, aimed at boosting returns, sometimes puts them in direct competition with their usual partners -- buyout firms such as KKR & Co. and Blackstone Group LP. (BX) It has also meant riskier deals, as when the funds said they would consider joining a bid to buy money-losing smartphone manufacturer BlackBerry (BBRY) Ltd.
The funds have been especially active this year. In the first 10 months, the six largest participated in $18.4 billion of mergers and acquisitions, according to data compiled by Bloomberg. That was more than double the $7.4 billion of the three biggest U.S. buyout shops, Blackstone, Carlyle Group LP and Apollo Global Management LLC (APO) -- the first time since 2009 the Canadian pensions have surpassed the private-equity firms, the data show.
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 charged by the buyout firms and to meet pension obligations for Canada’s aging population as interest rates remain stagnant.
“It’s important that the pension plans earn the returns to fulfill a promise that has been made,” said Jim Leech, CEO of Ontario Teachers’ Pension Plan, the country’s third-largest pension fund with $122.8 billion in assets as of Dec. 31. “Diversification is the only free lunch in investing where you can protect yourself.”
Unlike in Canada, many U.S. public pension plans are barred from participating in direct acquisitions, preventing them from making the same shift. They invest instead in the buyout firms’ funds, which charge limited partners a typical fee of 2 percent of assets and 20 percent of gains.
While the Canadian pensions do most of their direct private investing alongside buyout firms, usually entering bids jointly, they have become rivals in other transactions. Ontario Teachers’ bought a majority stake in Heartland Dental Care Inc. last year, outbidding buyout shops including KKR and Madison Dearborn Partners LLC, a person with knowledge of the matter said at the time. The transaction valued the company at about $1.3 billion.
Earlier this year, U.K. cinema chain Vue Entertainment Ltd. was bought by Canadian pension funds Ontario Municipal Employees Retirement System, known as Omers, and Alberta Investment Management Corp. for 935 million pounds ($1.51 billion). The deal -- put together without an auction -- was executed in six weeks and froze out other potentially interested buyers, including London buyout firm BC Partners Holdings Ltd., a person familiar with the situation said.
“We’re competing against every other investor in the world,” said Gordon Fyfe, CEO of Public Service Pension 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.”
More buyouts are on the way. Borealis, the infrastructure arm of Omers, is among bidders for Fortum Oyj’s Finnish gas network, according to people familiar with the situation.
It’s difficult to compare the private-equity performance of the Canadian funds to big buyout shops as they don’t break out returns in the same way. However, the private investing arms of the four largest Canadian pension funds returned an average 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 figures -- Blackstone, KKR, Fortress Investment Group LLC (FIG), Carlyle and Oaktree Capital Group LLC (OAK) -- had an average gain of 19 percent.
The Canadian funds don’t face the same pressure as buyout firms to sell their companies to return money to investors. Flush with a predictable stream of capital thanks to employee contributions, they can hold assets longer and ride out downturns, said Fyfe. Private-equity shops typically sell companies after five to seven years and need to raise new money every couple of years.
“When any of the top 10 pension plans decides to buy something, they think more in terms of decades than quarters,” said Scott MacDonald, head of pension segment development at Royal Bank of Canada’s investor services unit.
They’re steadily dedicating more of their resources to takeovers. Last year the four biggest Canadian funds on average had about 11 percent of their total assets allocated to private equity, both direct and as limited partners, 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,” said Michael Sabia, chief executive officer of Caisse de Depot et Placement du Quebec, the country’s second-largest fund.
That’s not always achieved. Ontario Teachers’ was forced to write off its entire investment in New Zealand’s Yellow Pages directory business, which it acquired with Unitas Capital for $1.6 billion in 2007, after lenders took control of the business.
In the BlackBerry talks, Canadian funds including CPP and Alberta Investment said they would consider joining with insurance company Fairfax Financial Holdings Ltd. to take the phone maker private. BlackBerry’s hunt for a buyer was scrapped in November in favor of a capital injection from Fairfax and partners. The funds did not contribute.
The competition between the pension plans and buyout shops can result in expensive takeover battles.
Canada Pension and partner Dexus Property Group (DXS) this month found themselves in a bidding war with Australia’s GPT Group to take over Commonwealth Bank of Australia’s listed property trust. GPT on Nov. 19 made an A$3 billion ($2.74 billion) offer that trumped CPP and Dexus’s A$2.83 billion offer, which they had already increased.
“There’s 10 times as much money flowing into private equity than 20 years ago,” Leo de Bever, CEO of Alberta Investment, said in a telephone interview. “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.”
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