The Canada Pension Plan Investment Board has struck a $12-billion (U.S.) deal to acquire General Electric Co.'s private-equity lending arm, expanding its corporate lending capacity among smaller companies, where the fund had long sought a foothold.
The acquisition of Antares Capital is CPPIB's largest deal to date. It is being backed by $3.85-billion of the pension fund's own money, with the balance of the purchase price provided by debt from a consortium of international banks.
The deal is expected to close in the third quarter.
"It is extremely complementary to our existing business and that is why we are so interested in it," said CPPIB chief executive officer Mark Wiseman.
Chicago-based Antares has a leading 20-per-cent share of the $96-billion business of providing loans for private-equity-backed transactions across industries. It specializes in the mid-market, focusing on companies with annual revenue as high as $1-billion.
The loans are generally rated below investment grade, and are therefore higher yielding than top-rated corporate debt.
CPPIB has an existing business lending larger amounts of money directly to companies, but the pension fund had been keen to expand its range.
"We had been undergoing a strategy review of the middle market for a number of years," said Mark Jenkins, global head of private investments at CPPIB.
"So as soon as it became apparent that Antares was going to be one of the companies that was going to be sold, we knew that this was a good opportunity for us."
CPPIB began discussions with GE in late April, soon after the U.S. conglomerate announced plans to sell off pieces of GE Capital, its finance arm.
The deal gives CPPIB about $11-billion in existing loans, mostly with durations under five years. The deal also comes with the Antares origination business, which will remain as a standalone unit under its existing management and brand name.
"Essentially, if we just bought the loan book, we'd be buying a melting ice cube. As the loans ran off, that portfolio would just wind down," Mr. Wiseman said.
"What we've done is, we've bought the origination business that will continually refresh and replenish the portfolio. So essentially we've bought an ice cube that will never melt."
He said other pension funds were likely rival bidders for Antares, but that CPPIB would consider bringing in partners as the deal progresses over the coming months.
"It's our nature to partner," Mr. Wiseman said. "If you look globally at what we do, we like working in concert with others."
The Canadian fund manager is set apart from typical asset managers because of its long-term investment horizon and stable assets. It has been expanding into the United States to take advantage of the country's relatively strong economic recovery but also as a diversification strategy.
CPPIB has a mandate to generate average annual returns of 4 per cent, after accounting for inflation. This can be a struggle when government bonds, once the foundation of pension assets, are yielding well below that figure.
CPPIB is "really pushing the envelope here and being creative about what is going to work over the next 10, 20 years," said Keith Ambachtsheer, director emeritus of the Rotman International Centre for Pension Management at the University of Toronto.
"There are risks in this business, especially if rates start surging higher, but I know they have qualified staff to handle the risks of each deal," said Montreal-based pension and investment analyst Leo Kolivakis.
The $265-billion (Canadian) Canada Pension Plan fund has delivered an average annual return of 6.2 per cent, after inflation, over the past 10 years.
However, its foray into riskier assets appears to be paying off. The fund delivered a return of 18.3 per cent in its 2015 fiscal year ended March 31.