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By Pav Jordan and Andrea Hopkins
TORONTO, Jan 12 Deep in the financial
crisis, a Canadian pension fund entrusted with the nest eggs of
17 million workers bet a chunk of that money on Internet phone
service Skype, venturing well outside its tradition of
long-term, conservative investing.
The investment, made by Canada Pension Plan Investment
Board(CPPIB) in partnership with private equity, more than
tripled in less than two years and marks the clearest sign to
date that Canada's once-staid pension funds have become a huge
new force in a globalized market.
Between them, CPPIB and four other big Canadian players
control over half a trillion dollars in assets, about the size
of the total Swiss economy and more than the $410 billion
managed by the Chinese sovereign wealth fund China Investment
The Canadian investments are large-scale and diversified,
with an emphasis on real estate, natural resources and
infrastructure projects such as bridges, tunnels and roads.
FACTBOX-Canada's leading pension funds [ID:nL1E8CBIB9]
Canada pension fund net assets r.reuters.com/wej95s
Large, aggressive and patient, they are pushing into a
financing vacuum that neither cash-strapped governments nor
private equity alone can fill. Their growing power is a
challenge to the world's biggest sovereign wealth funds and it
is enabling the Canadians to take on the occasional role of
"These are really talented dealmakers now; they’re very
savvy. It’s just not to be confused with some sleepy funds
sitting on money. That’s not who these folks are," said Scott
Petepiece, a New York-based M&A partner at law firm Shearman &
"They’ve become really significant players in the M&A market
in the U.S.," he added. "It’s a very different world in that
respect than it was 20 years ago. ... They’re somehow involved
in almost every significant 'take-private' deal that happens.”
The model - under which funds are run like a business rather
than a government agency - was pioneered by Ontario Teachers'
Pension Plan in the 1990s. Its approach proved so successful
that other Canadian fund managers soon embraced it, recruiting
CEOs with experience at the top ranks of Canadian finance,
government and business.
"Ten years ago ... we weren’t in the inner circle. Central
bankers spoke to the banks," said Jim Leech, the chief executive
of Ontario Teachers, who came to pension plans after careers in
the military and business. "Well, now central bankers speak to
the banks and the sovereign wealth funds and the pension plans."
The other factor in the funds' favor is a financial market
malaise that resulted in a treasure trove of assets up for sale
at a discount.
"For institutions like ours or others who have financial
flexibility, these are actually great markets," said Michael
Sabia, CEO of Quebec's Caisse de depot et placement. Sabia, one
of the French-speaking province's best-known business leaders,
previously headed Canada's biggest telecom company, BCE Inc, and
helped privatize Canadian National Railway.
In an era of debt-laden cities, states and countries, there
is no shortage of parties seeking investors for a highway,
office tower or pipeline.
"When governments hit the wall, the opportunities do arise.
And they arise particularly in the infrastructure space," said
Michael Nobrega, chief executive of OMERS, which manages the
funds of Ontario municipal workers.
In fact, pension plans and Chinese sovereign wealth funds
are among the few players left with the liquidity to invest big,
and the pension funds often have the edge.
"My experience is that they're the preferred players," said
John Ilkiw, a pension expert with Paros Consulting and former
senior vice president at the CPPIB.
"The larger funds in the world, they would say: 'Here is our
short list of people to approach first to be co-investors in
this deal,' and right on the top of the list would be GIC out of
Singapore, the China fund, Ontario Teachers, probably the Caisse
and certainly the CPPIB," Ilkiw said.
The Canadian funds could become even more powerful in the
next couple of years. The CPPIB expects to have net assets of
C$275 billion by 2020 and over C$1 trillion by 2050.
But nothing lasts forever, and soon they will have to beat
off competition from sovereign funds from emerging economies
that are racing to build Canadian-caliber investing expertise.
U.S. pension funds are also becoming more aggressive and are
looking to the Canadians to model similar investment strategies.
If the global economy continues to recover in the aftermath of
the financial crisis, there will be fewer fire sales and the
danger of overpaying will increase.
For now, however, the Canadians are riding high. While
hyperbole has it that half of Manhattan is owned by Chinese
investors, Canadian pension funds' purchase of an array of
attractive investments around the world has largely remained
under the radar.
