CPP Investment Board's external Private Equity Managers continue to drag returns

It has been awhile since I took the time to check out our CPP PE returns, and I’m sorry to report that they aren’t much better than last Spring.

Of the 54 Private Equity funds I can analyze, we CPP Investment Board beneficiaries have $9.1 billion committed to 25 different underperforming Private Equity funds, down a modest $200 million from the $9.3 billion we had spread across 27 funds when I last checked (see prior post “61% of CPPIB Private Equity Comitments sampled are currently below solvency threshold“).

Of the $19.8 billion of our PE fund commitments that can be tracked, using data that was current as of early February 2014 (which relies on CPPIB’s June 2013 data and the then C$ exchange rate), only 7 our these 54 funds are producing the types of 20% plus IRRs that the mega buyout industry is ostensibly targeting; and in those funds we’ve put just $3.4 billion (17.3%) of our $19.8 billion investment.

Rotten luck, that is.

If you ask yourself why the CPPIB reports that our hand-picked team produced $1.8 billion of negative value add over four fiscal years (see prior post “CPP Investment Board has produced $1.8 billion of negative value-add over a four year period” May 20-13), the answer may well be that for every 7 great funds we have, it appears that we are locked into 25 more that have not yet lived up to expectations.

As you may recall, none of this IRR information actually comes from CPP Investment Board, despite the fact that you and I have committed almost $40 billion to these general partnerships. I’ve written to the CPPIB Board of Directors twice, asking why. They replied — in essence — to say that they believe you deserve to know less about the performance of your investments than the pension beneficiaries of California, Oregon, Texas, and Washington, for example. With that in mind, I can’t explain to you why CPPIB CEO Mark Wiseman was invited to sit on the Board of the Canadian Coalition for Good Governance. Perhaps Executive Director Stephen Erlichman doesn’t read blogs or watch business television (see prior post “BNN interview regarding secrecy at CPP Investment Board” Dec. 21-12).

Despite the CPPIB’s secrecy, I can compile much of this information thanks to the websites of CalPERS, CalSTRS, NMERB, Oregon, UTIMCO and Washington State Investment Board. Each of these funds share private equity commitments with CPPIB, and each discloses their internal rates of return in the home currency of the pension plan. A Godsend.

Thanks to some spadework, Canadians are able to track the internal rates of return for 54 of the CPPIB’s 147 externally-managed private equity funds. Courtesy of these truly transparent U.S. pension plans, I’ve updated our earlier work for you (see prior representative post “Solvency canary alert?: 59% of CPPIB PE $ commitments producing IRRs below 6%” Dec. 6-12).

Here’s the news, 50% of these funds continue to perform below the 6%ish solvency benchmark. That’s the threshold that CPPIB managers need to achieve over the medium term so as not to have to ask for an increase to your payroll deductions. This is an improvement from the 59% figure of six months ago (see prior post “Solvency canary alert?: 59% of CPPIB PE $ commitments producing IRRs below 6%” Dec. 6-12). But the committed dollars involved, at 61% of the sample, are astounding.

IRR Performance of 54 CPPIB Private Equity Funds

30%+ IRR: 3 funds
20-30% IRR: 4 funds
10-20% IRR: 15 funds
7-10% IRR: 7 funds
0-6% IRR: 19 funds
negative IRR: 6 funds

Painfully, we have 46% of our commitments are to funds currently producing less that the CPPIB’s solvency target, while 45% of our dough is in funds generating more than a 10% gross return:

IRR Performance of 54 CPPIB Private Equity Funds by Fund Commitment

30%+ IRR: $1.4 billion committed
20-30% IRR: $2 billion committed
10-20% IRR: $5.4 billion committed
7-10% IRR: $1.8 billion committed
0-6.9% IRR: $7.6 billion committed
negative IRR: $1.4 billion committed

Here’s how I’ve arrayed the info for you. Following the “simple return” results that are released by the CPPIB are the far more useful “internal rate of return” data provided by one or more of CalPERS, CalSTRS, NMERB, Oregon and WSIB (when a figure is in square brackets, that means it is not as up-to-date as others for that particular fund). In the case of CalSTRS, they are still showing March 2013 IRR data.

