Profile: Canada –

As the market most exposed to the U.S. economy, Canada (comparable only to the United Kingdom) is most like the United States in its outlook on private equity investing in the United States, its maturity as an investor and its current exposure to U.S. public and private equities. Royal Bank of Canada (RBC) and Toronto Dominion (TD) Bank, Canada’s first and second largest banks, with more than $225 billion and $185 billion in assets, respectively, have longstanding experience in public and private equity investing in the United States. RBC, for example owns Dain Rauscher Inc., the Minneapolis-based investment bank with operations in brokerage, investment (all classes of equities, including venture capital), analysis, and merchant banking. Such institutions have important if understated roles in the U.S. private equity market.

For this story, it is the recent change in the Canadian government’s Ottawa-based social security system that is important. It will make the Canadian Pension Plan (CPP) one of the world’s largest private equity investors. CPP was founded in 1966 to collect and manage funds withheld from the paychecks of Canadian citizens. Prior to 1997 all of the funds collected were directed to retirement payments for the country’s citizens, but for a number of reasons (demographics, an increase in intake of funds, growing GDP), the CPP began to accumulate excesses. The Canadian government determined to set aside these excesses for the good of its citizens.

In order to ensure that these funds would be protected from government usage, an independent body was created in 1997 to manage the funds-the Canadian Pension Plan Investment Board (CPPIB). It was given the mandate to manage and invest the pension fund excesses and invest them across all asset classes. Those funds are expected to reach $115 billion by 2013.

CPPIB, while independent from CPP, has only one client, the CPP. It has an independent board of directors and non-governmental auditors and must publish its results on a quarterly basis. Up until 1997 the government invested its withheld funds in fixed-income vehicles, but it later decided to improve its returns by shifting to passive markets and indexed funds, with no more than 30% of its money allowed in foreign assets. It was a scenario typical for many conservative governmental, corporate or other institutional investment managers that promised better long-term returns than fixed-income investing and which cost the government relatively little to invest.

When it created CPPIB in 1997, CPP decided to build a professional investment organization with separate groups of managers across all asset classes and expertise in both public and private equity investing. CPPIB’s Private Market Investments group began modestly with a $721 million pool of capital in 2001 and a mix of investments in real estate and private equity. PE accounts for no more than 15% of its total funds, with no preference between venture capital and buyout funds beyond finding the best general partners.

It was, says Mark Weisdorf, vice president for Private Markets, “a big mandate” and given with a wide degree of latitude. CPPIB was allowed, for example, the flexibility to manage funds as appropriate to provide the best returns. That is, if the market is not good for venture capital CPPIB can shift dollars to buyouts, fixed-income investments or distressed debt. Both Weisdorf and his colleague in Public Markets have this flexibility. By focusing on the total portfolio, the vice presidents have the freedom to shift, within ranges, across asset classes where appropriate. If venture capital is not likely to generate strong returns, Weisdorf and his team can shift their emphasis to real estate or another asset class.

Finally, CPPIB was created as a fund advisor or a fund of funds to develop the expertise to pick managers of other funds, which would in turn have subject area-expertise.

To date that mandate has translated into $3.8 billion invested in 34 private equity funds with 29 different general partnerships-firms such as Advent International, Paul Capital, Lexington Partners and NIB.

CPPIB’s total assets (in all classes) were about $12.9 billion at the end of 2002, but an additional $27.4 billion from bonds and cash held by CPP will flow into CPPIB over the next three years if changes to CPP’s legislation are confirmed. That would put the organization on the fast track to become as important a group over the next decade in private equity as TIAA CREF or CalPERS in the United States. CPP currently has a limit on foreign investments of 30% of funds invested at any given time, but that limit is open to liberalization over time.