London's Heathrow Airport, toll roads in Chile, real estate
from Manhattan to Sao Paulo, gas pipelines in the United States,
water treatment plants in Britain, timberlands in Australia -
all are fully or partially owned by pension plans of Canada's
teachers, city workers and citizens.
"The UK government is trying to form an infrastructure fund
that all the pension plans will contribute to and all they keep
saying is: 'How come it’s Ontario Teachers that comes in here
and buys our water, buys our high-speed rail, buys our airports,
buys our gas distribution systems, and you guys, the UK pension
funds, don’t do anything?'" said Leech of Ontario Teachers.
In deals such as those, the Canadians have a big advantage
over China Investment Corp (CIC) and Government of Singapore
Investment Corp (GIC), which holds an estimated $300 billion:
the perception of political independence.
That is especially true of CIC, given sensitivities about
Chinese control of assets considered "strategic" in the West.
The political neutrality of a Canadian buyer - compared
with say, a sovereign wealth fund from China or the Middle East
- also enhances the appeal of pension plans as European
governments look to sell assets.
"They are friendly buyers from a political perspective for
these governments, ... a bunch of Ontario Teachers is quite a
benign group," said a senior banker at a major Wall Street firm.
The long-term horizon of Canada's pension funds is also
preferred by foreign governments and strategic bidders looking
to partner up on real estate or infrastructure, the banker
noted. "Governments don’t like what is considered to be critical
infrastructure being bought and sold every 5 to 10 years, it’s
disruptive," he said.
A second reason for the Canadian inroads is the expertise of
the fund's investment teams. CPPIB, Caisse and OMERS have as
many as 800 each on staff to find attractive investments, put
together bid proposals and close the deals.
In contrast, U.S. funds tend to farm out sometimes huge
amounts of capital to external managers because they lack the
in-house talent to deploy the money.
"When you have our scale and our advantages, it becomes very
efficient to manage it in-house," said Mark Wiseman, executive
vice-president, investments, at CPPIB. He cites costs that are
"10 to 15 percent" of what it would cost to outsource any given
investment to third-party fund managers or investment bankers.
That makes the big Canadian funds more like private-sector
teams than stodgy public ones, observers say.
"OMERS, Teachers, CPPIB - they've all developed internal
teams that are as good as anybody around the world in terms of
assessing a project, pricing it, doing risk analysis," said
Keith Ambachtsheer, a pension scholar and adviser on pension
design and governance.
But expertise and deep pockets don't mean Canada's top
pension funds want to go it alone. Increasingly they are teaming
with other funds to leverage their size in so-called club deals
that may vault them even higher up the list of dealmakers.
A prime example is the bid to acquire Canada's largest stock
market operator by the country's top banks and pension funds -
including Caisse, the CPPIB, Ontario Teachers and the Alberta
Investment Management Corp, known as AimCo.
The pension funds have been very clear that their investment
alongside the banks makes good business sense, and they insist
they were not motivated by opposition to a rival proposal from
the London Stock Exchange (LSE.L).
FORGED IN CRISIS
The growing dominance of Canadian pension funds arose from
the convergence of the global financial crisis and the funds'
own disappointing investment returns, which made it hard for
them to meet promised benefits while facing a rapidly aging
One by one, they radically shifted their strategy from
investing in public markets - mostly Canadian stocks and bonds -
to private investments in global markets, taking large stakes in
public companies, private projects and state enterprises in need
The 2008 financial crisis offered new opportunities.
Liquidity was in short supply, banks faced a capital crunch, and
pension plans were among the few with no one knocking at their
"You have to remember the markets hit a low in March of
2009. Pension plans in general were a different kind of animal
because we could bring some stability to the place, to the
system," recalled Leech of Ontario Teachers.
CPPIB's Wiseman, a former protege to Leech, nods to the
financial crisis as "a nice confluence of events."
"During the financial crisis, the certainty of assets was a
material advantage for us vis-a-vis most other capital markets
participants, and we were able to enter into transactions,
essentially to be a provider of liquidity at a benefit to us -
and cost to those we were providing it to - where liquidity was
In 2010, working with Onex Corp OCX.TO, the CPPIB was
involved in the largest private equity deal of the year, the
C$5.0 billion ($4.91 billion) leveraged buyout of Tomkins Plc, a
British maker of car parts, industrial hoses and bathtubs.
The year before it had a hand in three of the top five
private-equity deals, including the largest leveraged buyout,
the $4 billion acquisition of IMS Health Inc a provider of
prescription drug sales data.
