As markets continue their tailspin, many venture capital firms are warning startups they face a prolonged capital drought. But Canadian pension fund investors say they plan to keep making deals—and may even increase their funding. 

Investors at three of Canada’s largest pension funds told The Logic they believe they have an edge on traditional VCs, who may find new capital scarce in the coming months as fallout from the public bear market reaches private companies. 

Their biggest advantage, said Shawn Chance, a partner at OMERS Ventures, is the steady stream of funds from pension contributors padding their coffers at a time when other funding sources are less reliable. 

“We have the benefit of having OMERS’s ongoing, long-term, proven commitment to this asset class,” he said. “It doesn’t really matter what the markets are doing because we have to deploy capital for our pensioners. … We’re still out there looking at deals, we’re still writing cheques.” 

Pension funds invest in venture capital by directly funding private startups and scale-ups. They also invest indirectly, becoming limited partners (LPs) in other funds which deploy venture capital on their behalf. Some pension funds accept other investors as LPs. Venture investment as an asset class is considered risky, given that investments are often made before a company has revenue or profits, and can conflict with pension funds’ long-term, conservative approach to investing. 

The high risk, however, can garner high returns, and in recent years Canadian pension funds have expanded their exposure to direct and indirect venture capital. The value of VC deals in which the country’s 10 largest pension funds participated grew exponentially throughout the pandemic, data from PitchBook shows. Deals involving the firms jumped from US$4.3 billion in 2019 to US$10.7 billion in 2020, more than doubling again in 2021 to finish the year with US$26.6 in funding in the asset class. Pensions’ VC investments so far this year are near 2020 deal values, the data shows.

At CPP Investments, the investment arm of Canada’s largest pension fund, head of growth equity Leon Pedersen said the fund’s autonomy (it has no third-party LPs), coupled with its long-term approach to investing, means it can increase its exposure to direct and indirect venture capital deals at a time when other investors may deem them too risky. “I’m silently pleased with what I’m seeing right now. It means that valuations are coming down,” he said. 

Unlike CPP Investments, OMERS Ventures has several third-party limited partners backing its current fund. Chance said its LPs so far haven’t pressed the firm to change its approach to investing their funds. “There’s alignment [with LPs] that we should keep deploying capital,” he said. 

Pedersen added that venture capital firms raising money in the current adverse market are looking for “high-quality” limited partners, which he said bodes well for CPP Investments. “If we look at growth [equity] and venture capital and the excess of the [past] many years, the rising tide has been lifting all boats,” he said. “It almost didn’t matter what company you picked; if you’d been in the right space, in the right area, you probably made money.” 

“Our quality as an investor is clearly on the rise. Having partners like us is going to be important for both the VCs and for founders and companies.”

He said the slower pace of deal-making also suits the pension fund’s speed for evaluating risk, compared to the quick closes that characterized last year’s VC environment. “We [were] not able to get in there being comfortable with the amount of research we [wanted] to do,” he said. “Now it’s probably more our game and pace.” 

In May, CPP Investments launched a new group dedicated to growth equity. The team is targeting repeated investments in portfolio firms throughout their lifecycle, from startup to public company. Pedersen said CPP Investments had begun discussing its new growth equity division before the market downturn, but said the current conditions mean the fund manager can bring promising firms into that pipeline at a discount. 

Venture capital still represents a small share of pension funds’ portfolios in Canada, with the innovation ecosystem often calling on the asset managers to invest in more tech startups and scaleups. 

In fiscal 2021, CPP Investments committed $386 million to venture capital, representing less than one per cent of its total portfolio, which at the time was just under $500 billion. (The fund manager didn’t disclose its venture capital allocation in its annual report for fiscal 2022.)

Pension analyst Keith Ambachtsheer pegs venture capital at about one per cent of Canadian pension funds’ total assets overall. He said risking more on the asset class during the downturn is not going to break the bank for these institutional investors. He said pension funds can’t ignore venture capital, given the growth potential of companies in the space and the potential returns on investments—there could be a future Amazon or Google in that one per cent of a pension’s portfolio, said Ambachtsheer. He also cited decreasing valuations for venture-backed firms as a reason to wade deeper into the VC market. 

Ontario Teachers’ Pension Plan started substantially increasing its exposure to venture capital even before the market downturn. In April, it announced it will more than double the size of its VC portfolio to represent between seven and 10 per cent of its total assets within the next five to 10 years. Its VC division, Teachers’ Venture Growth (TVG), has announced five investments so far this year in deals worth nearly US$900 million combined.

Olivia Steedman, senior managing director at TVG, told The Logic by email that the fund “is not exempt from the impact of current macroeconomic conditions,” but echoed Chance and Pedersen’s point that its VC portfolio benefits from being tied to a pension fund with a long-term investing horizon. “This is a challenging macroeconomic environment, but our strategy has always been to look to the long term,” said Steedman. 

Chance said the bearish market gives OMERS Ventures leeway for structuring deals, following a year in which many companies had negotiating power over investors for setting terms. He said the firm may consider follow-on investing at lower valuations than a portfolio company’s previous raise. The fund is also looking at buying and selling secondary funds, which allow investors to acquire shares in a private company from early investors instead of waiting for an IPO—the market for which has frozen. “There are more creative approaches,” said Chance. “The net-dollar velocity for us may remain similar … because we’re looking at different ways to structure deals.”

Correction: This article has been updated to clarify the value of venture capital investing by Canada’s largest pension funds, and that the PitchBook dataset included 10 funds.