CPP Investment Board earning less than 6% return on more than $8 billion of Private Equity commitments

I’ve written to the CPP Investment Board twice now, but they aren’t biting. Despite my best attempts, Canadians are not yet able to get the same information about their external private equity fund managers that CalPERS, CalSTRS, Oregon and Washington State Investment Board provide online to their beneficiaries. It’s as though the CPPIB forgets that they work for us.

Despite getting the Heisman from CPP Investment Board (see prior post “BNN interview regarding secrecy at CPP Investment Board” Dec. 21-12), Canadians are still able to track the internal rates of return for 54 of the CPPIB’s 143 externally managed private equity funds. Thanks to some transparent U.S. pension plans.

In time, the Board of the CPP Investment Board will come to recognize they look as though they’re hiding something by ignoring the industry’s best practices; which, of course, they are. In the meantime, it’s up to me to piece the data together for you.

With the most recent financial quarter out of the way at CPPIB, I can update our earlier work for you (see prior representative post “Solvency canary alert?: 59% of CPPIB PE $ commitments producing IRRs below 6%” Dec. 6-12).

This 38% sample size (54 of 143 external funds) gives us a good sense of how we are doing given the range of commitment periods, firms, and jurisdictions of the funds I’ve been able to pull together 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, 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).

The thing I want you to notice is the galling difference between the simple return calculations that CPPIB publishes and the true industry-standard investment returns (IRRs) released by some of the major U.S. public pension plans. A so-called 20% gain sounds soooo much better than a negative 23.5% IRR to the unwashed pensioner, doesn’t it?. No wonder CPPIB CEO Mark Wiseman likes it this way; he chose most of the fund managers in question:

Advent International GPE VI (2008): CPPIB: +42%, CalSTRS: [12.4%] IRR, Oregon: +15.1% IRR

Apax Europe VII (2007): CPPIB: +19%, CalSTRS: [+6.1%] IRR, Oregon: 3.6% IRR

Apollo V (2002): CPPIB: +106%, CalPERS: 37.7% IRR

Apollo VI (2005): CPPIB: +31%, CalSTRS: [7.9%] IRR, Oregon: +7.6% IRR

Apollo VII (2007): CPPIB: +43%, CalSTRS: 21.4% IRR

Ares Corporate Opportunities Fund (2003): CPPIB: +57%, CalPERS: 14.3% IRR

Ares Corporate Opportunities Fund II (2006): CPPIB: +61%, CalPERS: 14.0% IRR

Ares Corporate Opportunities Fund III (2008): CPPIB: +56%, CalPERS: 25.6% IRR

Birch Hill Equity Partners III (2005): CPPIB: +46%, CalPERS: 9.5% IRR

Blackstone Capital Partners IV (2002): CPPIB: +134%, CalSTRS: 37.6% IRR

Blackstone Capital Partners V (2005): CPPIB: +6%, CalSTRS: 1.5% IRR

Blackstone Capital Partners VI (2008): CPPIB: +20%; CalSTRS: -23.5% IRR

Bridgepoint Europe II, LP (2001): CPPIB: +73%, CalPERS: 30.0% IRR

Bridgepoint Europe III, LP (2005): CPPIB: +10%, CalPERS: 1.0% IRR, WSIB: +1.0% IRR

Bridgepoint Europe IV, LP (2007): CPPIB: +14%, CalPERS: 4.8% IRR, WSIB: +4.8% IRR

Carlyle Venture Partners II (2002): CPPIB: +9%, CalPERS: -2.4% IRR

Charterhouse Capital Partners IX (2008): CPPIB: +18%, WSIB: +7.7% IRR

Coller International Partners IV (2002): CPPIB: +50%, CalPERS: +14% IRR, Oregon: 14.1% IRR

Coller International Partners V (2006): CPPIB: +30%, CalPERS: +6.8% IRR, Oregon: +6.8% IRR

CVC European Equity Partners IV (2005): CPPIB: +74%, CalPERS: +16.8% IRR, CalSTRS: [15.7%] IRR, Oregon: +16.5% IRR

CVC European Equity Partners V (2008): CPPIB: +32%; CalPERS: +9.2% IRR, CalSTRS: [10.8%] IRR, Oregon: +8.8% IRR

Diamond Castle Partners IV (2005): CPPIB: +12%, Oregon: +4.0% IRR

First Reserve Fund XI (2006): CPPIB: +11%, CalPERS: +2.9% IRR, CalSTRS: [4.8%] IRR, Oregon: +2.4% IRR

First Reserve Fund XII (2008): CPPIB: -1%, CalPERS: +0.4% IRR, CalSTRS: [3.9%] IRR, Oregon: +0.2% IRR

FountainVest China Growth Fund (2007): CPPIB: +8%, CalSTRS: 9.3% IRR

Hellman & Friedman Capital Partners V (2004): CPPIB: +144%, CalPERS: +27.6% IRR, CalSTRS: [28.2]% IRR

Hellman & Friedman Capital Partners VI (2006): CPPIB: +27%, CalPERS: +6.8% IRR, CalSTRS: 5.6% IRR

Hellman & Friedman Capital Partners VII (2009): CPPIB: -7%; CalPERS: -9.3% IRR, CalSTRS: -[10.2%] IRR