The thing I want you to notice is the ongoing stark difference between the simple return calculations that CPPIB publishes and the true industry-standard investment returns (IRRs) released by these major U.S. public pension plans. On its website, CPPIB reported June 2013 data for Apax Europe VII’s as an 11% performer on our $784 million investment. Which sounds so much better than the 4.3% IRR reported by the Oregon pension fund. How so? CPPIB’s solvency threshold is inflation plus 4%. As such, if everything was earning an IRR of 4.3% gross, the plan would be in a deficit. How does showing a simple 11% return help us understand how our capital is doing? One thing’s for sure, 11% sounds better than 4.3%:

Advent International GPE VI (2008): CPPIB: +53%, CalSTRS: [+15.7]% IRR, Oregon: +19.2% IRR

Apax Europe VII (2007): CPPIB: +11%, CalSTRS: [+3.8%] IRR, Oregon: 4.3% IRR

Apollo V (2002): CPPIB: +108%, CalPERS: 37.6% IRR

Apollo VI (2005): CPPIB: +45%, CalPERS: 8.7% IRR, Oregon: +11.2% IRR

Apollo VII (2007): CPPIB: +57%, CalPERS: 24.0% IRR, Oregon: 25.6% IRR

Ares Corporate Opportunities Fund (2003): CPPIB: +55%, CalPERS: +13.8% IRR

Ares Corporate Opportunities Fund II (2006): CPPIB: +63%, CalPERS: +13.8% IRR

Ares Corporate Opportunities Fund III (2008): CPPIB: +48%, CalPERS: +22.4% IRR

Birch Hill Equity Partners III (2005): CPPIB: +50%, CalPERS: +9.0% IRR

Blackstone Capital Partners IV (2002): CPPIB: +140%, CalSTRS: 37.3% IRR

Blackstone Capital Partners V (2005): CPPIB: +25%, CalSTRS: +5.1% IRR

Blackstone Capital Partners VI (2008): CPPIB: +22%; CalSTRS: +11.1% IRR

Bridgepoint Europe II, LP (2001): CPPIB: +71%, CalPERS: +29.8% IRR

Bridgepoint Europe III, LP (2005): CPPIB: +15%, CalPERS: +1.8% IRR, WSIB: +1.9% IRR

Bridgepoint Europe IV, LP (2007): CPPIB: +26%, CalPERS: +9.7% IRR, WSIB: +9.7% IRR

Carlyle Venture Partners II (2002): CPPIB: +11%, CalPERS: -2.3% IRR

Charterhouse Capital Partners IX (2008): CPPIB: +22%, WSIB: +9% IRR

Coller International Partners IV (2002): CPPIB: +49%, CalPERS: +13.3% IRR, Oregon: 13.3% IRR

Coller International Partners V (2006): CPPIB: +36%, CalPERS: +7.0% IRR, Oregon: +7.5% IRR

CVC European Equity Partners IV (2005): CPPIB: +87%, CalPERS: +17.5% IRR, CalSTRS: 16.2% IRR, Oregon: +17.5% IRR

CVC European Equity Partners V (2008): CPPIB: +35%; CalPERS: +9.6% IRR, CalSTRS: [8.5%] IRR, Oregon: +9.9% IRR

Diamond Castle Partners IV (2005): CPPIB: +7%, Oregon: +1.7% IRR

First Reserve Fund XI (2006): CPPIB: +21%, CalPERS: +5% IRR, CalSTRS: [+2.8%] IRR, Oregon: +4.1% IRR

First Reserve Fund XII (2008): CPPIB: +4%, CalPERS: +2.1% IRR, CalSTRS: [+0.4%] IRR, Oregon: +4.1% IRR

FountainVest China Growth Fund (2008): CPPIB: +12%, CalSTRS: [5.0%] IRR

Hellman & Friedman Capital Partners V (2004): CPPIB: +158%, CalPERS: +27.6% IRR, CalSTRS: [+27.2%] IRR

Hellman & Friedman Capital Partners VI (2006): CPPIB: +38%, CalPERS: +8.4% IRR, CalSTRS: [7.0%] IRR

