The Lack of Investment by Canadian Pensions in Domestic Assets is Exposing Companies to Foreign Takeovers
Canadian pensions are underinvested in the country’s public markets, starving domestic companies of capital and exposing them to foreign takeovers. This is the stark assessment made by François Carrier, head of capital markets at Desjardins Group.
The Problem with Canadian Pensions
According to Carrier, the lack of investment by Canadian pensions in domestic assets "sucks a lot of liquidity out of the market, which has an impact on valuations and your ability to grow and thrive as a public company." This is a sentiment shared by many business leaders in Canada. In March, over 90 business leaders signed an open letter to Finance Minister Chrystia Freeland and her provincial counterparts, urging them to change the rules for pension funds to "encourage them to invest in Canada."
The Impact on Canadian Companies
Several Canadian mid-caps have been swallowed up by foreign buyers this year. For example, steelmaker Stelco Holdings Inc. was bought by Cleveland-Cliffs Inc., and residential property owner Tricon Residential Inc. was acquired by Blackstone Inc. Carrier believes that when Canadian companies can’t access the right kind of capital and can’t achieve proper valuations, the door opens to aggressive acquisition offers, often from foreign companies.
Why Canadian Pensions are Underinvested in Domestic Assets
The country’s largest pension manager, Canada Pension Plan Investment Board (CPPIB), had only 12% of its capital invested in domestic assets as of March. This is a significant drop from the 70% investment in domestic assets in 2001, when CPPIB was a relatively new entity and Canada had rules that capped pension funds’ investments in foreign assets. Japan’s Government Pension Investment Fund allocates nearly a quarter of its portfolio to Japanese equities, which makes up only 5.1% of global equity market capitalization.
Solutions to Encourage Canadian Pensions to Invest in Domestic Assets
Former Bank of Canada Governor Stephen Poloz is now looking at ways to entice pension managers to invest more in domestic assets. Some solutions proposed include:
- Raising debt markets activity: Desjardins is ramping up debt markets activity for corporations, expanding beyond its traditional area of government debt.
- Improving capital access: Carrier believes that raising more capital "translates into better valuation, which makes for a more competitive stance on the M&A front, which then allows our Canadian issuers to thrive on global markets."
- Encouraging listing on the Toronto Stock Exchange: Apparel retailer Groupe Dynamite Inc. is in the process of listing on the TSX, while drugmaker Apotex Inc. is planning an IPO next year.
Conclusion
The underinvestment by Canadian pensions in domestic assets is a pressing concern for the country’s public market. If not addressed, it could lead to more foreign takeovers and expose companies to aggressive acquisition offers. The proposed solutions aim to encourage pension managers to invest more in domestic assets and improve capital access for Canadian companies.
References
- "Canada Pension Plan Investment Board (CPPIB) Annual Report 2022"
- "Japan’s Government Pension Investment Fund allocates nearly a quarter of its portfolio to Japanese equities" – Bloomberg
- "Desjardins ramps up debt markets activity for corporations" – Desjardins Group
- "Groupe Dynamite Inc. listing on the TSX" – Bloomberg
- "Apotex Inc. planning an IPO next year" – Bloomberg
