As LPs continually seek to reduce the costs associated with fund investing in the private equity space, one Canadian public pension fund has made the decision to move away from fund investing and shift its focus towards making direct private equity investments.
OMERS, one of the largest public pension funds in Canada, received a 7.23% rate of return on its private equity portfolio for 2011. This is substantially above its benchmark of -5.58% for the year; although it is significantly lower than the 22.21% return that it saw in 2010. During 2011, OMERS made record levels of direct private equity investments, committing CAD 1.6 billion to the asset class through both new commitments and strategic follow-on investments. This high level of direct investing ties in with OMERS’ long term target to have 80% of its private equity portfolio allocated to direct investments by 2015. As of December 2011, 57% of OMERS portfolio was allocated to direct investments and the remaining 43% was allocated private equity fund commitments. At this time, the pension fund was unlikely to make any new private equity fund commitments, except for strategic purposes or in markets whereby it lacks the expertise and resources to invest directly, such as China.
Similarly, another Canadian investor, CDP Capital - Private Equity Group was actively making direct private equity investments during 2011. CDP Capital saw a rate of return of 7.1% on its private equity portfolio in 2011, which unlike OMERS, was slightly below its benchmark of 7.4%. During 2011 it had made new commitments of CAD 2.5 billion, of which CAD 1.3 billion was direct investments. However, although CDP Capital had made a significant number of direct investments in 2011, it was still actively investing in private equity funds, and had made new fund commitments of CAD 1.2 billion during 2011. It is particularly active in committing to buyout funds. Approximately 80% of its private equity fund portfolio is made up of buyout investments.
Whether the increased level of direct investing implemented by OMERS and CDP Capital Private Equity Group provides increased returns over the longer term is yet to be proven. However, it is clear that a number of investors are beginning to adopt this investment approach, in order to move away from the high levels of fund investing favoured by many LPs.
Preqin’s Investor Intelligence database tracks 109 active Canada-based investors in the private equity space, which includes 29 public pension funds, 19 private sector pension funds and 19 foundations and endowment plans.