LP interview: Canada Pension Plan Investment Board

COVID-19 and its accompanying disruption have created unprecedented challenges for investors of all kinds, regardless of size. “It is different from previous cycles we've experienced. There are still many things we don't know about the virus and the uncertainty on future economic impact is significant,” says Frank Su (pictured), head of Asia private equity at Canada Pension Plan Investment Board (CPPIB).

Nevertheless, the C$434 billion ($329 billion) pension fund has seen no change in its investment strategies or its approaches to due diligence as a result of the pandemic. On the contrary, Su believes CPPIB’s two basic mandates have been enhanced.

First, the group takes a long-term view supported by a flexible exit strategy. While the investment team works to a five year-exit model, there is no obligation to seek liquidity just because a business has been sitting in the portfolio for a long time. “The philosophy is we want to continue support companies for their growth. We take a very flexible approach. We are not constrained to a time framework., so we can actually guide our portfolio companies to taking that longer-term view as well,” Su explains.

In the early stages of COVID-19, when it was hoped that normality would return by the summer, CPPIB was busy helping companies build strong balance sheets in case the pandemic turned out to be protracted. Now the focus is on opportunities that emerge – over multiple years – during the post-COVID-19 stabilization period. Asia is important in this context, given the region is ahead of the curve on recovery and offers long-term growth.

Second, CPPIB is a big believer in the strength of its on-the-ground capabilities, with in-house resources supplemented by a local partner network. While travel restrictions and social distancing measures make it difficult to jump on a plane or have in-person meetings, having resources in-market can help push fund commitments or co-investments along.

“For example, our team might have been tracking a fund manager for a long period of time and have met with them in person multiple times. If that manager is launching a new fund and reaches out to us, we can leverage that pre-existing knowledge to evaluate the fund. I don’t think not having in-person meetings will hinder us from continuing to have these interactions,” says Su.

He adds that the team is currently working on a couple of co-investments that have already reached a late stage of the process, while many new opportunities also under consideration. 

Going deep

CPPIB’s private equity exposure is significant by global pension fund standards. It had C$94.6 billion deployed in the asset class as of March, 23% of total assets. The PE program has more than quadrupled in size over the past decade and is larger than the real estate and infrastructure allocations combined. The five-year return on the asset class is 13.7% compared to 6.6% for the entire fund.

The Asia private equity portfolio had a carrying value of C$15.3 billion, of which C$9 billion was in funds, C$5.8 billion in co-investments, and C$500 million in secondaries. There were 35 active GP relationships covering 76 funds. During the 12 months to March, C$2.5 billion was committed to funds, with six new managers added to the roster, and C$700 million went into 10 co-investments alongside managers.

Among the additions were Polaris Capital Group and NewQuest Capital Partners, representing CPPIB’s first commitments to a Japan-only manager and a specialist Asian secondaries manager, respectively. Meanwhile, in China the pension fund established relationships with Genesis Capital, a growth-stage technology investor founded by former Tencent Holdings executives, and Lyfe Capital, a growth-stage life sciences specialist.

These new partnerships reflect how CPPIB’s Asia funds program has evolved, though it is bound by minimum fund sizes of $500 million and commitments to individual funds starting from $75 million.

The pension fund started out with managers that were already of scale or were the Asian leg of a global relationship (MBK Partners, TPG Capital, KKR) and then added more country-focused GPs (FountainVest Partners, CITIC Capital, Multiples Alternative Asset Management). Those remain part of the strategy, but CPPIB is increasingly looking at GPs with deep sector focus.

“We care a lot about whether we can develop a deep, long-term relationship with those GPs. We care about what a GP can bring to our network. How are they different from our existing relationships? Are we comfortable with their strategy? Do we think their team will be the right partner for us?” says Su.

Emerging markets – which to CPPIB means China, India and select geographies in Latin America – accounted for 21.4% of the fund across all asset classes as of March. The goal is to reach 30% by 2025, with China alone expected to represent 20% of the portfolio. Asia private equity is already primarily an emerging markets story, with just over half the capital deployed in China and 15% in India.

