Canadian pension plans see promising investment opportunities in private equity, and are shifting towards more direct private equity investments from fund-based investments, executives at four Canadian pension plans said on Tuesday.

Speaking at the 2010 Private Equity Symposium in Toronto, the executives expressed optimism around the current private equity environment. After a challenging year in 2009, the private equity market is now returning to more normal conditions, they said.

“We are entering into a brand new era of private equity, and I think that creates opportunity,” said Ed Rieckelman, vice-president of the private equity group at the Alberta Investment Management Corporation. “If you look at how the cycles have gone over the last 15 years, the next three years should be fantastic for investing in private equity.”

The fact that such a major proportion of the businesses around the world are private firms means there are constantly investment opportunities that are not available in public markets, Rieckelman said.

Jim Orlando, managing director of OMERS Private Equity, agreed that private equity investing opportunities are plentiful.

The private equity realm “provides enhanced returns over public market investments,” he said.

But the panelists warned that it’s critical to have a long-term time horizon when investing in private equity, since it can take time for those investments to produce returns. They noted that pension funds are well suited to be investing in private equity since they have such a long-term investment horizon.

“Fortunately, we have more patient capital,” Rieckelman said.

The panelists acknowledged that the period from 2006 to 2009 was a volatile and abnormal time for private equity markets. Rieckelman called last year’s performance by many private equity funds “brutal,” which he attributed to a decline of discipline by many fund companies.

A major way that pension funds make private equity investments is through private equity funds, as well as fund of funds. But the panelists said their pension funds were beginning to allocate a greater proportion of their funds towards direct private equity investments.

Tanya Carmichael, a portfolio manager at the Ontario Teachers’ Pension Plan, said the plan has a heavy emphasis on direct equity, with more than 40 of its 50 investment professionals dedicated to direct private equity investing.

OMERS currently allocates 65% of its private equity to funds, but aims to eventually have 80% of its portfolio in direct investments, Orlando said.

The Alberta Investment Management Corp. is similarly shifting its focus from funds to direct equity, Rieckelman said. Its goal is for 60% to 70% of its private equity portfolio to be allocated to direct investments, up from roughly 20% currently.

IE