Canada pension plan chief warns over illiquid private assets

The head of one of the world’s biggest retirement funds has warned that investors are becoming too exposed to private assets whose liquidity could prove a problem in the event of a downturn.

Institutional investors such as pension funds have increased exposure to assets such as infrastructure, real estate and private equity in the quest for better returns at a time of record-low interest rates.

“I don’t think there’s anything wrong with private assets or private equity [but] it’s very hard to sell the private stuff in a downturn,” said Mark Machin, chief executive of the Canada Pension Plan Investment Board which oversees C$392bn ($291bn) in assets. “My warning is you have to be really careful on how much you load up.”

About half of the Toronto group’s assets are invested privately, a heavy weighting with which Mr Machin is comfortable.

Private assets were among the top performers for CPPIB as it reported annual results for the year ending in March. Private equity in companies based in developed markets outside Canada was the best-performing asset class, with a gross return of 18 per cent compared with 16 per cent the previous year. Infrastructure returned 14 per cent compared with 15.2 per cent the previous year.

In common with other Canadian pension funds, CPPIB is known for being a proponent of “direct investment”, where it bypasses intermediaries to make deals or buyouts. Recent investments include about $750m in Aqua America, a US water company.

CPPIB is also part of a consortium led by private equity firms Apax and Warburg Pincus that plans to return Inmarsat, Britain’s largest satellite company, to private ownership in a deal that values the group at about $6bn including debt.

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Overall, CPPIB reported a dip in annual returns after a rocky period for global markets towards the end of 2018. It posted a net return of 8.95 per cent for 2018-19, down from 11.6 per cent the previous year.

Mr Machin had previously warned of lower returns, saying the prospect of double-digit returns year on year was “too optimistic”. He said it was a good result but added that renewed trade tension between Washington and Beijing was causing uncertainty.

“You’ve got rising geopolitical tensions that are very difficult to price,” he said. “The tension between the number one and number two economies doesn’t help anybody.

“We’re probably going to see rising volatility and less robust returns from here.”

Mr Machin’s total pay for the year rose 10 per cent to C$5.76m, including deferred awards.

Assets at CPPIB rose C$35.9bn. Much of this was derived from profits generated by the fund’s investment activities, with C$3.9bn coming from contributions made by pension savers. The group’s overall assets rose 10 per cent year on year. Fees paid to external investment managers fell C$152m to C$1.59bn because of lower performance fees.

CPPIB was formed 20 years ago to build a reserve fund to support the Canada Pension Plan, the country’s largest retirement fund with 20m contributors and beneficiaries.



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