How many of CPP’s Private Equity Funds Are Underperforming Bonds?

As promised (see prior post “CPP Investment Board Private Equity IRRs” May 19-15), I’ve broken out the 54 CPP Investment Board external Private Equity funds I can analyze to give you a sense of just how much capital we have in strong or weak performers.

This analysis only covers $16.7 billion of our $45 billion of PE commitments, which is an incredible amount of money if you think about it. If you want to know the IRRs for the balance of our current $45 billion private equity allocation, you’ll have to do a better job than I of convincing the CPPIB Board of Directors to disclose the true fund returns, as many pension firms do south of the border (see prior representative post “12 questions CPP Investment Board won’t be answering on BNN today” Jan. 17-13).

Based upon this exclusive analysis, assuming it is representative of our overall PE portfolio, we CPPIB beneficiaries may have 30% of our PE allocation committed to underperformers: that’d be $13.5 billion all told. Without a doubt, we currently have $5.0 billion of this $16.7B subset captive in underperforming funds. The $5 billion of committed investment dollars is managed across 16 different funds. The 16 figure is happily down from the grand total of 27 underperforming funds two years ago (see prior “61% of CPPIB Private Equity Commitments sampled are currently below solvency threshold” May 21-13).

Disappointingly, according to the data released by transparent U.S. pension plans regarding our PE funds, Canadians have just $1.8 billion committed to managers that are producing returns of at least 20% (via 7 different funds).

That 20% figure is very investment return that the global buyout industry is targeting to earn its investors:

IRR Performance of 54 CPPIB Private Equity Funds

30%+ IRR: 3 funds
20-30% IRR: 4 funds
14-19.9% IRR: 11 funds
10-13.9% IRR: 11 funds
7-9.9% IRR: 9 funds
0-6.9% IRR: 13 funds
negative IRR: 3 funds

Those IRR figures do not take into consideration the impact of currency swings. This is due to the fact that CPPIB discloses our investments in the currency of the fund, and doesn’t share with us the performance impact of the C$ over the course of the fund’s life. For example, if we make 20% on a U.S. dollar-denominated fund investment, but lose 20% on our currency exchange, CPPIB’s website only discloses the underlying fund performance and not the fact that our gains were wiped away.

Regardless of the currency swings, we have big money in many weaker funds, and more modest sums in the strong ones (at current exchange rates):

IRR Performance of 54 CPPIB Private Equity Funds by Fund Commitment

30%+ IRR: $544 million committed
20-30% IRR: $1.235 billion committed
14-19.9% IRR: $3 billion committed
10-13.9% IRR: $3.642 billion committed
7-9.9% IRR: $3.1 billion committed
0-6.9% IRR: $4.6 billion committed
negative IRR: $425 million committed

If you ever wonder why the CPPIB continues to quickly flip good investments, when its mandate is supposed to be all about buying long term assets and holding them forever — ala Warren Buffet — the answer may well be that for every 7 great funds, we have 16 that have not lived up to expectations. That reality may drive CPPIB to sell good “direct investments” and crystalize our paper gains in an effort to mitigate this apparent near term performance shortfall. There may well be another explanation for the recent sales of Suddenlink, Gates Corp., Air Distribution Technologies, or the early exit from a 7 year loan to the Formula One racing circuit. But ask yourself: if a global private equity firm is buying an asset from CPPIB, why are we selling in the first place? Obviously, when Blackstone or Apollo buy a great company from us they plan to make a good return on their acquisition; and given the weekly flows that the CPPIB receives from our paycheques, they have to turn around and quickly reinvest the profits they make on these exits in an even more appealing asset.

One hopes that as the individual underlying PE portfolios continue to mature, individual fund performances will brighten. While there has been some directional improvement as compared to two years ago, many of the larger-commitment funds above are of the 2005-2007 vintage. One assumes there’s not much left on the operational improvement front after almost 10 years of active fund management. There could still be harvesting to do, but, again, there won’t be as many businesses left to sell compared to our more recent PE commitments (2009-).

A fund such as ours should have a decent allocation to the private equity asset class, there’s no question about that. But that doesn’t mean we aren’t left with lots of questions, just the same.

