Insight: The surprising strength of Canada's pension funds

Thu Jan 12, 2012 3:56pm EST
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By Pav Jordan, Andrea Hopkins and Soyoung Kim

TORONTO/NEW YORK (Reuters) - 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(CPPIB) 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 Canadian 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 cash-strapped governments nor private equity alone can fill. Their growing power is a challenge to the world's biggest sovereign wealth funds and it is enabling the Canadians to take on the occasional role of activist investor.

"These are really talented dealmakers now; they're very savvy. It's just not to be confused with some sleepy funds sitting on money. That's not who these folks are," said Scott Petepiece, a New York-based M&A partner at law firm Shearman & Sterling LLP.

"They've become really significant players in the M&A market in the U.S.," he added. "It's a very different world in that respect than it was 20 years ago. ... They're somehow involved in almost every significant 'take-private' deal that happens."

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, recruiting CEOs with experience at the top ranks of Canadian finance, government and business.   Continued...