At last, some legit return figures to chew on.
For years, I’ve tried to give you all some insight into how our money was doing in the hands of the managers over at CPP Investment Board, and, by extension, our external PE fund managers. Each quarter, CPPIB publishes a few figures drawn from their private equity general partnership investments (see indicative prior post “CPPIB Q2 2011 General Partner performance numbers” Dec. 20-11), but that’s the extent of the disclosure.
Canada’s largest money manager gives off the illusion of being transparent, but it knowingly holds back just enough information so that we can’t know whether or not the $29 billion external PE program is meeting the CPPIB’s publicly-stated return thresholds. Unlike smaller government plans in U.S. States such as California, Texas, Oregon and Washington.
CPPIB gladly tells us how much they’ve committed to Fund XYZ, the year of the commitment, how much of that commitment the PE general partner has drawn to date, the reported value of that drawn capital (usually based upon GAAP), and the value of the cash distributions received. Add that up, and you’ve got the total “simple return” of the investment so far — based upon the reported value plus the distributions made to date.
What’s missing in that calculation is the true measure of the investment, at least as far as the PE world and most LPs would judge it: the actual internal rate of return. The idea being that if you invested $1, and received $1.30 back in three years, that return profile is far more valuable to you than if you received your $1.30 some 10 years later. After inflation, you’d have likely lost money over that 10 year time horizon. Same simple return, but a very different outcome for the investor.
CPPIB’s stated long term investment goal is to make a “real return” of 4% per year, which means 4% over the Bank of Canada’s current medium term 2% inflation bogey (see prior post “Did CPPIB hit its 4.0% ‘real return’ bogey? part 2” May 21-12).
Unfortunately, CPPIB won’t tell us what our IRR is when it comes to our PE fund investments. They give off a taste of the underlying performance, but this lack of transparency means we beneficiaries have no idea how to actually gauge the success or failure of our $29 billion PE program using traditional industry measures (see prior post “Thanks to Washington, we know how CPPIB is doing” Mar 29-11). Fortunately, both the Washington State Investment Board and the California State Teachers Retirement System report the IRR information on a quarterly basis. And it just happens the two groups have made 37 investments that the CPPIB has also committed to (of CPPIB’s 135 different external funds). It’s not perfect, but 27% is a meaningful and representative sample for the purposes of any such exercise.
The figures that follow cover three categories: CPPIB’s commitment, paid-in-capital (which tells you how much of the fund is invested in deals and/or drawn to pay management fees), and reported value + distributions (which tells you what the notional simple return of the fund is against the paid-in-capital figure). That figure is based in large part on what the manager believes the portfolio is worth as at June 30, 2012, subject to GAAP fair value accounting. The year in the brackets reflects the year that the investment commitment was made by CPPIB. MM equals millions.
The comparison is simple in a way: how CPPIB says we’re doing versus the actual US$ IRR that’s reported by CalSTRS (as at March 31, 2012) or WSIB (as at June 30, 2012) for the very same fund. The confusion that might arise as a result of these different reporting approaches is pretty compelling, as you’ll see in the first few names.
CPPIB reports a simple return of 33.7%, 19.3% and 28.6% on Advent, Apax and Apollo, respectively; CalSTRS says the IRRs on those same funds are 12.4%, 6.1% and 7.9%. Not quite as appealing when put that way, are they?
Advent International GPE VI (2008): E375MM, E300.7MM, E401.9MM;
