The sector’s reset from frothy valuations and record activity has created opportunities on the private side, CPPIB says
Rising rates, inflation and supply chain issues are contributing to a tech-sector rout, with some valuations down as much as 90 per cent, so it might seem like an odd time to step up the pace of growth equity investing by creating a unit to pick winners among early-stage innovators and disruptors.
But Leon Pedersen, who was selected to lead a team dedicated to doing just that at the Canada Pension Plan Investment Board (CPPIB), said the timing couldn’t be better.
“We have a massive reset in the valuation of, particularly, growth companies, so it’s an interesting point in time to go in and really do our foundational work to try to get it right,” said Pedersen, who was head of equities at Denmark’s BI Asset Management Fondsmæglerselskab A/S for four years before joining CPPIB in 2019 to lead thematic investing.
The sector’s reset from frothy valuations and record activity has created opportunities on the private side, where CPPIB’s team hopes to find gems long before they become public companies, as well as in the public markets, where there was a rush to take advantage of the hot initial public offering (IPO) market, which has since cooled off. The growth-focused Nasdaq Composite index is down more than 30 per cent from its peak in November.
“Some really high-quality growth companies have gone public over the past couple of years, maybe even too early (in hindsight),” said Pedersen, who spent more than two decades at Copenhagen-based Nordea Investment Management AB earlier in his career. With the markets punishing tech companies, CPPIB’s team might find some of those are ready “to think about public-to-private transactions,” he added.
The heightened focus on growth equity at the $539-billion pension manager has meant rethinking internal teams to bring together expertise in private equity and thematic investing.
It’s an interesting point in time to go in and really do our foundational work to try to get it right
The result is a 19-member growth equity group that is housed in two locations, San Francisco and Toronto, where Pedersen hopes to replicate CPPIB’s boots-on-the-ground and funding-partnership successes in Asia, where the pension fund became an early-stage investor in tech darlings such as e-commerce play Alibaba Group Holding Ltd.
Alibaba paid off in 2014, at least on paper, when the company went public with a value of US$25 billion, though the company subsequently faced domestic regulatory and consumer challenges.
“In our Private Equity Asia group, where we actually had the Alibaba investment originally, that model of collaborating with our partners, and direct approach, has been very successful … and that model is actually the inspiration for the group we’re doing now in growth equity,” Pedersen said.
“My group is focusing on North America and Europe … That model has proven very successful (in Asia) and we are seeing similar synergies in what we’re doing here in the growth equity group.”
Among the investments made so far this year are California-based Eikon Therapeutics Inc., which uses computing to track and measure movements of proteins in living cells in order to discover new medicines, and N26 GmbH, a branchless European bank based in Germany.
Some CPPIB investments made before the fund’s growth equity platform was formed have now been rolled into that portfolio, such as Sensibill Inc., a Canadian digital banking services company and Sila Nanotechnologies Inc., a California-based electric-vehicle battery company, both of which CPPIB invested in back in 2019, as well as Bermuda’s Viking River Cruises Inc. from 2016.
In addition to direct investments, the growth equity group will be investing through venture funds such as Forerunner Ventures Management LLC and Sequoia Capital. The former is a recent addition, while CPPIB has been investing through Sequoia funds since 2018.
The growth equity team will be able to take advantage of CPPIB’s “one-fund approach,” Pedersen said, adding that being a unit within a large and diversified fund with access and expertise in private equity, as well as credit and secondary markets, is a key ingredient that will help it compete with others chasing growth assets.
“We think the secret sauce for us will be to be early on in building relationships with these companies, and also, of course, through our partners,” he said. “That ability to have permanent long-term capital is going to be even more valuable in the years to come … (and CPPIB) can stay with these companies also when they go public.”
It’s not an entirely unfamiliar model among large Canadian pension funds. For example, the $241.6-billion Ontario Teachers’ Pension Plan launched an innovation platform in 2019 that it hopes will account for as much as 10 per cent of the fund’s assets by the end of its first decade.
Teachers’ Venture Growth, which makes up about three per cent of the fund’s assets today, set a goal to deploy up to $2 billion each year in markets around the world, with about three-quarters of that capital destined for direct investments and the rest invested through funds.
The two pension giants’ platforms share a focus on early-stage innovative and disruptive companies and technologies, and a split between direct investments and investing through funds. Initial direct investment targets are also similar, with Teachers’ looking in the range of $50 million to $250 million, and CPPIB looking at $25 million to $200 million.
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The innovation portfolio at Teachers would grow to more than $21 billion by 2030 if the fund’s projections hold.
Pedersen was not willing to disclose the size of CPPIB’s growth equity portfolio or discuss projections for its eventual contribution to the overall CPP fund. But he said the industry has a growth equity benchmark of at least 20 per cent of private-equity allocations.
As of March 31, 32 per cent of CPPIB’s worldwide assets were in private equity, including in Asia where Pedersen’s group is leaving growth equity investments to other teams.
“This is a really important area and we will be significantly growing our exposure to growth equity over the next five years,” he said. “That was part of the impetus for creating it as a separate group.”
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