Public cash – how should we deploy it?Posted: October 11, 2012
While the debate over growing corporate cash holdings continues (see my previous post), I’m surprised that no one has looked at the other elephant in the room – Canada’s increasingly massive pension funds and how they invest.
For while Canadian corporations are being singled out for holding over half a trillion in liquid assets, Canada’s largest pension funds hold even more. For the purposes of discussion let’s limit the discussion to the five largest pension funds – the Canada Pension Plan ($166 billion), the Quebec Pension Plan/Caisse de Depot ($165 billion), Ontario Teachers Pension Plan ($117 billion), the Canadian Public Service Pension Plan ($65 billion), and the Ontario Municipal Employees Retirement Savings plan ($55 billion). Between them they hold upwards of $550 billion in total assets, of which only a portion is invested in Canada. Across these funds, equities represent between 20 and 40% of total assets, with the rest invested in mostly (Canadian) fixed-income and real estate. Canadian equities represent between 20 and 40% of total equity holdings, not a necessarily surprising figure given the size of the TSX in relation to what’s available south of the border and abroad. However given the debates about corporate cash, should we be having the same about public cash and the companies in which our long-term retirement savings are invested in?
Now, to be sure, the foreign-persuasion of our pension holdings is a positive thing, as it limits the inflationary impact of large purchases on Canadian public equities and real estate holdings, and provides significant exposure to external growth. However since we’re increasingly seeing strong evidence that the lack of financing for Canadian startups and the lack of investment in productivity-enhancing technologies are significant roadblocks to growth, it’s worth asking whether our savings should be more explicitly targeted.
A recent Deloitte report on Canadian productivity states: “per capita availability of (Canadian) venture capital funding has historically lagged the US, sometimes by more than twentyfold.” More important, Deloitte’s interviews highlight that “members of the start-up community suggested that this issue is driving some entrepreneurs to leave Canada for jurisdictions where capital is more readily available.” Estimates on the size of Canada’s venture capital shortfall range upwards of $1 billion, though for comparisons sake total venture capital investment in Canada hit $3.9 billion in 2001 before falling off a cliff to the $1 billion range between 2006 and 2011.
If potential high-growth firms, notably those in innovative, knowledge-based sectors, are leaving than we have reason to worry. Research by Enrico Moretti, the author of the New Geography of Jobs and professor at the University of California, finds that “each innovation economy job supports up to five jobs elsewhere – in other professional sectors and in the service sector. These halo effects are large because sectors like the digital economy are labour-intensive, well-paid, and tend to cluster – amplifying the benefits for those cities with clusters of innovation job.”
And thus if the current venture capital environment is insufficiently supporting Canadian high-growth firms, should pensions, given they represent the savings of Canadians, step in to fill the void?
Two Canadian funds (that I’m aware of) do have explicit venture capital funds. The Caisse de Depot (Quebec’s version of the Canada Pension Plan) operates the Fonds Manufacturier Quebecois, a $100 million fund established in 2006 geared towards investments in local manufacturing companies to help them compete globally. Eligible investments must export and must be focused on the development of innovative and/or transformative processes and manufacturing technologies. Certainly this focus on manufacturing is tied to the political incentives related to job retention in struggling sectors, however, as a recent Deloitte reports highlights, the Canadian manufacturing sector lags significantly behind its US counterpart in terms of productivity and investment. If such funds help companies circumvent reticence to invest in productivity-enhancing technologies than we should applaud such efforts.
More recently, the Ontario Municipal Employees Retirement Savings (OMERS) pension fund established OMERS Ventures – a venture capital investment mechanism with upwards of $180million at its disposal from 2011 to 2013 for investment in Canadian and American startups. Since its creation, OMERS Ventures has invested in Canadian startups such as Wave Accounting, Desire2Learn, and HootSuite. All three qualify as the type of high-growth firms that are central to rapid job creation (remember that only 4-7% of startups are responsible for over 50% of total job growth – these are the rapid job creators that need to be nurtured). Ensuring they have the capital to grow, without forcing them to sell out or go public, is key to capturing future employment and its associated spinoffs.
Given the funds available in the aforementioned big 5 Canadian pension plans, one might propose that they each allocate a small percentage of total assets to a Canadian Venture Capital Fund. If each matches OMERS, than the $1 billion shortfall immediately disappears.
