Chief executive urges disciplined due diligence as private credit speeds up and retail capital surges
Canada’s biggest pension fund is telling private equity and private credit managers it would rather walk away from deals than pay new fees or sacrifice due diligence.
Canada Pension Plan Investment Board (CPPIB) is unlikely to keep partnering with private equity managers that start charging institutional investors fees on co-investments that have long been offered on a no-fee, no-carry basis, according to Bloomberg.
CPPIB chief executive John Graham said “it will undoubtedly have an impact on our appetite for the asset class, because that’s the model we run,” and added that “if we can’t get that agreement we actually will tend not to partner with them.”
Private capital firms are pushing hard into the so-called wealth channel and raising billions from retail investors just as institutional investors grow more selective after weaker private equity performance and worry about getting smaller allocations.
Graham warned that if the rush of retail money changes norms around offering large backers direct deals to lower fees, it would “impact, undoubtedly, our appetite for the asset class,” as reported by the Financial Times.
CPPIB has one of the larger private market exposures among global pension funds, with about 29 percent of assets in private equities and 11 percent in public and private credit.
The fund reported net assets of about $777.5bn at the end of September, Bloomberg said.
Despite recent low distributions from private equity funds, Graham told the Financial Times that CPPIB has invested in private equity for 20 years.
He said, “we continue to be believers in the governance model around private equity and private ownership,” and called the partnership between institutional investors and general partners “a very profitable model for everybody.”
On private credit, Graham issued a direct warning on risk and sophistication.
Private credit “is a buyer beware market,” he told the Financial Times, saying to non-investment grade private credit investors: “You should be sophisticated and you should know what you’re buying.”
He said CPPIB mainly invests directly in private credit rather than through funds, and while he sees the asset class as distributing risk broadly, he is concerned about “the speed at which deals are getting done.”
“We have to make sure that we aren’t compromising on due diligence,” he said, adding that he sometimes reminds his teams that “it’s OK to miss something.”
Money continues to flow into the asset class.
Private debt funds raised US$154bn in the first nine months of this year and are on track to raise less than the US$230bn recorded for 2024, but annual fundraising remains far above levels a decade ago, according to PitchBook data cited by the Financial Times.
Consultancy Oliver Wyman said private credit holdings by wealthy investors have grown 2.5-fold in the past three years, four times faster than the traditional institutional business.
At the same time, Blackstone president Jon Gray said in October that the era of excess returns in private credit had ended as central banks cut interest rates, with mid-teens returns giving way to more muted results, and recent blow-ups at First Brands and Tricolor have underscored broader credit risks.
Graham also pointed to the implications of more retail capital in riskier strategies such as junk leveraged credit. He described these as “buyer beware markets” and contrasted them with public equity markets, which he called “a gentleman’s game,” according to Bloomberg.
He stressed that “institutional investors are still the bedrock investors” and said, “Retail might be the shiny new thing, but for 20-plus years, institutional investors have helped build these franchises.”
In public markets, CPPIB is also taking a different tack from many global investors.
The fund has deliberately chosen to be underweight the “Magnificent Seven” megacap technology stocks, which means it currently underperforms the S&P 500.
Graham framed that stance as risk control rather than a short-term call: “Diversification is an act of humility,” he said. “The concentration level in the US equity markets is not a risk we want to take.”
