There was a point last June when Canada’s big institutional private equity players resembled nothing so much as monumental square dancers, twirling around the floor with partners that appeared to change as rapidly as the music altered tempo.

That was in the heady days when BCE Inc. was still on the block, and all the major private equity funds in North America were sizing each other up to find the best fit. The Ontario Teachers Pension Plan was partnered with Kohlberg Kravis Rogers & Co. as potential suitors; a few days later, OTPP was paired with OMERS, investment manager for the province’s municipal employee’s pension savings; more seriously, KKR and OMERS also teamed up in this venture and were joined, at different times, by the Canada Pension Plan Investment Board and the mighty Caisse de dépôt at placements du Québec.

Confusing as this might have been, in retrospect last summer’s frenzied mating ritual between managers of the country’s largest pools of pension money serves as a succinct introduction to what Jim Leech, OTPP president, calls “the new private capital,” aka the increasing involvement of this type of institution in Canadian corporate finance.

The stakes are huge, but so is the clout and the growing expertise that these institutions bring to the private equity table. When the dance ended on June 30, the deal put together by OTPP and two U.S. private-equity firms, Providence Equity Partners and Madison Dearborn Partners, worth $51.7 billion, ranks as the biggest leveraged buyout ever in Canada.

Whether they make private equity investments through third-party funds or, in the case of large players such as OTPP and to a lesser extent OMERS and the CPPIB, directly as lead or general partners, all the big Canadian pension funds are in the process of allocating a portion of the funds they administer to this new field.

Individually, this allocation seems not to exceed 10% of the assets under each fund’s management. Together, however, according to OTPP, this has added up to just less than 30% of the new private equity raised in Canada in the past two years.

At the end of 2006, the Canadian market was estimated to have roughly $70 billion in private equity capital under management.

Counting only the funds the five biggest pension players report as having been allocated to conventional private equity investments, these organizations — all of the pension funds that joined the BCE dance, plus the Ottawa-based Public Sector Pension Investment Board — account for almost $30 billion of that amount. Add to that the infrastructure investments made through OTPP, OMERS and the CPPIB, and the total dollar figure soars to more than $50 billion.

OTPP is widely viewed as the pioneer in the field — although seasoned pension management observers, including Leech, concede that the Caisse has been making private-equity investments long before the activity was known by such terms.

After years of investing in little more than Ontario government bonds, OTPP underwent a sweeping restructuring in the early 1990s that included its first forays into private equity investing.

“We think of [1991] as the beginning of the democratization of private capital,” Leech said in a speech made earlier this fall. Up until that time, this field was dominated by big U.S. private-equity firms such as KKR and the Blackstone Group. The appearance of Canadian pension funds as large, deep-pocketed and low-cost investors in corporate acquisitions and restructurings has, to Leech, dramatically and fundamentally changed the private equity business.

OMERS, CPPIP and the Caisse, while as large or even larger in terms of overall assets under management, remain a somewhat different story because of their various investment mandates.

CPPIB, for example, managed $121.3 billion in assets as of the end of 2006, but has allocated $1.9 billion to third-party funds to manage on its behalf while retaining the bulk of the $22 billion it has allocated for private equity (half of which has been invested to date) for airport and other infrastructure investments.

OMERS has similarly set $2.9 billion aside for private equity investments but has invested an additional $8.5 billion in infrastructure through its well-established Borealis arm.

OTPP, on the other hand, “is now no different than Cerberus or Blackstone or KKR,” Leech says. “We do deals directly and when we co-invest it’s because our partners have greater expertise in or better access to a particular market,” such as international media and telecom (in the case of Providence Partners) or a country such a Turkey and surrounding emerging economies.

@page_break@Leech and others note that the long-term nature of Canadian pension private equity investments, which Leech says are unique in the world, is beginning to have a profound impact on the management of the funds’ investments.

“Pension plan private capital can bring stability to the operation in which it’s invested,” he says. “That doesn’t mean that we buy to hold forever. Rather, it does mean that we will hold for as long as we believe we can continue to realize above-average returns.” IE