Competing with big beasts

Canadian pension PSP Investments is planning to build an in-house secondaries team. How hard will it be for the LP to win deals?

Secondaries Investor caught up with André Bourbonnais, the president and chief executive of Public Sector Pension Investment Board, one of Canada’s largest public pensions, last week. Bourbonnais discussed his expansion plans, which include launching an in-house secondaries team and opening offices in Asia and Australia.

Bourbonnais’ plan is to leverage the C$126 billion ($92 billion; €85 billion) pension’s GP relationships to gain access to co-investment opportunities and gather more knowledge about funds before building its own unit.

Buyers worried about competing for deals with another large Canadian pension need not lose sleep just yet – it will be at least two years, possibly as many as five, before PSP introduces the capability, Bourbonnais said.

Several sources Secondaries Investor spoke to this week were sceptical about whether PSP would be able to make it as a buyer. “You can’t just say, hey, we’re big, and we’re going to write big cheques,” the managing director of one global investment firm said.

Another source said PSP would have to compete for transactions north of the $200 million range to justify taking the strategy in-house. The argument is that unless the pension hires dozens of specialist professionals, it won’t have the bandwidth to execute scores of small deals. Competing in this part of the market won’t be easy, the source added, as PSP would be running up against the likes of Ardian and Lexington Partners who “do this day-in day-out”.

Market participants clearly believe Canada’s seventh largest public pension will face significant hurdles in cracking a crowded sector, but this doesn’t mean PSP should abandon the idea.

Canada Pension Plan Investment Board, PSP’s larger brother, took about six years to transition from being a passive investor to launching its own in-house secondaries business in 2007.

Today, CPPIB is a force to be reckoned with, clinching deals such as Ardian’s sale of $1 billion worth of private equity stakes in March, Australian superannuation fund Future Fund’s sale of around $1 billion of fund interests in January last year, and launching into preferred equity and other niche areas.

Of course, CPPIB benefited from being an early entrant to the market, while PSP won’t be mobilising until at least 2019 – when the market could have changed radically.   But like CPPIB, PSP – which has been investing in private equity for more than a decade – will be able to leverage its GP relationships as a source of dealflow. It also should be able to take advantage of a lower cost of capital than secondaries firms.

For now, PSP is happy to learn the art of secondaries investing from Ardian and AlpInvest Partners, the two firms to whose funds it has committed capital.

CPPIB has led the way, and there’s no reason PSP can’t follow. But the pension shouldn’t count on it being easy.

What challenges do entrants to the market face? Let us know your view: adam.l@peimedia.com

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