LP interview: Canada Pension Plan Investment Board

"There is a whole range of different strategies that are completely valid and time will tell if they play out. But don't expect everybody to do what we do," says Mark Machin, Asia president at Canada Pension Plan Investment Board (CPPIB). "We have some unique structural advantages in the way we are set up, particularly the nature of the money we are managing."

In an Asian context, CPPIB was the earliest proponent of the "Canadian model," devoting more resources to its alternatives programs with a view to generating better long-term returns.

The pension fund opened its Hong Kong office in 2008 and now has approximately 50 people based there, of which 10-12 are responsible for private equity fund commitments and co-investments alongside GPs. There are also investment professionals covering real estate, private debt, relationship investing, hedge funds and long-short equities. Other functions are predominantly run out of Toronto.

As Machin suggests, CPPIB's long-dated liabilities allow a degree of flexibility that works in its favor. The pension fund will collect excess contributions until 2022 and total assets are expected to surpass C$500 billion ($458 billion) eight years after that. Of the C$219.1 billion under management, about 15% is deployed in Asia. Business in the region as a percentage of active assets committed is 40% real estate, 20% private equity, 10% infrastructure and the remainder in hedge funds and other strategies.

The pension fund's growing commitments to Asia-focused private equity managers reflects not only the region's increasing economic significance, but also this ramp up in assets.

The size factor

In 2005, CITIC Capital received a $50 million allocation for its first China fund, which had a corpus of $450 million. CPPIB is no longer able to make investments of this size. Emerging markets funds below $500 million are typically off limits, while the threshold is $750 million for developed markets vehicles. In most cases, CPPIB cannot account for more than 20% of a single fund.

"We don't want to make investments of less than $100-150 million. Globally, we are one of the largest institutional investors in PE funds, and there is a reluctance to grow the number of GP relationships to too many. We have debated lowering the bar - if you believe private equity is going to outperform public markets on a risk-adjusted basis then perhaps you should - but the conclusion is we should keep the bar high."

The pension fund's largest commitment to an Asia-focused manager was $450 million for KKR's second pan-regional vehicle, which closed at $6 billion. At the other end of the scale, Anchor Equity Partners, set up by former Goldman Sachs principal investment executives in Korea, squeezed in with a $125 million allocation to its $500 million debut fund.

More recently, CPPIB has invested in the latest funds raised by China's CDH Investments and pan-regional players CVC Capital Partners and TPG Capital.

Regional funds aside, CPPIB started with China and then expanded its scope to take in Australia and India. The pension fund has been searching for an appropriate manager in Japan for a while but has yet to identify one and is now starting to look for suitable GPs in Southeast Asia as well.

While the bar has been raised in terms of fund size, the policy on co-investment has eased up. CPPIB previously only wanted to do very large deals and have a team alongside the GP from the outset. The preference for co-underwriting over passive syndication remains, but there is greater flexibility on size, with opportunities of $35 million and upwards taken into consideration.

In the last year, CPPIB has supported Baring Private Equity Asia's purchase of Hexaware Technologies and Anchor's acquisition of Korean pharmaceutical distributor Geoyoung.

Private equity is distinct from areas like infrastructure, real estate and relationship investing in that CPPIB must work with a partner. In almost all cases this will be a portfolio GP, but there is also the option of teaming up with one of a handful of "like-minded peer organizations," such as sovereign wealth funds.

Expansion plans

Subject to further analysis, CPPIB hopes to open an office in Mumbai next year - it is particularly active in real estate and infrastructure in India - and a couple more bases could be set up in Asia in due course. The general expectation is that, across all strategies, there will be an evolution from passive to direct engagement, with more people on the ground identifying opportunities.

"It is extremely early days for us," Machin says. "We are quite broadly invested in real estate and have good competence so that should keep growing. Our hedge fund portfolio will grow modestly over time. But on infrastructure we are just scratching the surface - we are pretty active in Australia, just starting in India, and not looking anywhere else right now. Private credit and relationship investing are also only just getting started.

"On private equity direct we have more flexibility and capacity so that will grow substantially over time."

But this does not necessarily signal a desire to become a fully-fledged direct private equity player, resulting in the disintermediation of managers. Machin places CPPIB at neither end of the passive-active spectrum.

"We spend a lot of time trying to figure out which managers will prove out over time, and we invest a huge amount of time building relationships with them and using those relationships to enhance our returns," he adds. "We are not going to move from that model."

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