Skip to main content
barrie mckenna

Go to the welcome page of the Canada Pension Plan Investment Board's website and there's a very comforting mission statement: "Our mandate is to invest in the best interests of Canada Pension Plan contributors and beneficiaries and to maximize investment returns without undue risk of loss."

But this isn't your grandma's CPP.

On Tuesday, the CPPIB made its largest and possibly riskiest bet to date as it chases yield in a low-rate, slow-growth world – the $12-billion (U.S.) purchase of General Electric Co.'s private equity arm, GE Antares Capital.

The acquisition establishes the $265-billion (Canadian) CPPIB as a major player in an entirely new realm of investing – direct lending to mid-sized U.S. companies.

As recently as 2000, the pension fund manager had 95 per cent of its assets safely squirrelled away in boring Canadian government bonds and other fixed-income investments.

Not any more. At the end of March, more than three-quarters of the fund was invested outside Canada. Fixed-income investments made up just 26 per cent of its portfolio.

Roughly half of the CPPIB's assets are in equities, including a big chunk in emerging markets. Real estate makes up 11.5 per cent. Another 5.7 per cent is invested in infrastructure – roads, ports, airports and the like.

For a measure of just how the CPPIB has transformed, look at some of the transactions it's made in the past year. It bought a one-third stake in Britain's leading ports operator, 44 per cent of a Rio de Janeiro shopping centre development and a portfolio of Brazilian warehouse and logistics sites.

And yet the CBBIP has a problem. Not today. Not tomorrow. But 10 years out, as waves of Canadians retire.

It must generate an average 4-per-cent annual return (after inflation) to meet its obligations to Canadian pensioners. For the past decade, it has impressively outpaced that mark, generating an average 6.2-per-cent return.

Government bonds, now earning less than 2 per cent, won't get it to four.

The CPPIB will no doubt cast the acquisition as a natural part of the evolution of its private equity lending.

Adding a big U.S. commercial loan portfolio to its existing real estate and infrastructure investments gives it asset and geographic diversification. That, in theory, will tend to spread risk.

Private equity offers the opportunity to make big returns, particularly with interest rates low.

But it's also risky business. GE made a strategic decision to shed its massive GE Capital lending arm and get back to its core industrial products business, in part to avoid strict regulation by the U.S. Federal Reserve as a systemically important financial institution.

With predictions that rates will eventually head higher, private equity could also become much less attractive than it looks now.

More direct lending to companies adds complexity as well. Keith Ambachtsheer, director emeritus of the Rotman International Centre for Pension Management at the University of Toronto, said CPPIB's board of directors will have to be vigilant that the pension fund manager stays on top of all the new risks and complications it's taking on.

GE Antares Capital's loan portfolio is eclectic. In recent months, it has taken major stakes in a maker of children's colouring books, a manufacturer of diesel engine controls and a drilling service company. Many of its deals involve merger-and-acquisition financing.

"Running an organization with a relatively high level of complexity in terms of the kind of investing that you're doing, you do have to watch that," said Mr. Ambachtsheer, who is generally supportive of the CPPIB's new foray.

CPPIB won't have to directly manage the new loan portfolio. It's buying an existing business, and GE Antares Capital's top managing partners are staying on.

But the CPPIB will likely have to bulk up its in-house expertise in a vast new array of financings and industries. That will add to its overhead costs.

Adding to the CPPIB's future challenges, the CPP's mandate may be vastly expanded in the years ahead to help ensure Canadians have enough to retire comfortably. In late May, the federal government proposed the idea of allowing people to make extra CPP top-up payments.

The challenge for the CPPIB is to scale up and diversify its portfolio, while protecting Canadians from the inevitable turbulence in financial markets.

The merits of this deal likely won't be known until after the next economic slump.

Report an editorial error

Report a technical issue

Editorial code of conduct

Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 28/03/24 7:00pm EDT.

SymbolName% changeLast
E-N
Eni S.P.A. ADR
+0.79%31.72
GE-N
General Electric Company
-2.55%175.53

Interact with The Globe