CPPIB debuts ambitious growth equity strategy

New growth equity unit appears to have swallowed up CPPIB's three-year-old venture capital business.

Leon Pedersen

Canada Pension Plan Investment Board unveiled a growth equity strategy aimed at the best opportunities emerging from a correction taking hold in private markets.

Growth equity, recently flying high due to digitalization trends, is being tested by uncertainty and volatility caused by inflation, rate hikes and other factors. Beaten-down public tech values are expected to roil growth equity investing and portfolios over the next six to 12 months.

The result will be “a reset” that engenders compelling dealflow for firms with ready capital to invest, Leon Pedersen, CPPIB’s new head of growth equity, told affiliate publication Buyouts. “I really welcome that and it’s great that we have most of our capital deployment ahead of us in a market that is adjusting.”

Of primary interest to CPPIB will be high-growth tech businesses that prove their mettle “as the tide goes out,” he said. “I think we’ll have a chance to get through our partners and our networks access to the most attractive companies coming out of the other side of the correction.”

Because it will take time for opportunities to unfold, CPPIB “will be patient,” Pedersen added. “We’re going to see some good vintage years over the next couple of years in growth equity.”

Funds and directs

CPPIB, which totals C$539 billion ($428 billion), rolled out its growth equity strategy last month. It is effectively a merger of two in-house platforms: thematic investing and venture capital.

Thematic investing, formerly led by Pedersen, was set up in 2015 to capitalize on mega-trends and structural shifts that research showed would drive the economy of the future. Often utilizing growth equity as a tool, it focused on investing across asset classes and in both private and public markets.

CPPIB created a VC arm in 2019 to partner with top-tier early-stage and growth funds and co-invest in start-ups in a range of tech sectors. To oversee a Silicon Valley-based team, it hired Monica Adractas, the ex-global director of Facebook’s Workplace. She is now a managing director, growth equity.

Venture Capital Journal reported in August 2020 that CPPIB had allocated $1 billion for VC fund investments in addition to capital for direct investments. Adractas told VCJ that CPPIB had already committed about one-quarter of its allocation, with an eye toward being fully committed in two to three years. It committed to funds from brand-name firms Accel, Andreessen Horowitz (a16z), Index Ventures, Sequoia Capital, True Ventures and Y Combinator, Adractas said at the time.

With the merger, the growth equity strategy gets “strong relationships and partners” and “strong domain expertise,” Pedersen said. Its fund portfolio reflects “some of the best managers out there,” such as Dragoneer Investment Group and the growth vehicles of Iconiq Capital and Sequoia Capital.

The strategy also gains an initial portfolio of investments. They include AI-enabled drug discovery company Insitro and animal-free dairy maker Perfect Day – backed by thematic investing – as well as database management system Aerospike and digital banking solutions provider Sensibill – backed by VC.

Pedersen’s team will build on this foundation by making fund commitments and direct and co-investments. Direct investing of $25 million to $200 million-plus will target North American and European businesses in sectors such as automobility, climate change, fintech and healthcare.

As the scope of growth equity investing expands to include, among other things, more globally sourced dealflow, Pedersen said CPPIB plans “to keep the funnel wide.” One opportunity he has in mind are tech companies that “went public too early” and may need “a safe harbor.”

Amped-up competition

Competition in the growth equity space recently intensified, thanks mostly to record fundraising. Pioneers like General Atlantic, Summit Partners and TA Associates today mix with multiple other specialists, the vehicles of buyout and VC shops, emerging managers and so-called “crossover” investors.

“Nowadays, growth equity is a bit of a Rorschach test,” Jon Korngold, head of Blackstone Growth, told Buyouts earlier this year. “Everyone calls themselves growth equity.”

CPPIB’s move into a crowded arena does not faze Pedersen, particularly with a correction underway. “I was more concerned six months ago than I am now.”

A key differentiator of the new strategy, he said, will be “a one-fund approach.” This allows the growth equity team to tap into CPPIB’s global resources and collaborate with other internal groups, such as direct private equity and private credit. These capabilities, plus a long horizon, support investing “through the whole growth cycle.”

The growth equity team consists of 16 investment professionals operating from Toronto and San Francisco. Along with Pedersen and Adractas, senior members are managing directors Paul McCracken and Caitlin Walsh.

CPPIB hired Pedersen in 2019 from BI Asset Management, where he was head of equities. Before, he worked for more than two decades with Nordea Asset Management, including as head of thematic investing.

What’s in a name

In light of its new strategy, CPPIB appears to have removed its old web page explaining its venture capital strategy and replaced it with a new page about growth investing. Here are the details about the VC strategy according to a cached version of the old page (quoted material in italics):

Venture Capital

The Venture Capital (“VC”) team seeks to make fund commitments and co-invest alongside top tier managers with the dual mandate of generating strong returns and bringing the best of innovation and growth to the broader organization.

The team seeks to establish partnerships with and execute co-investments alongside VC managers within four categories:

  • Established, top tier early stage firms with a proven, long-term track record of outperformance
  • Late-stage and venture growth managers with both strong returns and an interest in a partner for co-investments and other deal flow (pre/post IPO, credit, secondaries)
  • Thematically-focused managers with expertise and differentiated knowledge or networks

For each of the above categories, the team will seek to:

  • Make multi-year fund commitments
  • Operate in a partner-friendly manner with flexibility around commitment sizing and governance
  • Partner on co-investments, secondaries, credit and pre/post IPO opportunities
  • Assist with value-add partnerships across CPP’s large direct portfolio
  • Leverage global reach in North America, Asia, Europe and Latin America for introductions and support

Our Team

The VC team is led out of San Francisco with support from professionals in London, Toronto and Hong Kong. Here is a listing of our team members.

  • Monica Adractas, Managing Director, Venture Capital Funds

Here are the details of the growth equity strategy, according to CPPIB’s current website (quoted material in italics):

Growth Equity

Growth Equity (GE) invests in VC and growth funds and companies driving innovation across multiple industries. Our scale, expertise, and long investment horizon enable us to drive value creation for our partners, portfolio companies, and beneficiaries.

The Growth Equity team builds positions in the most attractive growth and venture backed companies by investing across a company’s lifecycle. The strategy is carried out through a combination of a thematic model and a partnership model leveraging the benefits of our GP relationships. We invest both directly and through co-investments in a wide range of next generation technologies and business models, focusing our direct investments in areas of high domain expertise. Among our thematic domains, we focus on direct investments within Innovations in Healthcare, Fintech, Climate Change Opportunities and Automobility. We invest primarily in North America and Europe, with direct investments ranging from investment sizes of $25M to $200M+ as we follow growth companies through their lifecycle.

Our Team

The Growth Equity team is comprised of over 15 experienced professionals with offices in Toronto and San Francisco. Here is a listing of all our senior team members, categorized and searchable by city.

  • Leon S. Pedersen, Managing Director, Head of Growth Equity
  • Paul Mccracken, Managing Director, Growth Equity
  • Monica Adractas, Managing Director, Growth Equity
  • Caitlin Walsh, Managing Director, Growth Equity

This story first appeared in affiliate publication Buyouts. Additional reporting, including details about changes to CPPIB’s website, by Lawrence Aragon for Venture Capital Journal