Canada Pension Plan Investment Board has sold a US$2.1-billion portfolio of stakes that it held in private equity funds to French investment manager Ardian SAS, turning to a growing secondaries market to free up money and tweak its mix of assets.
The portfolio CPPIB sold to Ardian contains limited-partner interests in 20 private equity funds, mostly in North America but also including some European buyout funds. The stakes are a collection of commitments CPPIB had made to various private equity funds run by other managers, some stretching back as far as 20 years.
CPPIB expects to reap about $2-billion in proceeds from the deal, brokered by investment bank Jefferies Financial Group Inc., after factoring in costs and accounting details.
The secondaries market for private investments allows fund investors – the limited partners that pledge money to a fund managed by a general partner, and share in its returns – to buy and sell stakes in illiquid funds before those investments are realized, usually at a discount.
CPPIB is a regular participant in the secondaries market, as both buyer and seller, as a tool to manage the makeup of its portfolios. In this instance, the portfolio CPPIB was shopping ranks as a larger secondaries deal, and that attracted Ardian.
The French-based company just opened a Montreal office to be closer to Canadian institutional investors, and has been one of the most active and well-capitalized participants in secondaries, with more than US$40-billion deployed into secondary private equity investments over the past four years.
“We see this sale as an attractive opportunity to optimize the construction of our portfolio and to allow us to further support future investments,” Dushy Sivanithy, managing director and head of secondaries for CPPIB’s private equity team, said in an e-mail.
Secondaries have become an attractive option for large institutional investors such as pension funds that have billions of dollars tied up in private equity funds. Those investments have been more illiquid than usual this year as private equity deal-making has slumped, hampered by higher borrowing costs and uncertainty about the trajectory of interest rates.
The desire to free up cash helped drive US$56-billion of sales of limited-partner interests in funds in 2022, according to data from investment manager Hamilton Lane.
“In our case, deployment on the direct private equity side has been slower, but the use of secondaries enables us to adjust the portfolio as part of our active management strategy,” Mr. Sivanithy said.
In September, Caisse de dépôt et placement du Québec tapped the secondaries market when it sold a portfolio of partial stakes in funds and co-investments for US$1-billion to Swiss private equity company Partners Group AG, according to industry publication Buyouts.
CPPIB, which manages $575-billion in assets for the Canada Pension Plan, has a large private equity portfolio that makes up about a third of its assets. The portfolio reported a 6.8-per-cent gain in CPPIB’s 2023 fiscal year.
The gap in relative performance between private assets such as private equity, real estate and infrastructure that have largely held their valuations, and public securities that had a rough year in 2022 and have been volatile this year has thrown some pension funds’ mix of assets out of balance.
“They’re suffering a lot from that,” Michel Fellmann, a senior managing director at Ardian, said in an interview. “That sort of forces people to use the secondary market as a portfolio management tool.”
Major Canadian pension funds have regularly tested the waters in secondaries, but have not always moved ahead with deals. The uncertainty around interest rates and future borrowing costs made it difficult for buyers and sellers to agree on pricing.
Now, as central bank-led rate hikes show signs that they may be cresting, the gap in expectations between secondaries buyers and sellers appears to be narrowing.
“Deal flow is definitely still very strong and we don’t see that going away any time soon,” Mr. Fellmann said.
James Bradshaw