MRM

 
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Wellington Financial portfolio co. Xactly files for NYSE IPO

We had some particularly good news earlier today, as reported by Fortune’s Dan Primack:

Xactly Corp., a San Jose, Calif.-based provider of cloud-based incentive compensation solutions for employee and sales performance management, has filed for a $75 million IPO. It plans to trade on the NYSE under ticker symbol XTLY, with J.P. Morgan and Deutsche Bank serving as lead underwriters. The company reports an $18.5 million net loss on $61 million in revenue for the fiscal year ending Jan. 31, 2015. The company has raised over $80 million in VC funding from firms like Rembrandt Venture Partners (15.2% pre-IPO stake), Bay Partners (11.7%), Alloy Ventures (11.5%), Key Venture Partners (11.2%), Bridgescale Partners (9.4%), Outlook Ventures (8.4%), Illuminate Ventures and Glynn Capital Management. www.xactlycorp.com

We first financed Xactly two years ago this month via our Fund IV, and happily provided additional follow-on funding as the need arose. Our non-amortizing growth capital fulfilled the company’s requirements during the lead-up to a bulge bracket-led tech IPO. Management had the capital they needed to focus on growth, and the existing investors didn’t dilute themselves; this is a classic role for an experienced venture debt firm.

MRM

 
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CPP Investment Board Private Equity IRRs

How long has it been? I can’t begin to count the weeks.

And yet you keep asking “where are the blogs”, just the same. So, to satisfy your curiosity and inexplicable continuing interest, I am back. At least temporarily.

In celebration of this week’s annual CVCA conference, I have pulled together a review of the externally-managed private equity portfolio as structured by our managers at CPP Investment Board. It has been a full 15 months since the last review (see prior post “CPP Investment Board’s external Private Equity Managers continue to drag returns” Feb 17-14), which is partly a function of being cowed into submission, while at the same time losing any free time (think bridge) to do the kind of organic early-morning research you’ve come to expect over the past nine years.

As you may recall, CPP Investment Board publishes a quarterly tally of PE fund commitments, the currency of the fund, plus what has been drawn, returned and so forth. Despite my best attempts, they have declined to publish (see prior representative post “CPPIB’s new website fails to improve opaque disclosure” Aug. 8-13) the IRRs for any of these funds, nor the impact of the currency swings on the money that we’ve already deployed, unlike public managers in California, New Mexico, Oregon, Texas and Washington, for example. Nor a pooled IRR calc for our PE investment program, again, unlike the leading U.S. pension funds.

Fortunately, we share enough fund investments (54) with these other pension plans that I’m able to solve for the IRRs on the funds themselves, although the impact of the C$ is still a mystery. With 169 different funds (32%), these findings are likely indicative of the overall PE campaign, particularly since they represent ~C$17B of our C$45.5B of our total external commitments (36.4%).

Following the “simple return” results that are released by the CPPIB are the far more useful “internal rate of return” data provided by one or more of CalPERS, CalSTRS, NMERB, Oregon and WSIB (when a figure is in square brackets, that means it is not as up-to-date as others for that particular fund).

As I always remind, notice the stark difference between the simple return calculations that CPPIB publishes and the true industry-standard investment returns (IRRs) released by these major U.S. public pension plans. Apax Europe VII’s so-called 34% gain sounds soooo much better than a 5.7% IRR to the unwashed pensioner. Particularly since a 5.7% IRR for the overall program would eventually require workers and employers to increase their CPP contributions given the CPP’s solvency threshold is currently 6%:

Advent International GPE VI (2008): CPPIB: +80%, CalSTRS: 17.9% IRR, Oregon: +19.3% IRR

Apax Europe VII (2007): CPPIB: +34%, CalSTRS: +5.7% IRR, Oregon: +5.8% IRR

Apollo V (2002): CPPIB: +109%, CalPERS: 37.6% IRR

Apollo VI (2005): CPPIB: +53%, CalPERS: 9.3% IRR, CalSTRS: 9.9% IRR, Oregon: +9.9% IRR

Apollo VII (2007): CPPIB: +80%, CalPERS: 25.8% IRR, CalSTRS: 26.8% IRR, NMERB: 27.6% IRR

Ares Corporate Opportunities Fund (2003): CPPIB: +59%, CalPERS: 13.1% IRR

Ares Corporate Opportunities Fund II (2006): CPPIB: +66%, CalPERS: 13.6% IRR

Ares Corporate Opportunities Fund III (2008): CPPIB: +59%, CalPERS: 22.3% IRR

Birch Hill Equity Partners III (2005): CPPIB: +90%, CalPERS: 11.9% IRR

Blackstone Capital Partners IV (2002): CPPIB: +149%, CalSTRS: 36.4% IRR

Blackstone Capital Partners V (2005): CPPIB: +60%, CalSTRS: 8.0% IRR

Blackstone Capital Partners VI (2008): CPPIB: +32%; CalSTRS: 19.3% IRR

Bridgepoint Europe II, LP (2001): CPPIB: +70%, CalPERS: 29.6% IRR

Bridgepoint Europe III, LP (2005): CPPIB: +22%, CalPERS: 2.5% IRR, WSIB: +2.5% IRR