CPPIB’s geographical priorities can be seen in its office locations. Hong Kong became the first international base in 2008, with London following soon after. The second and third Asian offices opened in Mumbai and Sydney, respectively, in 2015 and 2017. There are now more than 100 investment professionals in the region. The private equity team numbers 30, all of whom are located in Hong Kong. They are diverse in terms of nationality, with China, India and Korea – among the top target markets – well represented. 

Closer the better

As one of the first global asset owners to establish capabilities in Asia, CPPIB has moved smoothly from fund investments into direct investments. According to Su, half of all new investments are now co-investments, with two-thirds of the PE team spending most of their time on these opportunities. CPPIB favors larger co-underwritten deals, where it works in partnership with the GP from day one and shares transaction costs.

“We very much believe in the importance of on-the-ground capabilities. Asia is a diverse market with a lot of different countries. Conducting due diligence and managing portfolio companies is a resource-intensive process,” Su says.

A local presence is also important because Asia’s emerging markets are growing quickly but are still at an early stage in private equity terms. The industry infrastructure, from reliable processes to the availability of good management talent to the standard of financial and legal advisors, remains a work in progress. This means more risk for institutional investors and therefore a need for in-market expertise to mitigate it.

Perhaps most importantly of all, demand for high-quality private equity assets in Asia far exceeds supply. Dry powder is at record highs, so there is intense competition among GPs for deal flow and then plenty of LPs clamoring for co-investment. Without a local presence, CPPIB might lack the nimbleness to respond to opportunities and the information to know whether what is being shown to them is worth pursuing.

The pension fund can target co-investments as small as $30 million while the largest check it has ever written is $1.3 billion in support of a privatization. Commitments to co-underwritten transactions tend to be at least $150 million.

In-house resources make it easier to be a proactive participant in these situations, from pre-deal due diligence to post-close asset management. In addition, CPPIB brings global scale and perspective. It has a portfolio value creation team comprising industry veterans who work on initiatives such as using data analytics to improve business operations, corporate governance and decision-making. Moreover, if an Asia-based portfolio company wants to go global, CPPIB can tap its experience and networks in the target markets.

Thanks to the pension fund’s one portfolio approach, knowledge sharing stretches beyond private equity. For example, the public equities team will weigh in on private deals if they have relevant information to contribute. It is not unusual for CPPIB to continue investing in companies when they transition from private to public ownership – Alibaba Group and Meituan-Dianping are examples of this – and then some pre-IPO deals are classified as fundamental equity Asia rather than private equity. Ant Group is one of them.

Technology plus

Three key themes underpin all of CPPIB’s investment activity in Asia: consumption upgrades, disruptive business models, and productivity improvement. While COVID-19 hasn’t altered these themes, it has accelerated them, with the rapid adoption of online platforms for health consultations and education seen as fundamental changes.

It comes as little surprise to hear Su identify healthcare, consumer, technology and financial services as his preferred sectors. Recent investments include Kuaishou, a Chinese short video sharing platform, Kakao M, a Korean music and entertainment business with strong digital distribution, and Sogo Medical, a Japanese pharmacy chain operator and B2B healthcare management platform. These were co-investments with Anchor Equity Partners and Polaris.

“I don't think we are deprioritizing the traditional business model,” Su contends. “While technology plays an important role across our investment themes, it is not the only driver. We also think about the long-term perspective of those sectors and we look for businesses where we can bring extra value.”

As a counterpoint, the pension fund invested in Amcare Women's & Children's Hospital, a leading Chinese obstetrics service provider, earlier this year. The company’s major assets are six hospitals and three postpartum care centers.

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• Topics
• LPs
• Fundraising
• Greater China
• South Asia
• North Asia
• Asia
• Canada Pension Plan Investment Board (CPPIB)
• LPs