When Canada Pension Plan Investment Board chief executive officer David Denison saw credit drying up in 2008, he decided to try a new investment strategy: Becoming a lender.
In the 18 months since first dipping a toe into the financing market, the $130-billion pension giant has become a large provider of private debt financing to large companies, increasing its lending portfolio to $2.2-billion and creating an internal team to manage the business.
Mr. Denison said CPPIB decided the high borrowing costs being charged by lenders during the financial downturn presented an attractive incentive to get into the same line of business. And with ample cash rolling in from Canada Pension Plan members, the CPPIB isn't facing any cash or credit constraints of its own.
"In an environment where financing is generally difficult to come by, that's a very good opportunity for us to be a provider of debt financing to companies," Mr. Denison said in an interview Wednesday.
The shift means CPPIB is plugging a hole left by traditional lenders who have been shying away from deal financings or are demanding tougher terms for their participation. A deal last November - where CPPIB provided financing for a leveraged buyout of Northrop Grumman Corp.'s TASC division by General Atlantic LLC and Kohlberg Kravis Roberts & Co. - was hailed as a sign the acquisitions market was again open to buyout firms after a two-year hiatus.
While there were times in the past when providers of financing were earning little, Mr. Denison said the situation has reversed for lenders.
"If you go back to 2007 or early 2008, that was perhaps the most compelling example where providing debt, on a risk-adjusted return basis, you were not getting paid," he said. "Right now, providing debt on a risk-adjusted basis, we think that the spreads are very good - compelling, quite frankly."
Deals so far have been spread across the energy, power, chemical, industrial, health care and aerospace industries, and include term loans, high-yield bonds, mezzanine and other types of debt financing.
Most of the CPPIB's activity has been in North America and Europe. Deals include a $150-million loan last year to Montreal-based Osisko Mining Corp., as well as the Northrup Grumman loan.
Mr. Denison said there is no target for the size of CPPIB's private debt portfolio, but the lending will continue as long as current credit conditions persist.
"When the credit conditions aren't as good, we're not going to be investing. We don't feel compelled to put capital into that area of the market."
A turnaround isn't likely to come soon, however.
Mr. Denison predicts credit issues will be constrained for the rest of CPPIB's fiscal year, which ends next March 31. One result is that the fund's own private equity purchases remain difficult to complete.
Many of CPPIB's biggest deals are done with partners or with larger investment groups, and those players are still finding it difficult to get financing for deals, he said.
"Where we're acting with partners, their business models aren't the same as ours, and they don't have the same ability to look at transactions in quite the way we do," Mr. Denison said. "And many of our transactions are going to be with partners."
The fund reported Wednesday that it posted a 1.3-per-cent investment loss in its fiscal first quarter ended June 30, owing to a decline in global stock markets.
The value of the fund's assets rose to $129.7-billion from $127.6-billion, however, thanks to $3.8-billion in new contributions from plan members, which offset a $1.7-billion loss on investments.
The losses came as the S&P/TSX composite index fell 6.2 per cent in the three-month period, while the S&P 500 index fell 11.9 per cent. Equities represent about 54 per cent of the CPPIB's investment portfolio.
A recent pension fund survey by Morneau Sobeco found pension funds averaged a loss of 3.4 per cent in the quarter ended June 30, ending a rally that started in the second quarter last year.