Canada Pension Plan Investment Board

is revamping a private equity strategy that focuses on high-growth companies after getting mixed results in the strategy, according to people familiar with the matter.

The pension manager’s growth equity group holds stakes in about 30 companies, mostly in various subsectors of technology, including

artificial intelligence

and financial tech. But after a flurry of dealmaking in 2021 and 2022, the team has dramatically slowed the rate of new direct investments following a period of soft returns.

Lately, it’s shifted some assets into a different portfolio, and it plans to lean heavily on third-party managers to source new investment ideas, the people said, asking not to be identified discussing internal matters.

Canada’s largest pension fund invested in about four firms over the past few months, including putting US$75 million into

OpenAI

and participating in

Wealthsimple Financial Corp.

’s latest equity round. But it’s only done a handful of other direct investments in the growth equity category since the beginning of 2024.

The fund’s San Francisco office is closing at the end of this year, and the new head of growth equity, Max Miller, has relocated to Toronto, a spokesperson said. There are three other managing directors within the group, according to its website. Lisa Conway recently joined the pension fund from Ontario Municipal Employees Retirement System.

Michel Leduc, the pension manager’s head of public affairs and communications, said the slowdown in deal activity is related to the correction that took place in technology and growth companies after the COVID pandemic eased and interest rates shot higher, starting in 2022. Deal flow is picking up again, he said, and he predicted that there’s more activity to come.

“The current fiscal year will represent one of our biggest years ever for direct investing in growth equity companies,” Leduc said. The private equity department, which includes the growth team, has always relied on a partnership model and there’s no change in that or the team’s “appetite” to invest directly, he added.

Miller became leader of the growth equity team in June — the third person to hold that role since 2023 — taking over from Monica Adractas, who’s becoming an adviser to the $732 billion fund. He reports to CPPIB’s head of funds Afsaneh Lebel, according to a person familiar with the matter.

The fund doesn’t disclose the returns of its growth equity portfolio, but performance has been uneven, according to people familiar with the matter.

Typically, growth equity investments fall somewhere in between venture capital and traditional buyouts, seeking to provide capital to businesses that are more established than startups but are still accelerating. CPPIB has been investing in these kinds of companies for many years, but made the decision three years ago to highlight the group as a distinct entity within its larger private equity division.

At the time, Suyi Kim, then global head of private equity, said her investment team had “all the elements required to build a formal growth equity practice that was truly one of a kind, on a global scale.”

CPPIB was not alone in making bets on growth stocks, which surged during the pandemic era of ultra-low interest rates. About half of CPPIB’s growth equity direct holdings were made between 2020 and 2022, according to its website. But tech sector valuations got crunched when the cost of capital changed.

Some of investments have shown huge progress, such as software firm Databricks Inc., which recently raised money at a $100 billion valuation, and KoBold Metals Co., which is searching for lithium and other minerals in the Democratic Republic of Congo and is backed by billionaires including Jeff Bezos and Bill Gates.

CPPIB also scored recent gains when two of its holdings, Klarna Group Plc and Netskope Inc., went public and attracted strong investor interest.

Others have had notable public stumbles. Shares of Sana Biotechnology Inc have plunged more than 80% since it went public in 2021. CPPIB invested in the firm in 2019.

Plaid Inc., a fintech that acts as a middleman between financial institutions and startups, raised money in April at a $6.1 billion valuation, less than half of what it was worth in 2021, when CPPIB invested in it. Another of its holdings from that year, Canadian chip startup Untether AI, began winding down operations in June, with its team moving to Advanced Micro Devices Inc. CPPIB no longer holds this investment, said the person.

The portfolio also includes N26, Germany’s largest digital-only bank, which is undergoing a shakeup that led to the departure of its co-chief executive officer after the country’s financial regulator identified deficiencies in the bank’s internal controls.

A few months ago, the pension plan had around 40 companies in its growth equity portfolio, but the fund has exited some investments and moved others to another entity called Integrated Strategies Group, according to a person familiar with the matter.

The group, which sits within the office of the chief investment officer, was created in 2023 to manage holdings that no longer fit within traditional investment departments.

CPPIB manages money of behalf of tens of millions of Canadian workers.

— With assistance from Preeti Singh, Melissa Shin and Erin Fuchs.

Bloomberg.com