Now there are certainly risks with such a publicly-funded approach. Canada’s foray into labour-sponsored venture capital in the 1990s failed in part due to the crowding out of private investment and in part due to the somewhat skewed incentives that these publicly-driven funds displayed. However by requiring matching private investment, one could alleviate such concerns, especially if managed beyond the purview of political aims (which the Caisse de Depot, for example, struggles to do).
Ultimately, these big pensions represent the savings of nearly 2/3 of Canadians. Allocating a small portion to investment in high-growth potential companies, notably those with a focus on product or process innovation, seems a relatively easy step to take to keep Canada in the game.
 From a different angle the Canadian Federal Government recently announced the creation of a similar $400 million VC fund though with little detail as to how it will be deployed.
 Since 2000, the American manufacturing sector’s productivity levels have grown at six times those of Canada.
The numbers on Canada’s big pension plans:
CPP – Canada Pension Plan
- $166 billion in assets; 18 million members
- Asset mix: 34% public equities (23% Canadian), 16.9% private equity, fixed income 32.7%, real estate 10.7%, infrastructure 5.7%.
- Top public holdings: Royal Bank ($707m), TDBank ($677m), Scotiabank ($537m), Progress Energy ($371m), Suncor ($366m), Barrick Gold ($330m), Potash ($318m), Goldcorp ($297m)
- Top private holdings: Alibaba (Chinese search), Dollar General and 99c Stores (dollar stores)
QPP – Quebec Pension Plan
- $ 104 billion in assets; 4 million members.
- Asset mix (unknown) – however the Fonds Manufacturier Quebecois / Quebec Manufacturing Fund allocates $200million to Quebec companies in the explicit goal of helping them compete and grow.
PSPP – Public Service Pension Plan
- $64.5 billion in assets; 565,000 members.
- Asset mix: 28.6% Foreign equity, 23.2% Real Return Assets, 22.4% Canadian equity, 15.8% Nominal Fixed Income, 10.0% Private equity
- Top public holdings: RBC, TD Bank, Scotiabank, Suncor, Barrick Gold, Potash, Canadian National Railways, Canadian Natural Resources, Goldcorp.
- Top private holdings: Revera Inc., Telesat Holdings, SCG Hotel, Infragas Norge, LoneStar Fund, Transelec, DP World Australia, Timberwest Forest Corp, Star SDL Investment Co, ACH Limited Partnership.
OTPP – Ontario Teachers Pension Plan
- $117 billion in assets; 368,000 members
- Asset mix: 40% fixed income, 38% public equities (21% CDN), 4% commodities, 19% real estate (84% CDN) and infrastructure.
- Top holdings: Emerging Markets Index Fund ($1.9bn), Multiplan (Brazilian real estate) $1.1bn, GNC holdings $742m, Hitachi $703m, Canadian Natural Resources Ltd $577m, Total SA $571m, Vodafone $544m, McGraw-Hill $543m, ACE Ltd $447m.
OMERS – Ontario Municipal Employees Retirement Savings
- $55 Billion in assets; 420,000 members
- Asset mix: 58% public markets (of which 68% in fixed income vs equities), 15% infrastructure, 14% private equity, 13% real estate
- Top public holdings (value): Pargesa Holdings ($168m), Royal Bank ($124m), TD Bank ($112m), Total SA ($75m), Bank of Nova Scotia ($72m), Exxon Mobil Corp ($71m), Microsoft ($66m), Apple ($66m), Suncor ($65m), Goldcorp ($65m), Roche ($65m), Philip Morris ($64m)
- In 2011 announced the establishment of a $180million (over three years) venture capital fund to be focused on Canadian and US startups.
HOOP – Healthcare of Ontario Pension Plan
- $40 billion in assets; 270,000 members
- Asset mix: 82% fixed income (93% CDN),1% public equity (of which 18.6% CDN), 5.5% real estate (of which 94% CDN), 2% private equity (41% CDN)
OPSEU Trust – Ontario Public Sector Employee Union Trust
- $13.3 billion in assets; 84,000 members
- Asset mix: 43% fixed income, 27.6% public equities (of which 42% CDN), 20.3% real estate and infrastructure, 5.2% energy commodities, private equity 4%.
- Top holdings (value): TD Bank $108m, RBC $85m, Scotiabank $63m, Telus $61m, Suncor $56m, CIBC $51m, Samsung $50m, Canadian Natural Resources $48m, Rogers $42m, Potash $33m, China National Offshore Oil Corp $27m.