The Canada Pension Plan Investment Board's interest in General Electric Co.'s private-equity lending arm taps into the pension fund's strategy of expanding its footprint into the U.S. with higher-yielding assets, though it could be paying a hefty premium for it.
CPPIB is in discussions with GE to buy financial assets for as much as $10-billion (U.S.), which would more than double the size of its current private lending operations.
Sources close to the situation said negotiations are ongoing, with a deal likely to be announced within days.
CPPIB has been in discussions with GE since April, when the industrial conglomerate announced it was shedding its massive finance arm, GE Capital, a lender with hundreds of billions of dollars in assets, to focus on making things like engines and turbines.
"We thought it was a great time to be selling financial assets," said GE chief executive Jeffrey Immelt at the Conference of Montreal on Monday.
"You have slow growth, lots of liquidity and low interest rates, so any asset that has any yield at all is very desirable," he said.
He added that the company has had 420 inquiries on the assets since putting them on the market in April.
CPPIB, though, appears to be particularly aggressive in its pursuit of GE's financial assets, with a bid that adds a large premium to the intrinsic value of the debt holdings, shocking some of the observers close to the discussions.
The Canadian fund manager, known for its long-term investment horizon, is seeking to acquire a large portfolio of mid-market commercial loans from GE as part of a broader strategy to boost its clout in the United States as that country's economy recovers at a better pace than most of the rest of the world, including Canada.
It faces the daunting prospect of generating an average annual return of 4 per cent, after inflation, at a time when government bond yields have slumped well below that figure. The 10-year Government of Canada bond yields just 1.8 per cent.
Over the past 10 years, the Canada Pension Plan fund – the investment arm of the Canada Pension Plan – has delivered an average annual return of 6.2 per cent, after inflation.
"The reality is that if you are going to have any chance of generating a 4-per-cent real return on that portfolio going forward, you can't do what worked 10 or 20 years ago," said Keith Ambachtsheer, director of the Rotman International Centre for Pension Management at the University of Toronto.
The GE assets that CPPIB is examining yield about 5 per cent – though they are below investment grade and therefore come with substantially more risk than a Canadian government bond, especially if the U.S. economy weakens.
The bid for GE assets also fits with the pension fund's move to cut its outside management costs by bringing more expertise in-house: The deal means that CPPIB, which added a net total of 157 people in fiscal 2015, would not require an asset manager for exposure to private-equity lending.
The $265-billion Canada Pension Plan fund delivered a return of 18.3 per cent in its 2015 fiscal year ended March 31, marking its best annual return since its inception.
Over the past 15 years, the fund has been diversifying well beyond its traditional base of government bonds in a move designed to boost returns and provide a more diversified portfolio across public equity markets, bonds, private assets and real estate. Geographically, it has a bigger exposure to U.S. assets than Canadian.
GE is keen to sell some of its financial assets as quickly as possible, so that it can retain employees at the units and keep new business flowing.
Besides CPPIB, other asset managers that have been associated with the discussions with GE include Ares Management, Guggenheim Partners, Apollo Global Management and Blackstone Group.