Bridgepoint Europe IV, LP (2007): CPPIB: +37%, CalPERS: 10.4% IRR, WSIB: +10.4% IRR

Carlyle Venture Partners II (2002): CPPIB: +11%, CalPERS: 1.5% IRR

Charterhouse Capital Partners IX (2008): CPPIB: +44%, WSIB: +7.7% IRR

Coller International Partners IV (2002): CPPIB: +42%, CalPERS: +11.8% IRR, Oregon: 11.8% IRR

Coller International Partners V (2006): CPPIB: +23%, CalPERS: +9.3% IRR, Oregon: +9.3% IRR

CVC European Equity Partners IV (2005): CPPIB: +91%, CalPERS: +17.4% IRR, CalSTRS: 17.0% IRR, Oregon: +17.2% IRR

CVC European Equity Partners V (2008): CPPIB: +46%; CalPERS: +9.8% IRR, CalSTRS: 9.4% IRR, Oregon: +9.7% IRR

Diamond Castle Partners IV (2005): CPPIB: +2%, Oregon: +1.5% IRR

First Reserve Fund XI (2006): CPPIB: +7%, CalPERS: +1.3% IRR, CalSTRS: +1.3% IRR, Oregon: +0.9% IRR

First Reserve Fund XII (2008): CPPIB: +14%, CalPERS: +4.6% IRR, CalSTRS: +4.6% IRR, Oregon: +4.6% IRR

FountainVest China Growth Fund (2008): CPPIB: +20%, CalSTRS: 7.2% IRR

Hellman & Friedman Capital Partners V (2004): CPPIB: +166%, CalPERS: +28% IRR, CalSTRS: +27.6% IRR

Hellman & Friedman Capital Partners VI (2006): CPPIB: +71%, CalPERS: +12.8% IRR, CalSTRS: 12.9% IRR

Hellman & Friedman Capital Partners VII (2009): CPPIB: +17%; CalPERS: +10.4% IRR, CalSTRS: +10.3% IRR

Hony Capital Fund 2008 (2008): CPPIB: +12%, CalSTRS: +2.9% IRR

KKR 2006 (2006): CPPIB: +52%, CalPERS: +7.1% IRR, CalSTRS: +7.0% IRR, Oregon: +8.5% IRR

KKR Asian Fund (2007): CPPIB: +78%, CalPERS: +14.2% IRR, Oregon: +14.3% IRR, WSIB: +14.2% IRR

KKR European Fund II (2005): CPPIB: +30%, CalPERS: +3.9% IRR, Oregon: +4.5% IRR, WSIB: +4.5% IRR

KKR European Fund III (2008): CPPIB: +44%, CalPERS: +9.7% IRR, Oregon: +10.4% IRR, WSIB: +10.5% IRR

KKR Millennium Fund (2002): CPPIB: +75%, CalPERS: +16.6% IRR, Oregon: +16.6% IRR, WSIB: +17.0% IRR

KSL Capital Partners II (2006): CPPIB: +45%, Oregon: 14.4% IRR, WSIB: +14.4% IRR

Lexington Capital Partners V (2002): CPPIB: +68%, CalPERS: +19.4% IRR

Magnum Capital (2007): CPPIB: +2%, CalPERS: +1.3% IRR

MatlinPatterson Global Opportunities (2001): CPPIB: +76%, Oregon: +15.9% IRR

MatlinPatterson Global Opportunities III (2007): CPPIB: +20%, Oregon: +5.4% IRR

New Mountain Partners III (2007): CPPIB: +29%, CalPERS: +8.2% IRR, Oregon: +8.1% IRR

Onex Partners (2003): CPPIB: +207%, CalSTRS: +38.4% IRR

Onex Partners III (2008): CPPIB: +26%, CalSTRS: +10.8% IRR

Permira IV (2006): CPPIB: +47%, CalPERS: +6.4% IRR, WSIB: +7.4% IRR

Providence Equity Partners VI (2006): CPPIB: +15%, CalPERS: +5.3% IRR, CalSTRS: +5.9% IRR

Silver Lake Partners II (2004): CPPIB: +68%, CalPERS: +10.7% IRR, WSIB: +10.5% IRR

Silver Lake Partners III (2006): CPPIB: +63%, CalPERS: +18.7% IRR, WSIB: +18.5% IRR

