The problem is that the securities’ values could fall farther in the meantime. If so, the annual mark on the investment would show a loss, and that affects group compensation for the given year, often leading to infighting. “A losing trade is an orphan,” one portfolio manager said. ‘No one wants it.”
Such a struggle isn’t unique to CPPIB, but it was something the pension fund had to learn the hard way. “All pension plans get into the habit of hiding in the long term,” said veteran pension consultant Malcolm Hamilton, now a fellow at the C.D. Howe Institute. “You can’t think like that. Unfortunately, you have to act in the short term, you have to pay in the short term.”
While all of this was playing out, CPPIB started losing some top talent. Mr. Wiseman said the fund’s total employee turnover ratio has held relatively steady near 9 or 10 per cent annually, but he acknowledged some venerable names have left, including Mr. Raymond; Sterling Gunn, a former vice-president of quantitative research; and Jean-François L’Her, the former head of investment research for the fund’s Total Portfolio Management team – a departure that led to crying on the trading floor, according to someone there that day.
Asked what his No. 1 concern was at the moment, Mr. Wiseman emphasized talent retention. “I’m worried: Are we going to be able to keep those people engaged and have them continue to be employed and working for us?” he said.
To help convince them to stay, CPPIB is considering restructuring compensation. CPPIB typically pays salaries based on four-year rolling windows, which differs from most funds and firms on Bay Street, and that means new hires got bonuses based on previous years’ results. Going forward, newer employees won’t have as much of their pay tied to the fund’s performance before they arrived.
The troubled units, GCS and GTAA, also have new leaders, and in some cases, have retooled their strategies – something Mr. Wiseman said showed CPPIB’s long-term dedication. “If we were a hedge fund, we would have fired the whole team,” he said. “We still believe in the fundamental tenets of those two strategies. We still believe we can get it right.”
Burying the bad news
As the public markets arm retools, the CPPIB’s private equity division is dealing with a different, but equally challenging, scenario.
Whenever the board’s managers are asked about the fund’s private equity capabilities, they are quick to tout its inherent advantages. As a publicly funded plan, the CPPIB has certainty of assets, meaning it does not have to worry about investors redeeming their money at the first sight of something going wrong. Canadians cannot get their savings out until they retire.
Like many funds, the CPPIB has a tendency to celebrate its private equity successes – such as the recent sale of Gates Corp., the automotive parts manufacturing division of Britain’s Tomkins PLC. The pension fund teamed up with Onex to buy Tomkins for $5-billion in 2010 and the partners have since sold eight of the conglomerate’s holdings for gross proceeds of $7.9-billion.
However, struggling investments are rarely highlighted. For example, the fund invested $250-million in oil sands player Laricina Energy Ltd. in 2010 at $30 per private share; in March, the CPPIB coughed up $150-million more for a debt financing that came with warrants -- which can serve as a proxy for Laricina’s private share price – that allow the CPPIB to buy new shares between $15 to $20 apiece.
“Whenever CPPIB has a success, they are quick to discuss it publicly. The same goes for new investments,” said Mark McQueen, who runs Wellington Financial, a private firm that specializes in venture capital. But when you ask about struggling investments, “CPPIB says they’re not material. They want to have it both ways, and the board is complicit in management’s tendency to bury the bad news.”
There is also the age-old issue of risk versus reward. Private assets can generate major returns, but they also come with drawbacks. “One of the big advantages of being in public markets is you have liquidity. You can exit when you want,” said Jim Keohane, CEO of the Healthcare of Ontario Pension Plan, which manages $52-billion. The same isn’t true of private assets.
Pressed about these realities, Mr. Wiseman acknowledged some missteps. “We’ve made bad investments; we’ve lost all our money,” he said, adding that it is just the nature of private equity. “If we’re not doing that, we’re not taking enough risk.”