Head of Canada’s Largest Pension Warns Against Illiquid Assets

CPPIB CEO Mark Machin ‘rings the alarm bell’ about not being too invested in the asset class.

Canadian Pension Plan Investment Board (CPPIB) CEO Mark Machin warned investors against pouring their capital into illiquid assets, particularly private markets holdings, in an interview with Bloomberg at the World Economic Forum in Davos, Switzerland.

“I do ring the alarm bell on not to be too invested in illiquid assets,” Machin said. “We do have half the portfolio in illiquid assets. We are very comfortable with our risk models and what we would do in various lurches down markets, but I do worry about the expansion of a lot of funds like us around the world into private illiquid assets.

“I think people have to be very careful to make sure that they truly understand their liquidity positions, truly understand that thing they’re relying on to be liquid, turns out not to be liquid, that they can cope with that and still fulfill their fiduciary obligations.”

CPPIB’s investment portfolio returned 2.3% net of costs during the second quarter of fiscal 2020. That raised its total net asset value to C$409.5 billion ($307.4 billion) from C$400.6 billion at the end of the previous quarter.

Machin asserted that he and his team will continue to delve into private equity, given that the asset class offers attractive characteristics for CPPIB’s portfolio.

“The trends with private equity is still pretty robust,” Machin said. “When you look at different returns with asset classes, private equity’s still quite robust.”

Machin clarified that he doesn’t forecast a fall in the asset class anytime soon, but noted if a wide variety of investors were transitioning from public to private markets investments at around the same time, “it’s one of the things that could create a systemic issue down the road.”

Machin added that venture capital provides a clear avenue to disparage the information asymmetry that’s typically existed between investors and the companies that stay private for a little bit longer than anticipated.

“We find that by not being in some of those earlier companies, we’re a little less clear-eyed on those changes than we’d like to be. I wouldn’t say we’re blind to it, we have a lot of investment strategies that get closer to it. But getting into venture capital is one way that we hope we can partner with them to get insight on these trends.”

CPPIB’s illiquid portfolio includes a variety of holdings, including an Indonesian infrastructure investment executed last September, and a stake in an Indian logistics provider.

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