If Canada's pension plans sound proud to have made the inner
circle of global power players, they are.
"I had Australians around here the other week. Pick the
week, pick the nationality, whether it’s Korean, or Singapore.
Singapore has been here a few times. Abu Dhabi was here a few
weeks ago. Every week there is somebody coming through here
saying, 'How do you guys do such and such?'," Leech said.
"When statistics are published that show we earn 10 percent
over 20 years and that for the past 10 years we’ve been the
highest absolute return in the world and the highest value added
return, people pay attention," he said.
In 2010, the latest year for which figures are available,
Ontario Teachers' had a rate of return of 14.3 percent. That
compared with returns of 9.8 percent for a benchmark that tracks
standard indexes for Canadian and foreign markets in proportion
to the fund’s asset-mix policy
Two questions will dominate the future: Where will the
pension plans invest next, and who might stand in their way?
"Real estate and infrastructure ... those are areas where
there is likely to be fire sales occurring by governments, so it
is going to provide tremendous opportunity for people who have
the liquidity and the cash to step in and buy things at a
discount to what they are really worth," said David Service,
director of investment consulting at Towers Watson.
Service points to the United States and its struggling
cities and states as opportunities, along with Europe. Both have
aging infrastructure and a dearth of cash. He also sees
opportunities in developing markets.
"That's a whole different kind of project, obviously. It's a
much higher risk but potentially higher reward project. Those
are going to be there in a big way as well," Service said.
Caisse's Sabia is also likely to look toward building
infrastructure in both Europe and emerging markets to match his
fund's existing strength in real estate.
"I think we are going to see an interesting wave of
infrastructure opportunities in Europe. Why? Because governments
have got massive fiscal problems," he said.
At AimCo, the youngest of Canada's major new pension fund
administrators, Chief Executive Leo de Bever sees opportunity in
complicated fire sales of government assets.
"There are lots of opportunities that will come from the
fact that a lot of financing was done by European banks into
developing economies, and that is drying up because of all the
problems in Europe," said De Bever.
At OMERS, Nobrega looks to Western Europe, where the debt
crisis has sidelined competitors, and western Canada, where
natural resources from oil to potash are fueling growth.
The CPPIB, which teamed up with a consortium led by Silver
Lake to buy its Skype stake for $1.9 billion in September 2009
and then sold it last May for $8.5 billion, is likely to look
beyond infrastructure and real estate. With a new office in Hong
Kong, its sights are turning to Asia.
"We have about two dozen people in Hong Kong, close to four
dozen in our London office. You will continue to see us evolve
globally," said Wiseman. "And I think you’ll see us continue to
hone our skills and our abilities to do complex skills (deals)
that play back into those comparative advantages, so we can
execute on deals that others can’t.
"We never like to lose money, but given our scale ... we can
do two or three or four or five Skypes, and if all it takes is a
couple of them to work out, we’ll do well in the end," he said.
Wiseman would not comment on market speculation that the
CPPIB was looking at a potential deal with private equity funds
to bid for Internet giant Yahoo Inc (YHOO.O).
As proud as they are of their success to date, Canada's big
pension funds know others are trying to emulate their strategy,
whether by pooling resources and rewriting governance, as in New
York City or Britain, or building internal staff to compete on
the knowledge side, as in Singapore and China.
"It used to be we had a five-year lead on people. And now we
have much shorter leads on people and people can replicate
quickly," Leech said. "We’ve got to stay ahead of the curve."
Ambachtsheer, the adviser on pension design, said the
attempt to emulate Canadian success is well under way around the
"It is not just Canada anymore," he said ticking off
Denmark, Sweden, the Netherlands, Australia, Korea, Brazil and
China as nations trying hard to revamp pension traditions and
regulations to build a more efficient model.
"There is no secret. We know what the formula is, what you
have to do. But to actually implement it turns out to be very
challenging. There are lots of barriers to getting it right."
OMERS' Nobrega agreed. He thinks the Canadian headstart in
expertise and reputation will keep them the preferred partner
for a while to come.
"I think the last thing is that people know we can close a
deal," Nobrega said.
(Additional reporting by So Young Kim in New York; Editing by
Janet Guttsman, Frank McGurty, Leslie Adler)
Keywords: CANADA PENSIONS/
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