The Canadian Pension Plan Investment Board’s (CPPIB) recent move to bolster its exposure to Canadian private equity is a negative for its credit profile says Moody’s Investors Service.
Last week’s announcement from the CPPIB that it will invest another $330 million in private-equity firm, Northleaf Capital Partners, is negative both for CPPIB and its subsidiary, CPPIB Capital Inc., Moody’s says.
See: CPPIB commits additional $330 million to the Canadian private equity market
The rating agency says that it views the increased commitment to the private equity asset class as a negative because it “further concentrates the pension plan’s portfolio in less-liquid alternative investments that are difficult to evaluate in terms of both price and risk.”
The report notes that the CPPIB already has the highest exposure to private equity among the major Canadian pension funds, and the second biggest allocation to alternative assets overall. It says that 34% of its net portfolio is now devoted to less-liquid assets such as private equity, infrastructure, and real estate; which is up from just 4% in 2005. And, its allocation to private equity has increased to 18% in 2014 from 13% in 2010.
“These investments are consistent with CPPIB’s long-term objectives and strategy to increase investment in global private asset classes. However, these less-liquid assets tend to suffer from price opacity and additional risk measurement complexity because of a lack of market data,” Moody’s says.
“Relative to traditional asset classes, associated risk assessment is typically more complex and requires a robust risk management framework,” it adds.