The Canada Pension Plan Investment Board or CPPIB is one of the fastest-growing pools of investment capital in the world. In October 2012, Mark Wiseman, recently appointed as chief executive officer, must come up with the decision on organizational leadership to be at par with the growing market. For several years, CPPIB has been applying the "do-it-yourself mega-investing" approach. And it has gained a good reputation from other corporate entities on Bay Street as well as on Wall Street. However, Wiseman, in performing his obligations and duties as chief executive officer, is worried about how to gauge the investment strategy of CPPIB for the future. He is faced with the question: would he be able to lead CPPIB in achieving its goals?
Josh Lerner; Matthew Rhodes-Kropf; Nathaniel Burbank
Harvard Business Review (813103-PDF-ENG)
October 23, 2012
Case questions answered:
- Why do pension funds invest in private equity? What are the arguments for and against allocating assets in PE?
- Compare the different ways a pension fund can invest in PE – direct investment in partnerships, fund-of-funds, direct investment in companies/co-investment. What are the costs and benefits of each?
- How does the Canada Pension Plan Investment Board think about risk in its PE investments? Does their approach make sense?
- What are the process and governance issues that have to be tackled in setting up a PE investment program? How successful has CPPIB been in tackling these issues? What are the implications in terms of human resources, compensation, and governance?
- Was the move of CPPIB in 2005 a good one? Is the change in investment strategy borne real fruit? How would you advise CPPIB to change its investment philosophy, if at all?
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The Canada Pension Plan Investment Board: October 2012 Case Answers
This case solution includes an Excel file with calculations.
1. Why do pension funds invest in private equity? What are the arguments for and against allocating assets in PE?
Pension funds have become a key source of capital for private equities over the years. The majority of pension funds use PE as a component of their alternative investment allocation with the goal of achieving higher returns.
The allocation of capital to alternative investments envisages higher performance (generating positive alpha returns) and improved risk diversification (improving beta).
PE allows pension funds to navigate low-interest rates environments and market volatility and still achieve high and steady returns over the long term.
This premise is corroborated by historical data as PE’s 10-year returns to large public pension funds outpaced the S&P 500 by 3.7% net of fees1. Despite some indirect correlation between PE investments and public markets, PE investments’ long-term nature allows pension fund managers to mitigate downturns.
PE investments require capital to be locked in for long periods of time (5 years or longer). Superior returns can hence be seen as compensation for illiquidity. While the need for liquidity can be problematic for some investors, the long-term nature of pension funds’ liabilities towards pensioners allows them to have a long-term investment horizon.
Allocating assets to PE can also bring benefits of diversification that would otherwise be difficult to achieve. PE offers pension funds the ability to gain exposure to private companies, which are unavailable via more traditional asset classes such as listed equities and debt.
Moreover, allocating funds to PE also means partnering with their active investment style, especially when large pools of capital are available to be deployed.
PE’s ability to influence management decisions and exercise a degree of control is partly the reason why fund managers can secure an excess return compared to the broader market. Some pension funds decide to…
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