How 4 Canadian Pension Behemoths Achieved Investing Success

What is the key to investing success for allocators? A research paper sketched out four case studies to illuminate how Canadian pension plans deploy capital to supercharge their investments.

The study was penned by a trio of notable experts in the field: Eduard van Gelderen, CIO of the Public Sector Pension Investment Board; Sebastien Betermier, a McGill University finance professor; and Barbara Zvan, president and CEO of the University Pension Plan Ontario.

The paper covered a wide array of assets, explaining that “these projects are noteworthy because they are large, complex and span four asset classes: real estate, natural resources, infrastructure and private credit.” In all four cases, the allocators sought to focus large amounts of capital to integrate their new holdings, enhance internal synergies, minimize outside fees and enlist stakeholder groups such as local governments.

Although the four pension plans featured are giants, the paper showed Zvan’s small fund can also do well by following the big funds’ examples.

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The four case studies:

Real estate. The Ontario Teachers’ Pension Plan bought Cadillac Fairview, a real estate developer headquartered in Toronto, in 2000 for C$2.3 billion (about $1.7 billion in U.S. dollars at today’s exchange rate). Thanks to the acquisition, OTPP gained such landmark properties as the shopping malls CF Toronto Eaton Centre and CF Pacific Centre in Vancouver. In addition, the pension plan’s real estate portfolio grew significantly, with large deals in the U.K., Brazil, Chile and Australia.

The buyout of Cadillac Fairview beefed up OTPP’s real estate prowess, the report found, noting that the plan “gained expert knowledge that was not typically available to pension investors.” In that vein, the study added, “the acquisition also made it easier to attract and retain top talent because deals were larger and more interesting.” Also, the report maintained, “by having direct control, OTPP has a greater ability to mitigate risks throughout the life cycle of a project.”

Natural resources. In 2018, the Public Sector Pension Investment Board bought a 41,000-acre sugar plantation in Hawaii for an undisclosed sum. PSP set up an ag subsidiary to run the farm, called Mahi Pono, which means “to cultivate morally and properly.”

Too often, pension plans fail to do well with farming, the report noted. But “with the transaction, PSP differentiated itself from other buyers not only by stepping in as a long-term investor and a responsible steward of the land, but also by purchasing all of the land instead of individual parcels,” the study declared.

The land had been fallow for two years, as the previous owner could not operate it profitably. The paper reported that PSP’s unit switched the crops to a diversified mix that was more sustainable and profitable, growing avocados, citrus, coffee and macadamia nuts. Because water use in Hawaii is a fraught political issue, PSP made sure to hire a locally important person as its chief operating officer: Shan Tsutsui, a Maui native and former lieutenant governor and president of the state senate.

Infrastructure. Caisse de dépôt et placement du Québec is the main force behind the new rapid transit system for Montreal. The Réseau express métropolitain is a largely above-ground commuter rail network that folds in and modernizes existing tracks and adds to them, such as a link to the airport. A supplement to the city’s subway system (which opened in 1966), the REM will open in increments between now and 2027.

It is expected to be profitable, with a projected annual return of 8% to 9%. As the report stated, “an infrastructure project like the REM brought strategic value to CDPQ because of its steady cash flows and inflation hedging properties over the long term.” The pension fund has almost full control over REM, but it has attracted other investors to strengthen its capital base: Hydro-Québec, an electric utility centered on water-generated electricity, and the province’s government. CDPQ will pay for almost half the project’s almost C$7 billion (U.S.$5.2 billion) cost, with the rest coming from its two investing partners and debt financing.

A big risk for REM is gaining public support, as the build-out involves disruption in highly populated areas. The report said that CDPQ has managed to keep public opinion on the project’s side by holding “consultation sessions and involving the public in the decision-making processes.”

Private credit. In 2015, the Canada Pension Plan Investment Board took over Antares Capital, a New York-based investment firm, for $12 billion, with about a third in equity and the rest from bank loans. To help fund the acquisition, the CPPIB also sold 16% of the firm to Northleaf Capital Partners. Now the pension giant has a subsidiary that has $61 billion in assets under management. Antares has a specialty in lending to mid-cap companies, and the paper indicated that CPPIB’s heft is allowing Antares “to efficiently achieve scale.”

Plus, CPPIB uses Antares’ expertise to supplement its own investment efforts. The subsidiary “collaborates with CPP Investments’ internal private credit team and shares their knowledge surrounding underwriters, loan structures, etc., that can apply to the pension fund’s other investments.”

The upshot of the report is that its four profiles demonstrate how allocators can “capture a greater proportion of the upstream value creation.”