Pension Investors Can Improve the Productivity of the Companies in Which They Invest

Updated with correction

New research from the International Centre for Pension Management suggests that direct investments in companies by a pension fund can positively affect the company’s productivity. The findings were released in a white paper titled, “The Four Ways Through Which Pension Funds Increase the Productivity of Firms They Invest In.”

The ICPM paper analyzes another recent research paper based on Danish data, which found that pension fund investments can increase a firm’s productivity by 3%-5%. European pension funds, like Canadian ones, are more likely to make direct investments in companies, unlike U.S.-based funds, which typically invest in companies via allocations to private equity managers.

The paper identifies four “channels” in which a pension fund equity stake influences the productivity of a firm;

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Supply of funds: An increased supply of funding may allow a company to make productivity-increasing investments, which it otherwise could not;
Long-term commitment: Because pension funds are such long-term investors, they favor investments with long-term objectives rather than investing in companies with short-term projects and do not have the need to improve margins on a short-term basis, this can allow companies to focus on long-term research and development;
Engagement: An investment from a pension fund tends to improve the governance of a company, through engagements like changing a company’s management and strategy, and taking a seat on the board of a business and providing it expert advice; and
The signaling effect: An investment from a pension fund can give a positive signal to other financiers to also invest, and a firm with a good reputation can attract even further outside investment.

According to the white paper, a company’s productivity is more affected when a pension fund holds a larger stake in the firm and when that stake is held over a long period of time. The paper notes that because pension funds invest over such a long horizon, their supply of funds, long-term commitment and engagement channels can operate simultaneously with a firm over a long period.

These synergies, which the paper refers to as “patient capital,” take time to materialize. Other long-term investors, such as insurance firms and sovereign wealth funds, are some of the few investors that might have a similar effect on businesses in which they invest.

The white paper was written by ICPM’s Working Group, which consists of academic figures and senior officials of several Dutch, Danish and Canadian universities and pension funds such as PSP Investments, APG Asset Management, PGGM, CPP Investments, McGill University, University of Amsterdam, University of Toronto, Copenhagen Business School, PensionDanmark and others.

Examples in Action

The white paper provides case studies in which a company’s productivity was increased across all four channels due to an investment from a pension fund. In May 2021, PensionDanmark made a nine-figure investment in cleantech company Stiesdal, a manufacturer of offshore wind foundations, energy storage tech and other clean energy technologies.

As a result of the investment, Stiesdal had funding for its capital-intensive manufacturing operations, PensionDanmark’s long-term focus meant the business could focus on research and development for new and unproven technologies, which resulted in productivity improvements through the supply of funds and long-term commitment channels.

The fund’s investment in the company not only provided long-term financial support, but also signaled to other investors and potential customers the company’s potential, representing the signaling effect. PensionDanmark deployed experienced management to the company, holds a seat on the board and improved the company’s governance, which represent improvements through the engagement channel, the paper stated.

The working group authors of the report include Roel Beetsma, Sebastien Betermier, Jaap van Dam, Svend E. Hougaard Jensen, Felix Lanters, Mark Lyon, Allan Lyngsø Madsen, Michael Neft, Flo Pattiwael, Andrew Reeve, Alexandre Roy, William Scott and Mikhail Simutin.