An influx of capital from wealth channels is threatening to change a dynamic that has existed for decades
by Swetha Gopinath
Institutional investors will not allow alternative asset managers to start charging them for large deals despite the emerging competition from retail money, according to Canada Pension Plan Investment Board, one of the world’s largest retirement funds.
Large pensions and sophisticated investors like CPPIB have for decades jointly invested with buyout firms in marquee transactions on a no-fee, no-carry basis. An influx of capital from wealth channels now threatens to change that dynamic.
Any moves by alternative asset managers to levy co-investment fees “will undoubtedly have an impact on our appetite for the asset class, because that’s the model we run,” CPPIB Chief Executive Officer John Graham said in an interview on Wednesday. If the firm can’t keep the traditional structure “we actually will tend not to partner with them,” he said.
Private equity firm EQT, for one, has been working to quell concerns that it might start charging investors to do those transactions after its chief executive officer described it as a potential new source of revenue. Institutions are “economic animals” and if the fee model changes they will reevaluate their allocations to the sector, Graham said.
The shift in the investor base in private equity is playing out even as institutions get more selective about where they park their money after waning performance from the asset class in recent years. Larger investors are also worried they’ll get smaller allocations for deals amid the competition from wealthy individuals.
CPPIB had net assets of C$777.5 billion ($562 billion) at the end of September. About 29% of the portfolio is made up of private equities, it reported earlier this year. It’s also a big investor in real estate, infrastructure and credit.
It’s still too early to tell how the influx of retail money will impact the industry and co-investments like those favored by CPPIB, Graham said.
“Institutional investors are still the bedrock investors,” he added. “Retail might be the shiny new thing, but for 20-plus years, institutional investors have helped build these franchises.”
Still, he said, the influx of retail brings in other considerations, like regulatory scrutiny. Investments like junk leveraged credit “are buyer beware markets,” he said. “These are not public equity markets, which is a gentleman’s game.”
CPPIB is also taking a differentiated approach to public markets, deliberately choosing to be underweight the Magnificent Seven megacap technology stocks, which means the manager currently underperforms the S&P 500.
“Diversification is an act of humility,” he said. “The concentration level in the U.S. equity markets is not a risk we want to take.”
Copyright Bloomberg News
