September 6, 2013
Interviewed by: David Snow
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World’s Largest LP Wants GPs Who Can Scale

Jim Fasano, head of private equity funds for CPPIB, wants to partner with GPs who can “scale with us.” In this wide-ranging interview, Fasano tells why CPPIB’s size makes it difficult to move to a direct-only private equity program; explains the innovative “GP restructurings” of Behrman Capital and Kainos Capital; and details what attributes CPPIB looks for in a GP that can grow large.

Jim Fasano, head of private equity funds for CPPIB, wants to partner with GPs who can “scale with us.” In this wide-ranging interview, Fasano tells why CPPIB’s size makes it difficult to move to a direct-only private equity program; explains the innovative “GP restructurings” of Behrman Capital and Kainos Capital; and details what attributes CPPIB looks for in a GP that can grow large.

World’s Largest LP Wants GPs Who Can Scale

A Privcap Conversation with Jim Fasano of CPPIB

A number of large Canadian institutional investors are moving toward being exclusively direct investors. Why does CPPIB remain committed to fund investing?

Jim Fasano, VP and Head of Funds, Secondaries and Co-Investments, CPPIB:

You know, some of our peers are de-emphasizing funds and emphasizing direct investments more but with our scale, you know it’s hard to have a large enough direct program to be meaningful to $185 billion and quickly growing fund.

What kinds of GPs will you be seeking to back?

Fasano: Well, the main thing for us is both the historical performance of the GP and what we believe to be the expected performance going forward to us. Returns are the main driver. There are, however, other aspects. We like to think of ourselves as a deeper partner than just being an LP. We will work with GPs on large direct investments. We will do secondaries. We have a private debt group that will work with some of our GP’s. So the ability to have other opportunities like that matter as well. In addition, given our size and our growth, being able to deploy capital and scale is also a significant element. But at the end of the day, it really is all driven by returns.

Given CPPIB’s size, is it challenging to commit capital to medium-sized and smaller funds?

Fasano: There are a number of ways that we’ll look at that. Venture capital, for example, is just something where we’re never really going to be able to get the scale that we require. We don’t invest in venture capital outside of Canada. One of the things that we do within Canada is we have a third party fund-to-fund that will invest in both buyout funds that are below our size threshold and venture capital funds.

How about the emerging markets?

Fasano: In years past, we did have some international fund-of-funds relationships. We’re winding that back. One of the things we always had in our arsenal but we’re refocusing on a little bit more, is in addition to our core portfolio of GPs, sort of the more established GPs, we also are really rolling out more of an emerging manager program as well and focusing on those managers that, while not significant in scale today, we believe have all the attributes to really grow over time and they can scale with us down the road.

So are you looking to back managers that you expect will grow in size and scale?

Fasano: That’s correct and what it often means as well is maybe we are a larger proportion of the early fund than we would normally want to be, to be able to still have, to us, a somewhat meaningful amount of capital invested and perhaps a percentage that we wouldn’t be comfortable with in a more established firm and with the objective, that over time, as the GP raises more third party capital, that we grow our dollar amount, but probably shrink on a relative basis.

What are some critical attributes that you look for in an ‘emerging’ manager?

Fasano: We look at a number of items. Track record is incredibly important to us and even if it’s an emerging manager where they haven’t been together as a group and have a collective track record, making sure that the individuals have track records that we would back. We look at how well the team and the organization as a whole has been put together. Strategy and alignment, those are the key areas for us. And we try and see which of these managers we think while being relatively new today, will be very successful and thus grow significantly over the coming years.

Could it be said that CPPIB is ‘incubating’ managers, or is that too strong of a term?

Fasano: No, it’s probably not too strong a term at all. You know, in some cases, it’s a new geography. There are a few emerging managers, for example, in China that we have backed and some of those are teams from more established organizations that have spun-out and become independent. Some of them are, as we sift through the wreckage of the financial crisis, some good teams within firms that might not have sort of longer term potential together and backing some of those sub-teams from within some GPs.

