The Canadian Pension Plan Investment Board’s (CPPIB) latest foray into private equity is a credit negative, according to a new report from New York City-based Moody’s Investors Service Inc..
The CPPIB’s $12 billion purchase of GE Antares Capital, a middle-market private-equity sponsor, from General Electric Capital Corp. is a negative for both for the CPPIB and for its subsidiary, CPPIB Capital Inc., the report states, “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.”
Assuming no external financing on the transaction, this deal represents 5% of the plan’s assets, which “is a sizable investment for CPPIB and will increase its private-equity portfolio by 25%” to nearly 23% of the overall portfolio, the report states.
Canadian pension and asset managers have been increasing their exposure to alternative investments over the past few years, the report notes, and the CPPIB’s exposure to less-liquid assets (such as private equity, infrastructure and real estate) has grown from just 4% at the end of 2005 to 39% with this latest deal.
As a result, CPPIB now has the highest exposure to private equity as a portion of net investments among major Canadian pension funds, the report notes and the third-highest exposure to alternative assets, exceeded only by the Ontario Municipal Employee Retirement System (OMERS) and Ontario Teacher Pension Plan (OTPP).
“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,” the report states notes.
“Relative to traditional asset classes, associated risk assessment is typically more complex and requires a robust risk management framework.”