How CPPIB is navigating aging demographics and negative rates
The Canada Pension Plan Investment Board says it’s extending a push into private credit to help fill a need for yield made scarce by low interest rates.
The nation’s biggest pension manager has increased its private debt investments from $5.1 billion (US$3.4 billion) in 2011, to $32.7 billion at the end of March, its annual report shows. Investments in private credit were virtually zero in 2006. The growth of its allocations in less liquid assets has borne fruit, said its senior managing director and global head of credit investments John Graham.
CPPIB, with more than $400 billion of assets, is pushing further into private debt -- where borrowers bypass traditional capital markets -- to make up for dwindling yields elsewhere. With concerns about a new global economic slowdown causing interest rates to plunge, and about US$15.6 trillion of global debt paying less than zero, it’s increasingly urgent for portfolio managers to find new sources of returns. CPPIB has also boosted assets in private equity and real estate, and is looking further afield for gains, targeting growth in emerging markets and Asia.
“Getting paid for the lack of liquidity is certainly something that we’ve been very successful at in the credit side,” Graham said in an interview.
Graham currently oversees about $40 billion in credit investments, with around 80 per cent of that speculative grade. This includes corporate, real estate and structured deals.
While it’s benefited CPPIB, Graham is cognizant of the risks, as demand leads to a deterioration in deal terms. Investors could also get saddled with losses if credit conditions sour and they can’t unload under-performing assets.
“We’re seeing less and less liquidity across the board, and in some of these markets I’m not sure if there is liquidity at all,” he said. “Whether or not it’s a big issue is going to be very institution specific.”
CPPIB returned 1.1 per cent in the quarter ended June 30, as net assets grew $8.6 billion to top $400 billion for the first time. Pension funds invest in a variety of assets including low-risk government bonds. While that means they profit from fixed-income rallies, falling yields have also driven up future liabilities -- threatening their ability to meet obligations.
CPPIB remains bullish on the U.S. middle-market, where it invests through Antares Capital, which has about US$24 billion in assets. Antares is prepared to swoop in to buy assets from cash-strapped lenders when the cycle turns, its chief executive officer said in July.
“We really do try to get deep diligence on every single deal,” Graham said. He added that CPPIB sees good opportunities to invest in companies that will survive a downturn in the credit cycle.
The credit team, numbering just under 100 employees in Toronto, New York, London and Hong Kong, is currently focused on growing in Asia and emerging markets. The fund is looking to grow particularly in China, India and Brazil. Emerging markets account for around 10 per cent of the credit portfolio.
“These are markets that are going to grow, they are going to be increasingly relevant in the global economy and it makes sense to spend time to build out capability and the infrastructure to invest,” he said.