Updated Thursday, September 18, 2014 as of 1:46 PM ET

Canada’s Pensions Become Buyout Kings Taking on KKR to Carlyle

(Bloomberg) -- Mark Wiseman, the chief executive officer of Canada Pension Plan Investment Board, walked into the high-end New York department store Bergdorf Goodman in the mid-1990s looking for a suit. He left empty-handed.

“I couldn’t afford anything there -- I probably still can’t,” said Wiseman, sitting in the C$192.8 billion ($183 billion) fund’s headquarters in Toronto last month. “Is that where I shop? No, thanks. But there are a lot of people who do.”

Instead of a suit, Wiseman bought the store. Canada Pension, the country’s largest pension manager, in October helped lead a $6 billion (C$6.3 billion) buyout of Bergdorf owner Neiman Marcus Group, a change in style for a fund more familiar with port operators than Prada purses.

“It’s the biggest mistake that you can make in investing: don’t assume that the rest of the world is like you,” Wiseman said.

The deal shows how Canada’s pension funds have changed their conservative investing ways, becoming private-equity deal makers to acquire companies worldwide in industries ranging from luxury retail to entertainment and health care. The strategy, aimed at boosting returns, sometimes puts them in direct competition with their usual partners -- buyout firms such as KKR & Co. and Blackstone Group LP. It has also meant riskier deals, as when the funds said they would consider joining a bid to buy money-losing smartphone manufacturer BlackBerry Ltd.

Active Year

The funds have been especially active this year. In the first 10 months, the six largest participated in $18.4 billion of mergers and acquisitions, according to data compiled by Bloomberg. That was more than double the $7.4 billion of the three biggest U.S. buyout shops, Blackstone, Carlyle Group LP and Apollo Global Management LLC -- the first time since 2009 the Canadian pensions have surpassed the private-equity firms, the data show.

The Canadian public funds, which collectively manage more than $685 billion, have long invested in private-equity firms as passive limited partners.

Their shift into direct private-equity transactions, which began on a small scale in the early 1990s, comes as they look to sidestep fees charged by the buyout firms and to meet pension obligations for Canada’s aging population as interest rates remain stagnant.

“It’s important that the pension plans earn the returns to fulfill a promise that has been made,” said Jim Leech, CEO of Ontario Teachers’ Pension Plan, the country’s third-largest pension fund with $122.8 billion in assets as of Dec. 31. “Diversification is the only free lunch in investing where you can protect yourself.”

Direct Investing

Unlike in Canada, many U.S. public pension plans are barred from participating in direct acquisitions, preventing them from making the same shift. They invest instead in the buyout firms’ funds, which charge limited partners a typical fee of 2 percent of assets and 20 percent of gains.

While the Canadian pensions do most of their direct private investing alongside buyout firms, usually entering bids jointly, they have become rivals in other transactions. Ontario Teachers’ bought a majority stake in Heartland Dental Care Inc. last year, outbidding buyout shops including KKR and Madison Dearborn Partners LLC, a person with knowledge of the matter said at the time. The transaction valued the company at about $1.3 billion.

Earlier this year, U.K. cinema chain Vue Entertainment Ltd. was bought by Canadian pension funds Ontario Municipal Employees Retirement System, known as Omers, and Alberta Investment Management Corp. for 935 million pounds ($1.51 billion). The deal -- put together without an auction -- was executed in six weeks and froze out other potentially interested buyers, including London buyout firm BC Partners Holdings Ltd., a person familiar with the situation said.

More Buyouts

“We’re competing against every other investor in the world,” said Gordon Fyfe, CEO of Public ServicePension Investments, the fourth-largest fund manager in Canada. “There’s a limited amount of returns and if you’re going to win and you’re going to earn returns, you’re taking them from someone else.”

More buyouts are on the way. Borealis, the infrastructure arm of Omers, is among bidders for Fortum Oyj’s Finnish gas network, according to people familiar with the situation.

It’s difficult to compare the private-equity performance of the Canadian funds to big buyout shops as they don’t break out returns in the same way. However, the private investing arms of the four largest Canadian pension funds returned an average 12 percent in 2012, including both direct and passive investments, according to data compiled by Bloomberg from the funds’ annual reports.

Predictable Stream

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