For the likes of

Blackstone Inc.

and KKR & Co., a multibillion-dollar opportunity beckons from Canada.

Some of the country’s biggest

pension funds

are looking to scale back their direct private equity bets, according to people familiar with the matter. Instead, they’re moving to invest more through established buyout giants, or partner on deals with other big investors such as endowments and sovereign wealth funds.

Already, the

Canada Pension Plan Investment Board

, the country’s largest such money pool, has shifted some private equity holdings into a separate group and is considering taking on more passive co-investments, according to public records and some of the people familiar with the matter. The Ontario Municipal Employees Retirement System overhauled its private equity unit, bringing in a new external head, halting direct buyouts in Europe and cutting a team focused on the asset class in Asia.

In interviews earlier this year, the chief executive officers of the

Ontario Teachers’ Pension Plan

and

Caisse de Dépôt et Placement du Québec

each said they’re trying to control risk by leaning more on partners and third-party firms to help them manage private investments.

Altogether, the large Canadian pension funds known as the Maple Eight have amassed more than $400 billion of private equity holdings, a sum that’s equivalent to roughly a fifth of their assets. But with deal activity remaining muted, it has become harder for some pension managers to justify the heightened risks and extra resources needed to manage controlling stakes in companies, according to people familiar with the industry.

“Private equity investing is resource intensive and very, very complex,” said David Scopelliti, the global head of private equity and private credit at Mercer, one of the world’s largest outsourced asset managers.

Omers,

a $141 billion fund that’s long been the most active in direct investing, made notable changes, including launching a global funds strategy and shutting its European direct-investment arm after some bets struggled. It has completed only one direct buyout — the acquisition of IT-services firm Integris — in the past two years, according to its website.

The pensions may be confronting the reality that private equity’s golden age has passed, according to Ira Gluskin, former chair of the University of Toronto Asset Management Corp. Many funds built sizable internal buyout teams during a period defined by cheap leverage, soaring valuations and easier exits — conditions that no longer exist.

“You cannot do the same thing every year and hope to be successful in this very competitive environment,” Gluskin said in an interview.

Once seen as a path to superior performance, direct ownership has, at times, added operational headaches for Canada’s pension managers, according to people familiar with the matter. Moreover, it’s tough for these public entities to compete with giant alternative investment firms for talent.

Still, pension firms that have been scaling back on direct ownership have stressed that they’re not abandoning the strategy. It’s a matter of being more selective about what they do and where they do it, rather than ditching the direct model altogether.

This story is based on interviews with more than 20 people familiar with the industry, including Canadian pension plan officials and fund managers. Some of them asked not to be identified discussing matters that are sensitive.

Omers said it’s still committed to doing buyouts in North America, including having controlling stakes in firms. The manager is expanding its private equity funds program to complement that and help with diversification, Chief Investment Officer Ralph Berg said in a statement.

La Caisse said partnerships are an established part of its strategy, but that it remains primarily a direct investor in private equity.

Ontario Teachers’ said direct investments represent about 75 per cent of its private equity capital today, with the other 25 per cent in funds run by outside firms. The pension plan believes it can get the best results by doing both, according to Dale Burgess, executive managing director of equities.

“Our approach will continue to include investing directly in businesses — particularly in areas where we have a deep track record and in-house capabilities — as well as investing strategically with leading general partners that can deliver performance, unique insights, and co-investment opportunities,” Burgess said in a statement.

Canada Pension Plan Investment Board declined to comment.

Ontario Teachers’ pioneered direct investing by major Canadian pensions more than 30 years ago. For a long time, in fact, it controlled one of the country’s most beloved businesses — the

Toronto Maple Leafs

hockey club — and made a fortune when it sold.

By the mid-2000s, several of Canada’s big pension plans had evolved into global private equity dealmakers, competing against buyout firms to avoid outside fees and exert more control over portfolio companies. In one notable example a decade ago, CPPIB went alone in buying lender Antares Capital from General Electric Co. in a US$12 billion deal, beating other suitors including

Apollo Global Management Inc.

and Guggenheim.

When interest rates started going up in 2022, private equity returns sagged and liquidity dried up. The

United States Federal Reserve

’s recent rate cuts are fueling hopes of a deal comeback, but Apollo’s Scott Kleinman anticipates that private equity firms will keep selling their assets at a slower pace for the next few years.

And PwC said this month that “deal volume remains anemic,” though U.S.-based private equity firms are getting some larger transactions done.

For Canada’s pensions, the sluggish environment means some portfolio companies bought with cheap money are now harder to offload at desired valuations. Earlier this year, Omers’ plans to sell Premise Health Holding Corp., a U.S. health care provider, faltered when the pension manager failed to fetch a price that met its expectations, some of the people said.

In 2012, Omers bought U.K.-based Lifeways Community Care, which supports adults with disabilities, with the goal of scaling the business. But instead, the company stumbled and the Canadian pension transferred ownership to lenders in 2023.

Omers also had to write down its US$325 million investment in

Northvolt AB

, which filed for bankruptcy protection in the U.S. last year. Other pension plans, such as La Caisse, also took losses on their investments in the Swedish battery-maker.

Revamping buyouts

Even so, there are some bright spots — including signals that deals are starting to move. CBI Health, one of Omers’ longstanding portfolio companies, agreed to sell its home-care business to Extendicare Inc. this month. Ontario Teachers’ has struck deals to sell its stakes in at least three companies since the start of the year, according to its website. In July, the pension said it’s buying a Spanish chain of dental clinics.

And earlier this month, CPPIB committed US$600 million to invest in Boats Group alongside General Atlantic, with both the pension and the private equity firm controlling the company.

Meanwhile, the pension funds are restructuring for the future. Ontario Teachers’ shuffled its private equity team with at least five senior managers leaving or stepping down from their roles, including the head of the unit, Romeo Leemrijse. During its search for a replacement, the firm spoke with senior executives from other pension managers, according to people familiar with the matter, before ultimately promoting Burgess, an internal candidate formerly focused on infrastructure.

CPP Investment Board, for its part, moved some of its holdings into what it calls the “integrated strategies group,” a mix of businesses the fund has owned for a while and that don’t easily fit into the current strategies of its investment departments. The group includes two reinsurance companies and a large minority stake in agribusiness Bunge Global SA.

The pension is also considering doing more co-investing — transferring some of the due diligence burden to its partners — as well as boosting its number of fund investments, people familiar with the matter said. Those have delivered better returns than buying controlling stakes, even accounting for extra fees, after the pandemic and elevated rates weighed down the performance of some of its portfolio companies.

Omers is cutting its entire Asia direct buyout team as of Dec. 31. It has put cash into Thoma Bravo’s buyout strategy and is in talks to collaborate with several fund managers, including Warburg Pincus, according to people familiar with the matter.

Some of the changes enable pension funds “to access more deal flow, and really leverage the deeper relationships and networks, maybe even some specialized expertise,” Mercer’s Scopelliti said.

Even with all of these staff and strategy overhauls, private equity remains “a very core and strategic asset class” for Canada’s pensions, according to Sunaina Sinha Haldea, global head of private capital advisory at Raymond James Financial Inc. “As the markets shift they’re willing to be flexible and to shift back and forth with them.”

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For Gluskin, the former University of Toronto Asset Management chair, the pension funds’ change in approach isn’t a mystery or even a failure. It’s a rational response to a new investing environment.

Their earlier model was built for a different era, and the game has changed.

With assistance from Dawn Lim

Bloomberg.com