This week we reported Canada Pension Plan Investment Board had backed a deal worth close to $1 billion that allowed the UK’s second-largest pension, BT Pension Scheme, to reallocate capital to a new strategy.
The transaction also allowed BTPS’s manager, Hermes GPE, to maintain management fees over a portfolio of high quality and what appear to be relatively young buyout fund stakes – the likes of The Carlyle Group, IK Investment Partners, EQT and Exponent Private Equity, to name a few.
Fund restructurings are typically executed at asset level, moving stakes in companies from an existing vehicle into a new fund, such as a continuation vehicle. In this deal, stakes in funds themselves were moved. It’s unclear why CPPIB, which is understood to have originated the deal, chose to let Hermes retain management fees, rather than cut out the manager and acquire the fund stakes outright.
CPPIB’s motivation may never become clear, but one suspects it has an ongoing relationship with Hermes or has secured some sort of future dealflow rights through the transaction. Whatever its reason – remember no intermediary was used – the pension giant is proving itself a savvy and innovative operator.
In the space of just over a decade CPPIB has transformed itself from a passenger in private equity funds to a driver leading the pack. The Canadian pension’s secondaries team, led by Michael Woolhouse in Toronto plus Nik Morandi and Louis Choy in London, had its most active year ever in the 12 months to 31 March with C$4.2 billion ($3.2 billion; €2.7 billion) worth of transactions across 14 deals.
The team has backed some of the largest and most creative deals yet, including the restructuring of three of Peru’s Enfoca Investments’ funds with Goldman Sachs Asset Management and its preferred equity stapled deal with Olympus Capital Asia.
Non-traditional players such as CPPIB have benefits including a lower cost of capital compared with traditional buyers. They often don’t use third-party acquisition financing for deals and aren’t under the same pressures to deploy as traditional buyers who have 10-year vehicles. Plus, they don’t need to hit the fundraising trail or explain to LPs why they passed on a deal.
There are non-investment benefits too. As one professional at a non-traditional institution who used to work at a traditional shop said: “The hours are better. I don’t feel as guilty going home on the dot to my kids.”
Still, compensation remains a question. Without the allure of carried interest, joining a non-traditional player means individuals must get satisfaction from building a team, work-life balance or creating value for pension members.
The number of non-traditional secondaries players is set to grow – public or private pension funds and sovereign wealth funds backed 10 percent of deals last year, up from 6 percent the year before, according to research by Evercore. Singapore’s GIC continues to be a formidable player and anyone keeping their eye on job boards will know a certain Gulf-based sovereign wealth fund wants to build an infrastructure secondaries team. APG got into secondaries via real assets and just launched its private equity secondaries team this month.
The world of secondaries is about to get a whole lot more competitive.