CPPIB: +33.7%, CalSTRS: 12.4% IRR
Apax Europe VII (2007): E500MM, E462.8MM, E552.3MM;
CPPIB: +19.3%, CalSTRS: +6.1% IRR
Apollo VI (2005): US$400MM, US$482.9MM, US$620.8MM;
CPPIB: +28.6%, CalSTRS: 7.9% IRR
Apollo VII (2007): US$600MM, US$590.3MM, US$783.2MM;
CPPIB: +32.7%, CalSTRS: 21.4% IRR
Blackstone Capital Partners IV (2002): US$185MM, US$204.9MM, US$469.4MM;
CPPIB: +129%, CalSTRS: 37.8% IRR
Blackstone Capital Partners V (2005): US$413.5MM, US$402.8MM, US$416.3MM;
CPPIB: +3.3%, CalSTRS: 2.0% IRR
Blackstone Capital Partners VI (2008): US$500MM, US$59.2MM, US$55.4MM;
CPPIB: -6.4%; CalSTRS: -23.5% IRR
Bridgepoint Europe III, LP (2005): E100MM, E91.3MM, E100.6MM;
CPPIB: +10.1%, WSIB: +0.9% IRR
Bridgepoint Europe IV, LP (2007): E300MM, E189.5MM, E218.3MM;
CPPIB: +15.2%, WSIB: +5.1% IRR
Charterhouse Capital Partners IX (2008): E200MM, E79.5MM, E100.4MM;
CPPIB: +26.3%, WSIB: +9.5% IRR
CVC European Equity Partners IV (2005): E200MM, E190.2MM, E338.2MM;
CPPIB: +77.6%, CalSTRS: 15.7% IRR
CVC European Equity Partners V (2008): E350MM, E247.2MM, E324.5MM;
CPPIB: +31.3%; CalSTRS: 10.8% IRR
First Reserve Fund XI (2006): US$300MM, US$305.9MM, US$342.2MM;
CPPIB: +11.9%, CalSTRS: 4.8% IRR
First Reserve Fund XII (2008): US$500MM, US$380.3MM, US$377.2MM;
CPPIB: -1%, CalSTRS: 3.9% IRR
FountainVest China Growth Fund (2007): CNY1,500MM, CNY943.2MM, 1,041.1MM;
CPPIB: +10.4%, CalSTRS: 9.3% IRR
Hellman & Friedman Capital Partners V (2004): US$75MM, US$67.4MM, US$164.2MM;
CPPIB: +143.6%, CalSTRS: 28.2% IRR
Hellman & Friedman Capital Partners VI (2006): US$400MM, US$388.8MM, US$472.1MM;
CPPIB: +21.4%, CalSTRS: 5.6% IRR
Hellman & Friedman Capital Partners VII (2009): US$600MM, US$130.7MM, US$116.5MM;
CPPIB: -11%; CalSTRS: -10.2% IRR
Hony Capital Fund 2008 (2008): US$75MM, US$76MM, US$77.6MM;
CPPIB: +2%, CalSTRS: 6.6% IRR
KKR 2006 (2006): US$475MM, US$464.2MM, US$593.1MM;
CPPIB: +27.8%, CalSTRS: 3.7% IRR
KKR Asian Fund (2007): US$350MM, US$256.9MM, US$381.7MM;
CPPIB: +48.9%, WSIB: 11.4% IRR
KKR European Fund II (2005): E188MM, E202.7MM, E212.8MM;
CPPIB: +5.0%, WSIB: 1.0% IRR
KKR European Fund III (2008): E109.6MM, E54.3MM, E56.3MM;
CPPIB: +3.7%, WSIB: -6.1% IRR
KKR Millennium Fund (2002): US$282.5MM, US$329.6MM, US$507.5MM;
CPPIB: +54.0%, WSIB: 16.8% IRR
KSL Capital Partner II (2006): US$107MM, US$109.4MM, US$133.8MM;
CPPIB: +22.3%, WSIB: 10.8% IRR
Onex Partners (2003): US$150MM, US$141.5MM, US$394.4MM;
CPPIB: +178.7%, CalSTRS: 39.6% IRR
Onex Partners III (2008): US$400MM, US$225.2MM, US$219.7MM;
CPPIB: -3%, CalSTRS: -3.8% IRR
Permira IV (2006): E150MM, E136.9MM, E173.1MM;
CPPIB: +26.4%, WSIB: 4.6% IRR
Providence Equity Partners VI (2006): US$400MM, US$408.3MM, US$478.8MM;
CPPIB: +17.3%, CalSTRS: 6.0% IRR
Silver Lake Partners II (2004): US$100MM, US$96.7MM, US$146.4MM;
CPPIB: +51.4%, WSIB: 9.9% IRR
Silver Lake Partners III (2006): US$500MM, US$394.1MM, US$546.6MM;
CPPIB: +38.7%, WSIB: 17.4% IRR
TPG Partners IV (2003): US$100MM, US$108.2MM, US$183.3MM;
CPPIB: +69%, CalSTRS: 15.2% IRR
TPG Partners V (2006): US$500MM, US$511.9MM, US$437.0MM;
CPPIB: -13.6%, CalSTRS: -4.7% IRR
TPG VI (2008): US$750MM, US$494.6MM, US$525.5MM;
CPPIB: +6.3%, CalSTRS: 1.5% IRR
Triton Fund III (2008): E175MM, E128.2MM, E143.5MM;
CPPIB: +11.9%, WSIB: 2.0% IRR
Welsh, Carson, Anderson & Stowe X (2005): US$200MM, US$202.7MM, US$238.5MM;
CPPIB: +17.7%, CalSTRS: 3.3% IRR
Welsh, Carson, Anderson & Stowe XI (2008): US$300MM, US$174.3MM, US$197.4MM;
CPPIB: +13.3%, CalSTRS: 7.4% IRR
The sample size isn’t necessarily predictive, with just 37 shared investments. But here’s what we’ve learned so far:
30%+ IRR: 2 funds
20-30% IRR: 2 funds
10-20% IRR: 8 funds
7-10% IRR: 5 funds
0-6% IRR: 15 funds
negative IRR: 5 funds
You read that right.
We’ve got a negative IRR on more (5) of the 37 funds than have met or exceeded the original 20%+ PE return profile that our managers at CPPIB were sold on. And more than half of those 37 funds — 20 — have returned less than the CPPIB’s 6%-ish bogey.
