The Canada Pension Plan Investment Board (CPPIB) will commit up to 10% of its assets to private equity investments over the next five years, as part of a plan to enhance long-term returns.
The CPPIB will invest up to C$1.8bn (US$1.19bn) in private equity, according to John MacNaughton, president and chief executive officer of the CPPIB. Sectors being targeted by the CPPIB for private market investments include real estate, infrastructure projects, oil and gas properties, electrical power projects, and natural resources.
Additionally, the CPPIB revealed that its private equity investments will be made in the form of pooled funds. The pooled funds will provide venture capital to start up companies, investment firms that provide expansion capital to established companies, and merchant banks involved in buyouts and acquisitions.
Mark Weisdorf, vice president of private market investments, said that the CPPIB was looking to make real estate and infrastructure investments in the 2002 financial year and that direct investments in energy and natural resources would be looked at during 2003.
Over the next 12 months, the CPPIB expects to have formed partnerships with up to 15 private equity investment managers. The CPPIB is looking to appoint managers from Canada, the US and Europe, in order to achieve diversification by industry, geographic market and investment style.
According to Weisdorf, the CPPIB is turning to private equity as it: Offers superior returns relative to public equities and fixed-income securities, and provides some risk diversification to our total portfolio. Our target for these investments is to exceed inflation by 8% annually over a 10-year period. With inflation included, the nominal return target is 10% to 11% annually.”
The move to private equity by the CPPIB comes after it announced a C$852m (US$549m) loss for 2000. Of that C$852m loss, C$788m (C$508m) occurred in the fourth quarter.
As of March 31, the CPPIB had C$7.2bn (US$4.75bn) invested solely in publicly traded equities. Approximately 70% is invested in Toronto Stock Exchange (TSE) 300 Index equities and 30% invested in US and international index funds. The CPPIB runs 14% of the Canada Pension Plan, and receives additional funds on a quarterly basis from the Canadian government. Currently, all CPPIB investments are made on a passive basis.
The rest of the Canada Pension Plan is comprised of fixed income assets, which are administered by the Canadian Department of Finance. The fixed income assets - federal, provincial bonds and cash reserves - last year had a market value of C$42bn (US$27.7bn) and earned C$3.8bn (US$2.5bn).
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