CPPIB intends to invest up to $1 billion in venture capital funds

CPPIB CEO Mark Machin delivers an address at the Canadian Club of Toronto luncheon. Nov. 20, 2018 Courtesy: Mike Hagerty, @hagarty_mike/The Canadian Club of Toronto

The Canada Pension Plan Investment Board (CPPIB) is planning to invest between $500 million and $1 billion in venture capital funds, The Logic has learned.

Canada’s largest pension plan, which manages $368.3 billion in assets, is hiring a senior principal to focus on investments in the venture capital space. That principal will be responsible for investing up to $1 billion in 10 to 15 venture capital funds in North America, Europe and emerging markets. The move will make CPPIB one of the largest venture capital investors in Canada.

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CPPIB’s current involvement in venture capital is limited, but the fund has recently made a number of moves to change that. Toronto-based Northleaf Capital Partners announced on Monday that CPPIB participated in a raise of over $150 million.

“CPPIB invests in some emerging ventures, including Canadian startups, through funds, and recently launched a focused strategy to invest in a limited number of leading venture capital funds globally,” Shane Feeney, CPPIB’s global head of private equity, told The Logic. “This could result in CPPIB making investments with more direct VC exposure in the future.”

Talking Point

For its new senior principal, CPPIB is looking for a Toronto-based candidate with established connections in the global VC ecosystem—particularly in London; Boston; and Menlo Park, Calif. The effort is part of a more public emphasis by Canada’s largest pension plan to focus on how technologies are disrupting specific industries that may affect their investment portfolio.

Canada has seen a number of VC funds raise significant sums in 2018. On Monday, Kensington Capital Partners announced that it raised $85 million, and Versant Ventures announced that it raised US$100 million for a Canadian fund. The influx of new funds could help reverse the slight decrease in VC investment in Canada this year. Canadian companies raised a combined $652 million in venture capital deals in the third quarter of 2018. That’s 12 per cent lower than Q3 2017.

“It makes perfect sense for [CPPIB] to get a foothold in the VC space right now,” said Keith Ambachtsheer, director emeritus of the Rotman International Centre of Pension Management at the University of Toronto. “The private markets are all about relationships; it’s all about who you know, who you trust. That’s the real investment they’re making now.”

Canadians’ contributions to the Canada Pension Plan, which has over 20 million contributors and beneficiaries, will gradually increase starting Jan. 1, 2019. After seven years, both employers and employees will each contribute an additional one per cent compared to 2018 (from 4.95 per cent to 5.95 per cent), injecting significant new cash into the pension plan.

“CPPIB will have continued positive cash flow for the next 20 to 30 years because this additional money is going to be pre-funded,” said Ambachtsheer.

For its new principal, CPPIB is looking for a Toronto-based candidate with established connections in the global VC ecosystem—particularly in London, Boston, and Menlo Park, Calif. The candidate will be part of CPPIB’s private equity funds team, which manages a portfolio of over $27 billion.

The successful candidate will be responsible not only for investing in VCs, but also for sharing information gained from their VC fund relationships throughout CPPIB.

“We will consider the startup space carefully, so that we understand the ideas and technology that may shape or disrupt our existing portfolio companies, and also so that we are ready to invest in these businesses at the appropriate phase of their growth,” said Feeney.

The new funding will not be limited to Canadian firms. However, Sean Mullin, executive director of the Brookfield Institute for Innovation + Entrepreneurship, thinks CPPIB’s new focus will still have particular benefits for Canada.

“It will definitely be a good thing for the ecosystem,” said Mullin. “If even some of these investments get made in Canada, it will mean anchoring either new significant funds or, when an existing player raises the next round, it will allow them to go bigger.”

Mullin said CPPIB typically likes to make large investments relative to those made by VCs in Canada. “We’ve got a lot of funds that will cut the Series A or the smaller cheques, but there are only a few funds that can cut a $50-million cheque to a company that is going for world class.”

Mullin said CPPIB’s venture capital expansion could help Canadian VC firms raise larger pools of capital. “Even if they’re only cutting $50 million cheques…that’s a significant chunk of even some of our biggest funds,” he said. In April this year, iNovia Capital said it planned to raise US$500 million for a growth-stage fund, while in August, Georgian Partners closed its fourth fund at US$550 million, which The Globe and Mail called “the largest independent venture capital fund in Canadian history.”

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In the case of Northleaf, CPPIB is putting in funds alongside the federal government’s Venture Capital Catalyst Initiative. The $400-million program invests in funds-of-funds, which must raise matching private money. It will distribute $350 million between Northleaf and four other firms, including U.S.-headquartered HarbourVest Partners and Hamilton Lane Advisors.

According to public disclosures, CPPIB has a long history with Northleaf, investing six times in the company, including $70 million in a 2013 Northleaf Venture Catalyst Fund. CPPIB’s largest venture fund investment to date was a $200-million commitment to software investor Insight Venture Partners’ US$6.3-billion Fund X this past June. The earliest publicly-recorded venture investment made by CPPIB was March 2002, when it committed $75 million to biotech-focused fund, MPM Bio Ventures III.

CPPIB has mostly focused on late-stage investments thus far. In November, the fund invested in a Series H round for ChargePoint, a San Francisco-based electric car charging network. In the past three weeks, CPPIB has also invested in seven-year-old Byju’s, a Bangalore-based edtech company, and 120-year-old Berlin Packaging, a Chicago-based packaging firm. According to publicly-available Crunchbase data, the largest round the company has participated in to date was a US$4-billion Series F in Meituan-Dianping, a Beijing-based company, in 2017.

These new efforts are part of a more public emphasis by Canada’s largest pension plan to focus on how technologies are disrupting specific industries that may affect their investment portfolio.

In a speech at the Canadian Club in Toronto last month, CEO Mark Machin said the fund needs to be an expert in what he called “the implications business,” which he described as “predicting the future so we can benefit from its growth and profit from it for the benefit of Canada’s millions of pensioners.”

“At CPPIB, we have an obligation to analyze how these technologies are disrupting specific industries that may affect our investments not only today but decades ahead,” said Machin.

CPPIB isn’t the only Canadian pension fund that’s stepped up its tech focus in recent years. Caisse de dépôt et placement du Québec, the country’s second-largest pension fund, invested $40 million in travel app Hopper in 2016. It also led a US$166-million Series D round in Lightspeed, a point-of-sale software company, in 2017.

The Ontario Municipal Employees Retirement System (OMERS) has its own VC division, OMERS Ventures, which is one of the country’s leading funds. And, the Ontario Teachers’ Pension Plan recently bought a minority share in Fleet Complete, a connected vehicle tech firm; it has also invested in Lyft and Indian e-commerce platform SnapDeal.