Canada Pension Plan Investment Board (CPPIB) already invests 80% of its C$367 billion ($281 billion) in assets directly through its in-house team – but it will continue raising that percentage. The public fund is also becoming more proactive in how it manages its relationships with private equity firms – an asset class that is a key growth area for it in China and other emerging markets.

So said Alain Carrier, CPPIB’s London-based head of international, during an interview with AsianInvestor last month.

The fund has outsourced less and less over the years, and that will continue, he noted. “The strategy is to do more and more direct investment, as it allows for more flexibility in managing the asset exposure over longer time periods and also reduces the fee drag.”

Alain Carrier, CPPIB

This is a common theme among CPPIB’s domestic peers. Roughly three-quarters of the portfolios of the top 10 Canadian public pension funds are managed internally and around one-third are in alternatives, according to a World Bank report published in November 2017, ‘The Evolution of the Canadian Pension Model’.

It is also a trend among other large institutional investors in Asia and elsewhere to build up their in-house capabilities with a view to having more control over assets and reducing fees. Japan Post Bank is one recent high-profile example; the $1.7 trillion asset owner has swiftly built out an alternative investment team since 2015.

PROACTIVE ON PRIVATE EQUITY

Meanwhile, CPPIB has also become more active in recent years in how it manages its relationships with private equity general partners. It now looks at the value of the entire relationship, said Carrier – not only the net returns of the fund but also the benefits of any partnership opportunities provided by the manager.

If a GP does not provide a strong flow of deals that are attractive on a no-fee, no-carry basis, then CPPIB expects it to generate outstanding performance in its own right, he explained.

However, CPPIB is less singularly focused on returns if a manager posts just-above-average performance but also brings several attractive transactions to the table.

“We’ve been a lot more proactive in driving that approach with our relationships,” Carrier noted. “[We’ve been] reducing our commitments to funds that don’t generate value on a standalone basis or when combined with the deals they bring us, or increasing our investment in funds that do.”

He added that when it comes to co-investment, CPPIB tries to do as much as possible in Asia, but he stressed that the fund sees a difference between co-investment and co-sponsorship.

Co-investment often refers to a situation whereby a private equity manager has already done a deal, then offers part of a minority position to a number of limited partners (or existing investors) in its fund.

“What we call co-sponsorship is a true partnership with the private equity fund from the start of the deal,” noted Carrier. “It’s a much bigger commitment. We do both, but we deploy a lot more dollars with co-sponsorship.”

The distinction has been less relevant in Asia, which has traditionally been less of a buyout market than Europe or the US. Still, CPPIB has done a number of co-sponsorship deals in Asia, as is the fund’s preference: taking big positions alongside partners in transactions that can lead to scale.

One example was CPPIB’s deal with Baring Private Equity Asia last year to privatise Nord Anglia Education, a Hong Kong-based operator of international schools – it valued the company at $4.3 billion.

The cover story in the upcoming October/November issue of AsianInvestor magazine will take an in-depth look at how Canada’s public pension funds, including CPPIB, are ramping up their investment in Asia. The edition will also include an extended interview with Alain Carrier.