To a private equity firm looking for dough, the pitch is compelling. CPPIB now has access to, and investments in, the largest private equity funds in the world. With more money than most could handle, the fund gets preference in “co-investing”—putting up money beside the PE outfits in deals that might be too large even for the largest firms to handle.
By all accounts, CPPIB competes effectively in the market of global investing. That said, it seems short-sighted that it has only two foreign offices, in London and Hong Kong. After all, there are other giant pools of capital around the world trying to do almost exactly the same thing as CPPIB.
Even though it ranks in the pack of supersize funds globally, the Board got started a long time after some others, and it is not the largest by any stretch. The United Arab Emirates, for example, has $627 billion (U.S.) to invest. Also in the big leagues is Norway, which realized that it ought to save some of its North Sea oil revenues for a rainy day. It has $560 billion (U.S.) in its kitty. China, meanwhile, has a positive balance of payments so high that it invests through two funds that together have about $1 trillion (U.S.) under management.
Given the size of these pools of capital, efficiency and scale of investing is a hot topic these days. Last year, two University of Toronto academics, Alexander Dyck and Lakasz Pomorski, tried to figure out if managing more money meant more efficiency. They looked at the efficacy of funds both large and small, both internally and externally managed, and found that larger plans outperform smaller ones by almost half a per cent annually. Half a per cent doesn’t sound like much until you manage $160 billion. That’s $800 million a year extra for Canada’s pensioners that comes from CPPIB’s sheer heft and from not paying external managers. (The Board does outsource work that falls below its minimum-investment thresholds, to the tune of more than $500 million in management and performance fees in 2011.)
In competing with others who also have billions to invest in good ideas, CPPIB has a mantra: “We’re here, we’re steady and we are not going away.” The goal is simple—to be the first call from anybody selling anything that might be valuable for CPPIB to buy.
Much of the job of letting everybody know who CPPIB is and how much money that it has to invest was completed many years ago. Now the direction is reversed. Sitting quietly in the Board’s 26th-floor lobby in downtown Toronto on any given weekday are salespeople from all over the world, waiting to offer their asset wares to a very hungry investor.
The job of getting excess return is really about finding unique investments. That job largely rests with Bourbonnais, who runs private investments and took the EMI hit. He personifies the competitive-investor cast of CPPIB in 2012. He flies his own plane for sport. It’s a Cirrus SR20, a plane that comes with its own parachute so it can coast to the ground if the engine conks out. That’s a little like having a hedge on adventure.
The confidence is quiet in Bourbonnais, but firm. When asked if he gets mad when he hears about a large potential investment that CPPIB wasn’t informed of, he responds, “I’m pissed, but it doesn’t happen very often.” He has more than 100 people who not only follow investments, but who have models for assets not yet for sale. They also track competitor investors and their abilities to stay with their assets over the long term.
According to Wiseman, CPPIB was “very underwater” on some investments at one point during the credit crisis in 2009. But while the market value of its portfolio was way down, it wasn’t under pressure to sell near the bottom to raise cash—the way many mutual funds, hedge funds and pension fund managers were, because their clients were bailing on them. And the CPPIB still had money—more than half a billion a month—coming in from contributions.
It was a huge structural advantage. The investment team realized that there could be assets for sale from other investors who were forced to sell. Speed at decision-making, advance preparation and the ability baked into the fund based on risk budgeting—and not a percentage allocation to certain asset classes—turned CPPIB into one of the few games in town (that would be the global town) for making investments.