CPPIB backed two innovative GP restructurings – Behrman Capital and Kainos Capital, which spun out of HM Capital. What attracted you to these deals?

Fasano: Yeah, in both Behrman and Kainos, we were attracted to two things. One, is a portfolio of assets that is attractive but yet is at an inflection point that requires some more time to really realize full value. And secondly, a GP that we have confidence in to be able to manage those assets going forward. We don’t even look at as a win-win. We look at it as a win-win-win. When we talk about a situation like Behrman or Kainos, it’s a win for the existing LPs, many of whom are looking for liquidity. It gives them the option but not necessarily sort of a mandatory liquidity event for them. It’s a win for the GP’s who can look forward to a little more stability, knowing that they have some longer-term capital behind them. And for ourselves, we have acquired a collection of assets that we find attractive and are able to work with a newly realigned GP to try and maximize the value going forward.

Would you encourage GPs in need of transition capital to give you a call?

Fasano: We have a very active pipeline on the side. It has been us sort of combing through some old portfolios and reaching out, and in some cases, you know, a transaction like Berman hits the press and that rings a bell in a lot of people’s minds and they reach out to us. So it’s happening both ways but we do have a very active pipeline of these direct secondaries.

Have you seen an improvement in the timeliness and depth of information that GPs are sharing with LPs?

Fasano: Yeah, we have definitely seen an improvement. You know, some GPs were always good at sharing information and communicating. Some who weren’t, I think as we’ve gone through the years, during and after the financial crisis, some that weren’t, have maybe been forced to a little bit more. It’s very important to us for a few reasons. One is, we are I think probably some of the more active monitors of our GP’s in terms of how the portfolio’s going, how the franchise is developing. We also are, as I mentioned earlier, looking at peripheral opportunities, whether that be for our secondaries program, our private debt program, co-investments or co-sponsorships, etcetera. You know, having a strong information flow from the GP enables us to do that more effectively.

What will CPPIB’s co-investment program look like?

Fasano: Our existing direct business, our direct private equity businesses is focused on what we refer to as a co-sponsorship model. We play a very large role. We are involved early. We are active partners.  I think everything we’ve done over the last five years we have been between a 25 and 50% partner with one or more GPs. That group, because of the way they invest, has always been stretched very thinly and because of that and because we talked about sort of some of the consequences that come with being such a large fund, they have been focused on larger and larger equity checks.

So what we have lost really is exposure or an ability to invest along maybe some of the mid-market managers who even in the largest of co-sponsorships couldn’t hit sort of CPPIB, these minimum equity check size. So here we’ll be looking at opportunities that are say, 125, 150 and below. Whereas our direct group will really be focused on two to 300 million and above. We’ll be focused on lower percentage ownership. You know, I think generally sub-20% while our direct business is focused sort of on those 25 to 100% ownership positions. And we will be less active. We won’t get involved as early. It’ll be more towards a classical syndicated co-investment program.

What are some other ways that CPPIB is addressing the challenge of its largeness?

Fasano: Scalability of our business has long been a challenge for us. So we look to a number of ways in which we can increase our private equity business. One of them is to add on new activities, new products. So our secondaries business is a good example of that. You know, taking what is today the primary fund side, an $18 billion portfolio. And you know, our secondaries business today is a 5 billion portfolio and that we’ve managed to add on to that. What we do on the large direct side and what we hope to do with our new co-investment program, again an example of how without broadening the depth to which we go into the GP world, essentially getting more scale per manager.

We also look to do on the direct side a couple of things that we’ve done recently would be looking to take advantage of our longer term capital and when our partner is looking to exit, perhaps buying them out and holding the business longer ourselves. That has happened in a couple opportunities. And we’re also exploring ways in which we can assist GP’s with holding businesses that they really like for a longer period of time by coming in after some hold period and providing their LPs with some liquidity, enough liquidity and sort of a validation for their mark that they then can more easily hold it for a longer period of time. And that allows us to get more dollars to work within those GPs.

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