December 12, 2002
Note: All financial numbers are in Canadian dollars
The CPP Investment Board announced today that it has expanded its public disclosure on private equity so that Canadians can better understand how this asset class performs.
Last May, the CPP Investment Board took a leadership position on disclosure by posting on its web site information about private equity investing, including descriptions of all general partners to whom it has committed capital and how much is invested in each fund managed.
It has now gone further by disclosing quarterly by fund the commitment and capital drawn as well as the reported value by the fund manager and distributions received by the CPP Investment Board.
“The North American pension fund industry is in turmoil over what to disclose on performance, recognizing that private equity investing is complex and considered by some to be secretive,” commented Mark Weisdorf, CPP Investment Board’s vice president of private market investments. “To complicate matters, a good deal of desired disclosure is necessarily limited by confidentiality agreements. Nonetheless, we believe Canadians have the right to know more about our private equity investments and we will disclose as much as we can.”
The CPP Investment Board has interests in portfolios that contain hundreds of private companies in Canada, the United States and Europe. These interests are held in limited partnerships with other investors. The fund managers decide on behalf of investors which companies to invest in and when to sell.
Confidentiality agreements enable fund managers to protect information that gives them a competitive advantage in identifying, analyzing, investing in and nurturing ventures that could grow into large and profitable corporations. Compliance with these agreements is a condition of participation. (The CPP Investment Board honours all such agreements).
The CPP Investment Board does not disclose interim internal rates of return (IRRs) because they are not the best indicators of how a fund is performing and will perform over its full life, Mr. Weisdorf said. “We emphasize cash-on-cash returns, or realized IRRs, and the multiple of distributions received relative to capital contributed over the life of the fund.” Generally, private equity investments take 10 to 12 years to realize full value.
He noted that the reported values of private equity funds are not comparable for a variety of factors. One fund may be in the formative stage, where costs have a larger negative impact on results in the initial years. Another fund may be divesting companies and distributing the net proceeds to investors. Reported values are also influenced by the performance cycle of the different industries in which funds are invested, such as technology versus manufacturing.
Furthermore, there are no generally accepted standards, practices or policies for reporting private equity valuations and general partners use different valuation and accounting policies and practices.
The CPP Investment Board has committed $4.9 billion to 33 limited partnerships managed by 28 private equity firms. As of September 30, 2002, $850 million has been invested, compared with $15.8 billion in public equities that replicate stock indexes. Private equity is expected to produce higher returns than public equity over the long term. Up to 15 percent of total equity assets has been allocated to alternative investments such as private equity, real estate and infrastructure assets.
Created in December 1997, the CPP Investment Board is a crown corporation that invests funds not needed by the Canada Pension Plan to pay current pensions. Cash flows are invested in equities to balance the bond portfolio owned by the Canada Pension Plan. By increasing the long-term value of funds, the CPP Investment Board will help the Plan to keep its pension promise to Canadians. Located in Toronto, the CPP Investment Board is governed and managed independently of the Canada Pension Plan and at arm’s length from governments.
For further information contact:
Vice President – Private Market Investments