The Ontario Teachers' Pension Plan is among the bidders for Citigroup Inc.'s 200-branch Canadian consumer finance company, the latest in a series of pension-fund acquisitions from U.S. banks and financial companies that face heightened regulation in the wake of the global financial crisis.
Teachers and several North American private-equity companies are vying for subprime lender CitiFinancial Canada, which has 1,200 employees. The company's main business is providing loans and mortgages to borrowers with poor credit ratings.
These customers, estimated to be approximately 20 per cent of the population, can get an unsecured loan from CitiFinancial at a minimum interest rate of 27.99 per cent, while the minimum mortgage rate is 10.35 per cent. These rates are three to five times what the major Canadian banks charge clients for the same products. CitiFinancial also provides credit for customers of retailers, such as furniture stores.
Citigroup split its holdings into core and non-essential businesses in 2009 and has consistently stated it plans to exit subprime lending. The bank got out of U.S. consumer finance last year by selling its 1,100-branch OneMain Financial unit for $4.25-billion (U.S.) to a private equity-backed competitor, Springleaf Holdings Inc. If the Canadian business commanded similar valuations, it could be worth more than $400-million. CitiFinancial has been doing business in Canada since 1923 and the company has made 4.9 million loans in Canada over the past decade, providing $26.4-billion (Canadian) in credit.
A Citigroup spokesperson declined to comment on the bank's plans for CitiFinancial. A spokesperson for Teachers also declined to comment. An investment banker working with a potential rival to Teachers said none of the major Canadian banks plans to bid for CitiFinancial, as the business does not fit with their lending strategies and brands, but Canadian and U.S. private-equity funds such as Springleaf backer Fortress Investment Group LLC are "kicking tires" at the Canadian company.
Canada's largest pension funds are using their private-equity expertise, deep pockets and risk-management skills to snap up businesses being sold by U.S. financial institutions that suffered staggering losses in the 2008 financial crisis and are now restructuring to reflect higher capital requirements for many of their units and regulations, such as the Dodd-Frank Act, that are intended to prevent another financial meltdown.
While public-sector pension plans are regulated by governments, their investment strategies get far less scrutiny than the big banks, and they have lower performance targets and longer investment horizons than most private-sector investors, which gives these funds a competitive advantage when businesses are being auctioned.
For example, Teachers teamed up with Toronto-based entrepreneur Stephen Smith to acquire Canada's second-largest mortgage insurance company from American International Group Inc. (AIG) in 2010, and rebranded the business as Canada Guaranty Mortgage Insurance Co. The Teachers fund has $171-billion of assets under management.
The pension plan's overall private-equity holding in financial companies is relatively small, with 9 per cent of a $28-billion portfolio invested in financial services business. In the fund's most recent annual report, Teachers head of private capital, Jane Rowe, said the fund is focused on financial services niches "such as property and casualty insurance, asset and wealth management, specialty finance, payments and services businesses."
Last year, Canada Pension Plan Investment Board (CPPIB) invested $3.9-billion (U.S.) in the purchase of Antares Capital, a leading lender to private-equity funds, from General Electric Corp. Last month, the Wall Street Journal reported CPPIB is working on a $1-billion acquisition of AIG's interest in insurer Lloyd's of London and an AIG reinsurance company located in Bermuda. The Canadian pension plans aren't always moving in lockstep, as the Teachers sold a Lloyd's of London insurance business in April, 2016, for $219-million.
Canadian entrepreneurs are also benefiting from the yard sale being held by U.S. financial institutions, as Toronto-based Element Financial Corp. acquired most of GE's fleet financing business last year for $8.6-billion (Canadian).
While there are currently a number of bidders for CitiFinancial, there is no guarantee that the subprime lender will find a buyer at a price that is acceptable to Citigroup. HSBC Bank of Canada tried to sell its consumer finance business in 2012 and decided to shut the 75-branch network after failing to receive an attractive offer. Onex Corp. was one of the private-equity companies rumoured to have looked at the HSBC business, and passed on it.
Canada's pension plans have made solid returns from private-equity investments over many years, but their track record on financial investments has blemishes. The Caisse de dépôt et placement du Québec lost 25 per cent of its assets, or $39.8-billion, in 2008, due in part to losses on asset-backed commercial paper, securities that had previously been viewed as low risk.