As investors try to predict the pandemic’s long-term effects, private equity allocations increase
By Ed McCarthy
Private equity investments continue to gain importance among Canadian pension plans. According to CIBC Mellon’s 2020 survey, In Search of New Value, 90% of responding funds planned to increase their investments in private equity over the subsequent 12 to 24 months. An RBC Investor & Treasury Services survey, Pathways to Sustainability: Canadian Defined Benefit Pension Survey 2021, found similar results, noting that “demand appears to be strengthening for private equity and private debt as a higher proportion of respondents are planning increased allocations year-over-year (38% to 47% and 38% to 46%).”
These increased allocations to private equity are part of a years-long shift. RBC reports that the past year’s increase continued “a 10-year trend of doubling allocations to this asset class in the search for higher returns (6% to 12% of assets).” The motivation for the reallocation: “Potential benefits of private equity include the prospect of an ‘illiquidity premium’ for not being in the public markets, while others suggest that stronger returns from private equity investments may be tied to complexity or higher governance costs rather than their illiquid nature.”
That shift has paid off for some plans. The Canadian Pension Plan Investment Board reported a 20.4% net return as of the March 31 end of its fiscal year. Private equity was a key driver in that result, with the fund’s Canadian, foreign and emerging private equity investments generating returns of 22.8%, 34% and 38.5%, respectively.
COVID-19’s Impact
Sandra Bosela
As the world continues to deal with COVID-19 and investors try to forecast the virus’s intermediate and longer-term impacts, it’s worth considering if and how the virus affected plans’ use of private equity. Sandra Bosela is Co-Group Head, Managing Director and Global Head of Private Equity with OPTrust in Toronto. She reports that after a strong year in 2019, in which OPTrust’s private equity portfolio generated a net return of almost 25%, growth initiatives at most of the plan’s companies were temporarily put on hold as they entered the pandemic in spring 2020.
“Going into the pandemic, we had very little exposure to some of the hardest hit sectors, in part because we have typically avoided more cyclical industries,” says Bosela. “Instead, we have focused on investing in businesses that provide essential products or services, and as such, tend to show resilience through challenging times. Fortunately, we were able to navigate the challenges of 2020 without experiencing any rescue capital calls in our portfolio – something we attribute to the flexible and conservative capital structures we had put in place, the ability to conserve cash through cost savings programs and the resilience of our portfolio companies’ business models.”
Looking Ahead
Jack Hansen
Jack Hansen, a principal with private equity firm Altas Partners in Toronto, believes private equity will continue to drive returns for Canadian pensions because the investing styles mesh well. Pensions can own companies for longer periods and don’t need to worry about day-to-day trading and liquidity risk, a longer-term approach that is widely used among private equity firms.
Perspective and time-horizon also influence Bosela’s thinking. Although the world has experienced immense change over the past two years, as a defined benefit pension plan, what hasn’t changed is OPTrust’s focus on its members’ long-term interests, she maintains. “Given the low interest rate environment, private equity continues to be an important asset class for OPTrust to generate the returns we need to fulfill our mission of paying pensions today and preserving pensions for tomorrow,” she says. “We remain cautious about the ultimate slope of the recovery curve but have seen growth resume in 2021 and believe that the portfolio is well-positioned for the long term. Importantly, we continue to have ample liquidity, giving us the ability to capitalize on available opportunities to grow our existing portfolio companies, as well as to make new investments in businesses and industries that have attractive long-term growth potential.”
Ed McCarthy is a longtime financial writer and author of three books, including “Foundations of Computational Finance with MATLAB.”