Hony Capital Fund 2008 (2008): CPPIB: +2%, CalSTRS: 6.6% IRR

KKR 2006 (2006): CPPIB: +32%, CalPERS: +5.5% IRR, CalSTRS: [3.7%] IRR, Oregon: [+7.0%] IRR

KKR Asian Fund (2007): CPPIB: +54%, CalPERS: +13.1% IRR, WSIB: [11.4%] IRR, Oregon: +13.2% IRR

KKR European Fund II (2005): CPPIB: +12.0%, CalPERS: +1.3% IRR, WSIB: [1.0%] IRR, Oregon: 2.2% IRR

KKR European Fund III (2008): CPPIB: +11%, CalPERS: -2.8% IRR, WSIB: [-6.1%] IRR, Oregon: -2.3% IRR

KKR Millennium Fund (2002): CPPIB: +57%, CalPERS: +16.5% IRR, WSIB: [16.8%] IRR, Oregon: +16.5% IRR

KSL Capital Partner II (2006): CPPIB: +25%, WSIB: [10.8%] IRR, Oregon: 11.0% IRR

Lexington Capital Partners V (2002): CPPIB: +64%, CalPERS: +19.8% IRR

Magnum Capital (2007): CPPIB: -9%, CalPERS: -4.1% IRR

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

MatlinPatterson Global Opportunities III (2007): CPPIB: +16%, Oregon: +5.8% IRR

Onex Partners (2003): CPPIB: +180%, CalSTRS: 39.6% IRR

Onex Partners III (2008): CPPIB: +11%, CalSTRS: -3.8% IRR

New Mountain Partners III (2007): CPPIB: +18%, CalPERS: +8.3% IRR, Oregon: +8.1% IRR

Permira IV (2006): CPPIB: +27%, CalPERS: +4.0% IRR, WSIB: 5.0% IRR

Providence Equity Partners VI (2006): CPPIB: +15%, CalPERS: +4.1% IRR, CalSTRS: [6.0%] IRR

Silver Lake Partners II (2004): CPPIB: +52%, CalPERS: +9.8% IRR, WSIB: 9.8% IRR

Silver Lake Partners III (2006): CPPIB: +37%, CalPERS: +17.3% IRR, WSIB: 16.9% IRR

Terra Firma Capital Partners III (2006): CPPIB: -43%, Oregon: -19.4% IRR

TPG Asia Fund V (2007): CPPIB: -6%, CalPERS: -3.5% IRR

TPG Partners IV (2003): CPPIB: +71%, CalPERS: +14.9% IRR, CalSTRS: [15.2%] IRR, Oregon: [14.8%] IRR

TPG Partners V (2006): CPPIB: -15%, CalPERS: -4.0% IRR, CalSTRS: [-4.7%] IRR, Oregon: [-3.4%] IRR

TPG VI (2008): CPPIB: +11%, CalPERS: +5.0% IRR, CalSTRS: [1.5%] IRR, Oregon: [+6.0%] IRR

Triton Fund III (2008): CPPIB: +12%, WSIB: 2.3% IRR

Welsh, Carson, Anderson & Stowe X (2005): CPPIB: +25%, CalPERS: +5.0% IRR, CalSTRS: [3.3%] IRR

Welsh, Carson, Anderson & Stowe XI (2008): CPPIB: +21%, CalPERS: +11.5% IRR, CalSTRS: [7.4%] IRR

Of the 54 investments:

30%+ IRR: 4 funds
20-30% IRR: 3 funds
10-20% IRR: 13 funds
7-10% IRR: 7 funds
0-6% IRR: 18 funds
negative IRR: 9 funds

Negative IRR or 0-6% IRR: more than $8.3 billion in committed capital.

We’re still suffering with a negative IRR on more funds (9) than the seven which have met or exceeded the original 20%+ PE return profile that our managers at CPPIB were sold on. With the new data, we can report that 27 of the 54 funds (50%) are producing an IRR below the CPPIB’s solvency threshold of 6-ish percent.

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.

20 of the 54 funds have achieved an IRR of at least 10%, to date. That’s the good news. But, 34 of the 54 CPPIB PE funds (63%) I’ve been able to analyze failed to earn an IRR of even a modest 10%, based upon the published financial reporting of CalPERS, CalSTRS, Oregon and WSIB.

The 54 funds tracked above represent $15 billion of the ~$32 billion committed to CPPIB’s entire external PE Fund program. That’s a highly representative sample, don’t you think? More than $8 billion of that $15 billion (57%) is tied up in funds that are currently reporting an IRR below the CPPIB’s required solvency threshold of 6-ish%.

And those horrible results are before the one-way negative impact the strength of the Canadian dollar has had on the 52 funds above that are denominated in either USD or Euros. As in, we invested in most of the vehicles when the USD and Euro were higher compared to the Canadian dollar. CPPIB shows the individual PE fund performance (sans the IRR) in the funds’ home currency, unlike its four peers. As such, CPPIB hides the performance impact of the currency moves over the past decade. Unlike its four peers.

And, in case you’re wondering, the fund vintages of this 54 fund sample are highly representative:

2001-2003 vintage: 11 funds
2004 – 2006 vintage: 21 funds
2007-2009 vintage: 22 funds

The nine funds that have a negative IRR to date total $3.1 billion. The three really strong performers equal less than $600 million. Canadians are long the weak and light the strong.

Not that the CPPIB wants us to know any of this information. But the sunlight is shining just the same, thanks to our American friends.

MRM