With their massive deal-making clout and favorable tax status, America's private equity firms have become a convenient scapegoat for all sorts of ills, real and imagined. But north of the border, the industry operates with impunity, thanks in no small measure to the fact that Canada's big pension funds are some of the leading players in the buyout game.
The role of the funds was underscored in June, when a private equity group led by the Ontario Teachers' Pension Fund acquired Canada's leading telecommunications company, BCE. The C$51.7 billion ($49.3 billion) deal was the largest buyout ever and culminated a heated bidding battle. But for Jim Leech, senior vice president of private capital at Teachers', it was just business as usual.
"We've been making direct investments in nonpublic equities for 17 years," Leech tells Institutional Investor. The acquisition will raise Teachers' exposure to private capital, which includes venture capital, infrastructure and timber, by C$4 billion to C$20 billion, when it closes in early 2008. And Leech has plenty of appetite for more. The C$106 billion-in-assets pension fund seeks to raise that allocation to C$30 billion.
Teachers' isn't alone. The state-owned Canada Pension Plan Investment Board is keen to increase the 7 percent private equity weighting of its C$116 billion portfolio; it made an unsuccessful bid for BCE with Kohlberg Kravis Roberts & Co. Caisse de dépôt et placement du Québec has invested $24.2 billion in private equity, including a 28 percent stake in the consortium that completed a £10 billion ($19 billion) buyout of U.K. airport operator BAA Group last year.
Leech, who works under the fund's executive vice president of investments, Robert Bertram, runs a division with 65 professionals that has generated a 33 percent average annual return over the past four years. Notwithstanding those results, however, he cautions that only the biggest pension funds can really compete in the buyout space. "If you haven't built up the expertise, it isn't easy," he says.
Like its peers, Teachers' became a principal in the buyout business almost by default. For years limits on foreign investment kept U.S. buyout firms out of Canada, and there were few domestic private equity players to which the funds could turn. Although Canada has lifted most investment restrictions, a law that limits foreign investors to stakes of no more than 46.67 percent of telecom companies ensured that Canadian players would take the principal role in the BCE bidding. Teachers' led the winning consortium with a 52 percent stake; two U.S. firms, Providence Equity Partners and Madison Dearborn Partners, took stakes of 32 percent and 9 percent, respectively.
Although most U.S. buyout firms would already be thinking about an exit strategy, Leech says he has a long investment horizon. "The advantage is, we don't have a fixed date," he says. "If BCE becomes a holding in perpetuity, that's just fine."