How did CPPIB become dominant in the secondaries market?
In 2007, we made the strategic decision to evolve into a principal participant in the secondary marketplace. That essentially meant building our own internal team to focus on this space. At that time, we put a strategy paper together which said that (i) CPPIB would invest $5 billion in the next five years, (ii) the market during that period of time would be $100 billion, essentially equating CPPIB’s share to about 5 percent of the global market share, and (iii) we would build the team out to be about 15 investment professionals during that period of time.
How has that progressed?
The year 2012 was our five-year anniversary and at that point we had invested $5.5 billion dollars. Our analysis suggested that the market during that period of time was $102 billion. Finally, we had grown our team to 12 investment professionals solely focused on the secondaries market. We achieved many of the objectives set out in our initial five-year plan. In the process, and in a fairly short period of time, we went from standing still to being one of the largest investors in the secondaries marketplace. We believe we have built a solid reputation as a sophisticated and credible counterparty that can move swiftly and in scale. In addition, we have played a crucial role in evolving the secondary market with regards to direct secondaries such as the Behrman, Kainos and Childs transactions which we lead between 2012 and 2014.
As we look forward to the next five years, our objective is to invest an additional $10 billion in the secondary market. We certainly don’t need to do that, but the mandate is there if the opportunities present themselves. That essentially makes us one of, if not the largest, participants in the secondaries marketplace.
How has the CPPIB divided its attention?
Of the over $6 billion we’ve deployed thus far, about 60 percent of that has been in the traditional LP secondary space. The remaining 40 percent has been in direct secondaries.
We define direct secondaries as either the spin-out of captive private equity platforms within financial institutions or what we call “Portfolio Liquidity Solutions”. Others call them GP restructurings.
More recently, we have been very active in [what we call the] ‘Portfolio Liquidity Solutions’ market. Generally speaking, the opportunities we pursue tend to be funds at or close to the end of their lives. We seek to find a fair, balanced and appropriate approach to all stakeholders in these transactions; what we call the “win-win-win”. Existing investors get the option but not the obligation for liquidity, GPs get longer term more patient capital to drive the remaining companies to full value and we invest alongside a well-aligned and committed GP. From our perspective, we have been and expect to continue to be consistently active in both sides of the market; LP and direct secondaries.
Have you worked out a proportion that you might spend on direct secondaries?
Over the long-term, our portfolio will likely be evenly weighted between LP secondaries and direct secondaries. At different points in the cycle, we will bias our resources more towards one or the other depending on where we believe there are better risk-adjusted returns. However, we intend to remain consistently active in both markets.
How do you go about assessing risk on these ‘portfolio liquidity solutions’?
We have a growing team of 13, moving to 15 this year. These transactions tend to consist of very concentrated portfolios. So to get ourselves comfortable, we complete single asset-like diligence on the portfolios. We spend a considerable amount of time working to understand the underlying companies. This includes spending significant time with the GP as well as hiring bankers and consultants, onsite visits to company headquarters and due diligence sessions with the company management teams.
By spending a considerable amount of time on our diligence it enables us to increase our conviction in the portfolio and results in us providing a fair price to the existing investors in the fund. Investors then have the choice, sell if they deem our price attractive or roll into the new vehicle if they are keen to continue to participate in the portfolio.