With only 12 of the 37 funds achieving an IRR of at least 10%, you have to assume their profits are swamped by the poor performance of those that are below the CPPIB’s solvency bogey of 6%.
When CPPIB’s media staff explain this away to the odd mainstream journo who might call to commiserate about this blog post, the line will go something like: “the more recent funds are the ones that are hurting, which is no surprise given the short investment horizon, poor IPO market, tough economy, etc., etc.”
Let’s delve into that spin doctoring for a moment: of the 25 funds that have an IRR below 10%, 12 of them are of the 2004-2006 vintage. The traditional buy and hold life span of a mega buyout fund is 7 years; since these twelve poorly performing funds are now 6-8 years old, half of our weak lot are coming to what’s traditionally seen as the useful end of their fund life. It might be hard for the CPPIB’s media relations team to claim that the subpar performance is merely a function of the relative newness of the portfolio.
Even if the “new normal” fund life is 10 years, rather than 7, what is it about the economic horizon of 2013/14 that’s going to skate these funds onside? The individual corporate investments underlying each portfolio are already benefitting from mark-to-market valuations as the Dow Jones trades just below a 4 year market high.
Another interesting fact is that of the 12 fund investments that have achieved an IRR of 10% or better, 6 of them were made under the stewardship of founding CPPIB CEO John MacNaughton; before ex-CEO David Denison and current CEO Mark Wiseman joined the organization. Remarkably, of the 25 fund investments (commitments made in 2006 and onwards) with an IRR we can track since the new management took over from Mr. MacNaughton in mid 2005, only 6 exceed a 10% IRR to date; which isn’t a very high bar to begin with.
That’s a batting average of .240. Which wouldn’t get you a contract with the Toronto Blue Jays.
And this entire financial analysis ignores the huge, one-way negative impact all of these unhedged US dollar and Euro-denominated funds are actually having on our true IRR, since CalSTRS did their analysis in USD vs. USD; which means that whatever IRR CalSTRS or WSIB has enjoyed/suffered is worse for our CPPIB investments since we made them in Canadian dollars back when the US dollar/Euro was often at least 20% higher than it is today (see prior representative post “CPPIB’s $29 billion PE program largest naked currency bet in Canadian history” March 31-11).
Inexplicably, CPPIB shows the return in the home currency of the fund, unlike the public plans in places like Washington and California, both of which bring it back to the currency of the plan, allowing all and sunder to see the return profile exactly as it is in the hands of the beneficiary. The information is largely useless otherwise.
But that’s not the half of it.
The five funds that have a negative IRR to date represent some of the largest commitments ever made in CPPIB history: $2.14 billion on just those five alone. And the four really strong performers? We’ve not been so lucky there, CPPIB committed just $335 million in aggregate to the 30%+ IRR crowd and another $675 million to the 20-30% IRR segment.
Of the $12.3 billion committed to these 37 different PE funds, $7.5 billion of these commitments are to vehicles with an annual IRR below the 6%ish return required by CPPIB to maintain solvency over the medium term. Another $1.3 billion of commitments falls into the 7-9% IRR cohort.
It is possible that the other 98 funds within the CPPIB empire are mostly doing swimmingly from an IRR standpoint. But based upon an eyeballing of the balance of our portfolio, these 37 CPPIB/CalSTRS/WSIB shared funds appear to have many similarities with the entire lot.
I could be worrying for naught. And CPPIB, with a few simple keystrokes, could update their disclosure to reflect the standards of the Association of Investment Management and Research, as CalSTRS proudly touts on its website. We know the CPPIB team already provides the information to their auditors, since the funds’ aggregate quarterly financial results are reported in Canadian dollars.
CPPIB could even go so far as to show the aggregate return for the entire external PE fund program, as CalSTRS does (it’s 13.8% btw).
Six months ago, Doug Steiner did a profile on the CPPIB team for ROB Magazine. It touched on some of the themes you’ve already read about here over time (see prior post “EMI’s bankruptcy pain felt in Canada” Feb 2-11). But it deftly hit a new nerve, too. The piece wound down with a rather jarring quote from the CPPIB’s new CEO, Mr. Wiseman:
And what happens if the CPPIB team turn out to be the worst investors the world has ever seen, and lose most or all of the money? Notwithstanding all of the checks and balances in place, Wiseman cracks a smile and says, “If they raise the amount taken off your paycheque by 50%, in less than five years we’re right back where we are now.”
Based upon the last decade’s results of the $29 billion external private equity program, assuming the CalSTRS and WSIB IRR figures are representative, a huge number of CPPIB’s managers are currently reporting results below the CPPIB’s long term solvency target. And that’s before the currency hit we’ve taken as the Canadian dollar strengthened over the past five years.
None of which CPPIB will disclose to its beneficiaries directly.
If there’s a CPP contribution hike over the next 7-10 years, we can’t say we didn’t see it coming.