Gamble on Skype pays off
Aggressive strategy makes pension fund a big market force
TORONTO — Deep in the financial crisis, a Canadian pension fund entrusted with the nest eggs of 17 million workers bet a chunk of that money on Internet phone service Skype, venturing well outside its tradition of long-term, conservative investing.
The investment, made by Canada Pension Plan Investment Board in partnership with private equity, more than tripled in less than two years and marks the clearest sign to date that Canada’s once-staid pension funds have become a huge new force in a globalized market.
Between them, CPPIB and four other big Canadian players control over half a trillion dollars in assets, about the size of the total Swiss economy and more than the $410 billion managed by the Chinese sovereign wealth fund China Investment Corp.
The investments are large-scale and diversified, with an emphasis on real estate, natural resources and infrastructure projects such as bridges, tunnels and roads.
Large, aggressive and patient, they are pushing into a financing vacuum that neither cashstrapped governments nor private equity alone can fill. Their growing power is a challenge to the world’s biggest sovereign wealth funds and it enables the Canadians to take on the occasional role of activist investor.
The model — under which funds are run like a business rather than a government agency — was pioneered by Ontario Teachers’ Pension Plan in the 1990s. Its approach proved so successful that other Canadian fund managers soon embraced it.
“Ten years ago . . . we weren’t in the inner circle. Central bankers spoke to the banks,” said Jim Leech, the chief executive of Ontario Teachers, who came to pension plans after careers in the military and business. “Well, now central bankers speak to the banks and the sovereign wealth funds and the pension plans.”
The other factor in the funds’ favour is a financial-market malaise that resulted in a treasure trove of assets up for sale at a discount. In an era of debt-laden cities, states and countries, there is no shortage of parties seeking investors for a highway, office tower or pipeline.
“When governments hit the wall, the opportunities do arise. And they arise particularly in the infrastructure space,” said Michael Nobrega, CEO of OMERS, which manages the funds of Ontario municipal workers.
In fact, pension plans and Chinese sovereign wealth funds are among the few players left with the liquidity to invest big, and the pension funds often prevail.
The Canadian funds could become even more powerful in the next couple of years. The CPPIB expects to have net assets of $275 billion by 2020 and over $1 trillion by 2050.
U.S. pension funds are also becoming more aggressive and are looking to the Canadians to model similar investment strategies. If the global economy continues to recover in the aftermath of the financial crisis, there will be fewer fire sales and the danger of overpaying will increase.
For now, however, the Canadians are riding high. While hyperbole has it that half of Manhattan is owned by Chinese investors, Canadian pension funds’ purchase of attractive investments around the world has largely remained under the radar.
London’s Heathrow Airport, toll roads in Chile, real estate from Manhattan to Sao Paulo, gas pipelines in the United States, water treatment plants in Britain, timberlands in Australia — all are fully or partially owned by pension plans of Canada’s teachers, city workers and citizens.