Canada’s largest pension fund plans to nearly double the size of its credit holdings over the next five years, and it’s counting on an upturn in leveraged buyouts to generate some of that growth.
Andrew Edgell, global head of credit investments at Canada Pension Plan Investment Board, said the fund expects to have more than $115 billion (US$84.1 billion) in credit assets by 2029, compared with about $62 billion today. Much of that will be handled by its in-house investment team, which is prepared for a thaw in the buyout market after a couple of slow years.
“There’s pent-up demand. In discussions with sponsors, there’s a greater sense of optimism,” Edgell said in an interview. “There’s also so much dry powder that’s really pushing the LBO market to get unlocked.”
Global mergers and acquisitions rebounded in the first quarter of 2024 compared with a year earlier, driven by mega-deals in the finance, software and energy sectors. Still, there’s a long way to go before private equity firms return to the brisk dealmaking pace seen a couple of years ago, and uncertainty about interest rates remains a headwind.
CPPIB, the manager of Canada’s national pension fund, is expected to reach $1 trillion in assets around 2030, from almost $600 billion today. It has been investing in private markets for years, and its top executives see attractive returns in plunging even deeper into private lending — which already represents about two-thirds of its credit holdings.
Less than 20 per cent of the fund’s credit portfolio is being managed by third parties, according to Edgell, though the firm maintains strong relationships with some of the world’s largest alternative asset managers. It recently committed $350 million to Blackstone Inc.’s BGreen III private credit fund for renewable power and energy infrastructure. It has also provided financing to support acquisitions led by Carlyle Group Inc., KKR & Co. and CapVest Partners, among others.
“We’ve sent the message to the market that we’re a direct lender, but we want to be pragmatic about it,” Edgell said. “And because we have direct investment expertise, we can do co-investments or work on opportunities with those partners on sizable deals.”
CLOs Return
A revival in the market for collateralized loan obligations could provide another boost to deal activity, Edgell said. New-issue CLOs have increased 53 per cent compared with 2023, Bloomberg News reported last week. “CLOs are being issued again, which improves the LBO math,” Edgell said.
CLOs are divided into tranches, with the senior portion rated as investment grade, the mezzanine part below that and an equity slice making up the riskiest layer. Big buyers of the senior tranche — typically more than 60 per cent of the instrument’s structure — had backed off for a while, given their ability to lock in rich yields from more vanilla debt instruments.
Still, without a lot of LBO activity yet, lenders are “clamoring” to compete for the transactions that come up, Edgell said. As deal flow increases, “we’ll get to a more natural balance and you won’t have lenders having to do silly things,” he said.
Competition among lenders is bringing down spreads for issuers in general, even if the total cost of borrowing is still elevated due to high interest rates, Edgell said.
Issuers that are only concerned about price may choose between private credit and other sources of capital, he said. The best private credit managers however will develop long-term relationships with sponsors and earn loyalty from issuers that may be willing to pay a little bit more in return for flexible loan terms, he said.
“It’s more fit-for-purpose for their business plan. And they know that if something goes sideways, then they know who they’re dealing with,” Edgell said. “They know they’re dealing with a partner that has capital.”
The potential risk in private credit is concentrated in smaller firms that haven’t been around for long, he said. But, he said he doesn’t see any systemic risks in the asset class.
“One thing to keep in mind is the move to private credit is actually a great thing for the capital markets because it matches the assets with a more suitable liability. And even when there’s leverage used, it’s very little leverage,” Edgell said.
Every time you see Andrew Edgell appear in a Bloomberg article, make sure you read it carefully.
Last time I spoke with him was at the beginning of the year when I went over private debt's next stress test.
Now we read that CPP Investments is going to nearly double the size of its credit holdings over the next five years, and it’s counting on an upturn in leveraged buyouts to generate some of that growth.
Is this possible? Aren't leveraged buyouts in the doldrums?
Today, Toby Nangle of the Financial Times recently published these comments on PE's winter:
It’s amazing to think quite how recently private capital management was a pretty-much-nothing industry. Back in 2003, the entire sector’s AUM was less than $500bn. That’s around a quarter of an Nvidia or a single SPDR S&P 500 ETF.
Things have changed.
Along the way, Blackstone overtook BlackRock to become the most valuable asset management firm and the private market explosion brought riches to many many managers, as well as prompting a growing political backlash.But, as readers know, not all is hunky-dory in PE-land. Exit values are down 66 per cent from their 2021 peak. In 2023, 38 per cent fewer buyout funds closed, and deal values have fallen by 60 per cent over the past two years.
With public markets surging and the US steadfastly refusing to enter recession, what’s been going on? The short answer is that higher bond yields have clogged up the PE pipeline. Bain & Co’s latest private equity review gives a longer answer. This was expertly covered in MainFT upon release, but we thought we’d take the chart-curious through an extended parsing of the report.
Take the time to read Bain & Co's Global Private Equity Report 2024 here.
Here are some of the highlights:
Clearly higher rates have led to lower deal activity and lower exit values but if rates stabilize and inflation comes down, conditions are ripe for a pickup in activity.
Thus far, it's a tough slug. Just read Roula Khalaf's FT article on how Princeton endowment chief sees ‘worst ever’ private equity liquidity:
Princeton University’s endowment, known for its aggressive bets on private equity, is facing the “worst ever environment” for liquidity in the asset class as a slump in dealmaking and public listings weighs on returns, according to its outgoing chief investment officer.