Hellman & Friedman Capital Partners VII (2009): CPPIB: +1%; CalPERS: +0.8% IRR, CalSTRS: [-9.0%] IRR

Hony Capital Fund 2008 (2008): CPPIB: +11%, CalSTRS: [+1.4%] IRR

KKR 2006 (2006): CPPIB: +39%, CalPERS: +6% IRR, CalSTRS: [+5.5%] IRR, Oregon: +7.7% IRR

KKR Asian Fund (2007): CPPIB: +56%, CalPERS: +12.9% IRR, WSIB: 12.9% IRR, Oregon: +12.4% IRR

KKR European Fund II (2005): CPPIB: +20.0%, CalPERS: +2.7% IRR, WSIB: +3.6% IRR, Oregon: +4.0% IRR

KKR European Fund III (2008): CPPIB: +16%, CalPERS: +1.9% IRR, WSIB: +2% IRR, Oregon: +4.0% IRR

KKR Millennium Fund (2002): CPPIB: +63%, CalPERS: +16.2% IRR, WSIB: 16.6% IRR, Oregon: +16.5% IRR

KSL Capital Partners II (2006): CPPIB: +35%, WSIB: +13% IRR, Oregon: +14.2% IRR

Lexington Capital Partners V (2002): CPPIB: +65%, CalPERS: +19.5% IRR

Magnum Capital (2007): CPPIB: -14%, CalPERS: -5.7% IRR

MatlinPatterson Global Opportunities (2001): CPPIB: +76%, Oregon: +15.9% IRR

MatlinPatterson Global Opportunities III (2007): CPPIB: +24%, Oregon: +6.4% IRR

New Mountain Partners III (2007): CPPIB: +21%, CalPERS: +8.1% IRR, Oregon: +8.9% IRR

Onex Partners (2003): CPPIB: +185%, CalSTRS: [+39.0%] IRR

Onex Partners III (2008): CPPIB: +11%, CalSTRS: [+6.5%] IRR

Permira IV (2006): CPPIB: +35%, CalPERS: [+5.4%] IRR

Providence Equity Partners VI (2006): CPPIB: +15%, CalPERS: [+3.3%] IRR, CalSTRS: +4.8% IRR

Silver Lake Partners II (2004): CPPIB: +54%, CalPERS: +9.7% IRR, WSIB: 9.7% IRR

Silver Lake Partners III (2006): CPPIB: +38%, CalPERS: +15.3% IRR, WSIB: 14.6% IRR

Terra Firma Capital Partners III (2006): CPPIB: -40%, Oregon: -12.5% IRR

TPG Asia Fund V (2007): CPPIB: 0%, CalPERS: -0.2% IRR

TPG Partners IV (2003): CPPIB: +81%, CalPERS: +15.4% IRR, CalSTRS: [+14.8%] IRR, Oregon: +15.9% IRR

TPG Partners V (2006): CPPIB: 0%, CalPERS: -0.9% IRR, CalSTRS: [-3.3%] IRR, Oregon: +1.2% IRR

TPG VI (2008): CPPIB: +19%, CalPERS: +8.0% IRR, CalSTRS: [+5.2%] IRR, Oregon: +9.1% IRR

Triton Fund III (2008): CPPIB: +4%, WSIB: -1.1% IRR

Welsh, Carson, Anderson & Stowe X (2005): CPPIB: +40%, CalPERS: +6.7% IRR, CalSTRS: [+5.0%] IRR

Welsh, Carson, Anderson & Stowe XI (2008): CPPIB: +28%, CalPERS: +11.5% IRR, CalSTRS: [+11.4%] IRR

Get this. The disclosure approach hasn’t been changed, even after the CPPIB provided new tools for analysis. We still can’t analyze for the impact of currency, nor IRR (see prior post “CPPIB’s new website fails to improve opaque disclosure” Aug. 8-13). You have to wonder why. It’s been brought to the attention of CPPIB’s Board of Directors, and the website was upgraded a few months later. The good news is that we now have webfocus tools.

The bad news is the data we are being provided to analyze is still intentionally useless.

MRM