Terra Firma Capital Partners III (2006): CPPIB: -36%, Oregon: -19.4% IRR

TPG Asia Fund V (2007): CPPIB: +12%, CalPERS: +3.2% IRR, CalSTRS: +3.2% IRR

TPG Partners IV (2003): CPPIB: +94%, CalPERS: +15.9% IRR, CalSTRS: +15.8% IRR, Oregon: 15.8% IRR

TPG Partners V (2006): CPPIB: +25%, CalPERS: +3.1% IRR, CalSTRS: +4.4% IRR, Oregon: +4.4% IRR

TPG VI (2008): CPPIB: +35%, CalPERS: +11.0% IRR, CalSTRS: +11.1% IRR, Oregon: +11.7% IRR

Triton Fund III (2008): CPPIB: +20%, WSIB: +5.4% IRR

Welsh, Carson, Anderson & Stowe X (2005): CPPIB: +47%, CalPERS: +6.9% IRR, CalSTRS: +6.9% IRR

Welsh, Carson, Anderson & Stowe XI (2008): CPPIB: +44%, CalPERS: +14.2% IRR, CalSTRS: +14.1% IRR

As you’ll see, many funds have pulled themselves out of negative return land. 24 months ago, 8 of the 54 funds that one could analyze had produced a negative IRR; as of Sept. 2014, that figure had fallen to just three. Tomorrow, I’ll break down how these funds are doing based upon capital we’ve committed and vintage year.

(One respectful request of my friends at CPPIB: please don’t shoot the messenger. These figures are objective. The disclosure you provide is by choice. The money being invested belongs to all of us. The performance of the program affects our payroll taxes. You should embrace this sunshine, and be proud to be held to the same performance and transparency standards that you hold the PE and VC industry to.)

MRM

 
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Wellington Financial Provides $3 Million Financing to Automation and Management Software Company

Earlier this month, we closed a new US$3 million venture debt financing facility for a leading U.S.-based provider of automation and management software.

Although the firm is VC-backed, our capital was a much more cost-effective means of funding the company’s next phase of growth. Our interest-only structures continue to be a compelling choice for high growth companies that appreciate the flexibility of our True Growth Capital relative to what is available in the commercial bank market.

Since 2012, Wellington Financial LP has led more than $230 million in transactions, making it one of the most active funds of its kind in North America.

MRM

 
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Wellington to introduce no cov, no am, low interest loan product

Published on April 1, 2015 by in General

As a former boss of mine once said about Free Trade, “Only donkeys never change their minds.”

For years, the Wellington team has thought that the best way to succeed in our business over the long term is to find good companies and provide them with appropriately-priced, flexible capital. By flexible, I mean useful. I mean, “no am.” Rather than the traditional amortizing loan product that pervaded the tech debt industry for two decades prior to our firm’s founding in 2000. The credit check on the “no am” structure was a financial covenant, which was meant to ensure that one could have a meaningful conversation with your portfolio company should they go wildly offside the business plan that you funded against.

Some U.S. venture debt funds avoided utilizing a financial covenant, preferring to allow the amortization of the loan to manage their exposure to any individual loan. Regulated banks, however, didn’t have that luxury, even in the tech space. As any CFO will tell you, A/R margins, borrowing base certificates, and amortizing term loans (with a short principal holiday at most) were the norm throughout all of the last decade. Commercial bank credit officers understood that a loan without a covenant was merely a form of secured equity (as is a VC pref share) but at debt pricing.

They knew that the concept would put the bank’s capital at unnecessary risk, and even if they could get comfortable with a specific company, they were be confident that the bank inspectors from FDIC, OCC, OSFI or the Federal Reserve would slap them for it…so why bother?

Over the past 24 months, we’ve noticed that several tech-focused commercial banks have decided to dispense with covenants altogether, including MACs, just as the larger commercial banks have let leverage levels grow to all-time highs (see prior post “Bloomberg: Regulators stand by while U.S. bank lenders get footloose” May 14-14). All while dropping loan rates to 4-5% all-in for sub $25 million revenue firms that are losing money. Those rates are below what high-yield bonds cost a company with $250 million of EBITDA.

With that in mind, it seems to me that our commercial response should be to start doing “no am”, “no cov”, no MAC, no collateral deals at rates that are as low as they’ve been since WWII.

If bank regulators don’t have a problem with it, despite the fact that banks are levered 20-1 and are ultimately guaranteed by the taxpayer, why should our pension fund limited partners feel they’re at risk?

I mean, what could go wrong?

MRM
(disclosure: yes, this is an April Fool’s joke; the last part anyway)

 
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