“Until the last few weeks, I have seen very little liquidity coming out of the private equity and venture capital space,” said Andrew Golden in an interview with the Financial Times. “We have seen some potential thawing more recently, but we can’t be sure whether or not that’s really a start of a new trend or if that’s just a blip.”
Signs of improving liquidity “can sometimes just be a head fake”, he said, “that doesn’t mean it’s necessarily going to continue.”
Golden will retire in June after almost 30 years running one of the world’s largest endowments, where he now oversees a $34bn portfolio.
His remarks came after the Princeton University Investment Company suffered a 1.7 per cent loss last year, a product mainly of private equity underperformance, after growing by almost 10 times since he took office in 1995.
Where am I going with this? Quite simply, we need to start seeing a pickup in M&A and private equity activity for CPP Investments' to double the size of its credit holdings over the next five years, and unless we see an upturn in leveraged buyouts to generate some of that growth, that target will not be achieved.
The good news is we are already starting to see a small pickup in the LBO markets.
Silver Lake recently lined up as much as $8.5 billion of debt financing for its buyout of Endeavor Group Holdings Inc., the talent agency and controlling investor in WWE and the Ultimate Fighting Championship:
JPMorgan Chase & Co. is leading underwriters on a portion of the financing structured as a leveraged loan, according to people with knowledge of the matter. The makeup and amount of debt could still change, said the people, who asked not to be named because they’re not authorized to speak publicly.
Competition between banks and private credit lenders to finance deals has risen to a fever pitch amid a dearth of leveraged buyouts and acquisitions. Demand for new paper from investors is high as the loan market tightens to levels not seen since 2022.
Silver Lake and JPMorgan declined to comment, while Endeavor didn’t respond to a request seeking comment.
Goldman Sachs Group Inc., JPMorgan, Morgan Stanley, Bank of America Corp., Barclays Plc, Deutsche Bank AG and Royal Bank of Canada acted as lead financing arrangers and lead financial advisers to Silver Lake, according to a press release. LevFin Insights earlier reported some details of the financing.
The biggest acquisition deal in the leveraged loan market this year included around $5 billion of loans in February for KKR & Co.’s purchase of a stake in Cotiviti Inc. That deal marked a key victory for Wall Street banks over private credit lenders.
Banks and direct lenders are going toe-to-toe to finance deals such as the buyout of Sanofi’s consumer health division and the potential buyout of Apleona Group GmbH. Direct lending firms led by Ares Management Corp. and Blue Owl Capital Inc. are set to provide roughly $4.8 billion of debt financing for the acquisition of pharmaceuticals manufacturer Catalent Inc.
Endeavor Group agreed to be acquired in a $13 billion buyout by Silver Lake earlier this month. The transaction is expected to close by the end of the first quarter of 2025.
I am bringing this up because big banks and and direct lenders are going toe-to-toe to finance big leveraged buyouts but CPP Investments has strategic relationships with these banks as well as private equity sponsors like Silver Lake, KKR, Blackstone and many others.
Don't forget, CPP Investments is one of the biggest private equity investors in the world and CPP Investments has those strategic relationships to build out its direct lending capabilities.
Again, from Bloomberg article:
Less than 20 per cent of the fund’s credit portfolio is being managed by third parties, according to Edgell, thoughthe firm maintains strong relationships with some of the world’s largest alternative asset managers. It recently committed $350 million to Blackstone Inc.’s BGreen III private credit fund for renewable power and energy infrastructure. It has also provided financing to support acquisitions led by Carlyle Group Inc., KKR & Co. and CapVest Partners, among others.
“We’ve sent the message to the market that we’re a direct lender, but we want to be pragmatic about it,” Edgell said. “And because we have direct investment expertise, we can do co-investments or work on opportunities with those partners on sizable deals.”
Got it? Co-investments on larger transactions with world class partners to reduce fee drag in direct lending, just like they do in private equity.
Bottom line: I trust Andrew Edgell and his entire team and think it's unambiguously a good thing that they are aiming to be a much bigger player in the direct lending business.
Lastly, on a sad note, Michael Hill, the head of OMERS Infrastructure and formerly Americas Head of Sustainable Energies at CPP Investments informed me of the passing of Ryan Selwoood, CIO of Bregal Investments and former Head of Direct Private Equity at CPP Investments.
Ryan was on a business trip with Alain Carrier, CEO of Bregal Investments and also former executive at CPP Investments, when he suddenly died.
I never met Ryan but we did exchange emails long ago and he was a very nice man, had a stellar reputation and was very much loved by his family, friends and colleagues.
The news stunned many including me as he was only 51-years-old, two years younger than me and he died way too soon.
Please take the time to read Ryan Selwood's obituary here.
Our thoughts and prayers are with his wife, children and entire family during this difficult time.
I know I'm ending it on a sad note but it's a good reminder to all of us, including me, that life is short and we simply can't take our time alive for granted.
Below, Mark Wiseman, former chair of AIMCo and former CEO OF CPP Investments, joins BNN Bloomberg to weigh in on the ongoing debate on where Canadian pension funds should be investing. He says he'd love to see more pension fund money in Canada, but there are several barriers to achieving that.
I like the part where he says it's not taxes, it's money hard working Canadians and their employers put into a fund to secure their retirement, we don't want to change the governance to make it a stealth tax.
Also, Blackstone president Jon Gray joined Andrew Ross Sorkin on CNBC to discuss their quarterly results and the tailwinds they’re seeing in private credit and private wealth, among other key areas.