A private partnership approach

One strategic focus for the Canada Pension Plan Investment Board in 2013 is increasing the activity of its principal investing business, reveals Asia president Mark Machin.

The Canada Pension Plan Investment Board (CPPIB) is the investment management business of the Canada Pension Plan. The fund that it manages stood at C$170.1 billion as at September 30, of which Asia Pacific accounts for almost C$20 billion, or about 11%.

Mark Machin is president of Asia and joined 10 months ago after 20 years at Goldman Sachs, where he was most recently vice-chairman of Asia.

CPPIB has 12 business lines based out of Toronto, of which six are now on the ground in Asia, with the others active from out of region. It maintains an overall exposure of 65% to equity and 35% fixed income.

Q Please outline the scope of your six businesses in Asia.

A Real estate, with about $5.5 billion committed across the region, primarily in Australia, China and Japan; funds and secondaries, with $3.3 billion of commitments to 10 general partners, or 15 funds in the region; external portfolio management, with $2.5 billion committed across Asia in 12 funds and $600 million QFII in China; principal investing, which features direct private equity investments in China, Korea and India, including a recent investment into Coway in Korea alongside MBK; relationship investments, which was initiated in the fourth quarter of 2012 to seek significant direct investments in publicly listed firms, over a long period and including active engagement with the investee; and private debt, which was initiated in Asia in the first quarter of this year to make direct corporate investments in leveraged loans, high-yield bonds, mezzanine and other debt securities across the capital structure.

One of our key strategic focuses for Asia is increasing the activity of our principal investing business.

Q What is the remit of your principal investing business?

A Principal investing undertakes private equity investments and other direct transactions, alongside existing funds and other financial or strategic partners. These equity investments can range from $50 million to over $1 billion, although there is no predetermined maximum. The size of transaction is evaluated by investment based on the risk-return characteristics of the opportunity.

We focus on five core markets in Asia Pacific: China, India, Australia, Korea and Japan; in other words, two emerging and three developed markets. While we are sector agnostic, our investments to date are in consumer and TMT and we are also keen on financial services.

Q How do you gauge your risk factor?

A We look at each opportunity and decide whether this is a business worthy to support with capital and time and whether the return justifies the commercial and other risks that are embedded in that business.

Q Do you carry out fundamental research?

A Yes, we undertake detailed analysis of companies, their industry and regulatory environments and other aspects, with the input of internal and external experts, to ensure that during our holding period we truly understand the embedded risks.

Q Please describe your relationship with consultants.

A On the commercial due-diligence side we typically get advice from global consulting firms such as Bain, BCG, McKinsey and AT Kearney.

Q What is your typical holding period?

A It can be very long because we have no need for liquidity and our fund continues to grow. Our holding period can be subject to the requirements of other partners we have invested with, but we can be flexible.

Q What would cause you to exit an investment?

A When we determine that the return is sufficient and has met or exceeded our initial return parameters. Similar to the above, we also consider the requirements of other partners.

Q What is your return expectation?

A Our return expectations are similar to other private equity investors, but our need for liquidity is much lower and our holding period can be much longer.

Q How much has your principal investments group invested in Asia?

A We have invested several hundred million dollars across our focus markets of India, China and Korea. It takes time to build up the business. What is interesting and challenging is there are a lot of variables in the private equity business; you can get approval and put in your best bid, but that does not mean you will close the deal.

Even after you win a deal, that does not necessarily mean you will close it. There are a lot of new players coming into the market, and not everyone is experienced and disciplined. So you need to pick your spot.

Q Do you find Asia’s PE market hard to access?

A Yes, but it is an emerging and growing market. The qualification is whether you are disciplined enough. It is easy to write a cheque. To generate expected return upon exit down the road is where the real work happens.

Q Is it frustrating not being able to invest sometimes?

A It is, but at same time you would have buyer’s remorse on a wrong deal. Cleaning up would be worse.

Q What areas are you looking at and where do you see potential?

A Geography-wise China will always be a constant, because it will continually generate interesting growth. Hong Kong, Korea, India and Australia have also offered us interesting opportunities.

Q Are you looking to invest in firms that will eventually list?

A Yes, in the majority of cases for China. Also, if you look at the development cycle of the industry, publically listed companies will one day want to become private again. We are only on the rise of the first cycle in China. Increasingly people have started to understand and respect long-term capital.

Q What is the size of your team?

A Our office now houses about 35 people across our six businesses. They are responsible for different parts of due diligence, as well as market research and portfolio monitoring.

Q Are you looking to increase staffing in principal investments?

A You need more people to look at more deals. There is a certain yield factor, and you need to search for enough opportunities to increase your yield. Plus you need a certain critical mass so you can collectively brainstorm, which means you need a certain level of seniority and experience.

Q How many opportunities would your principal investments team look at over a year?

A Around 50. So over the past three years we have probably screened about 150 leads. This is a typical yield for a private equity team.