Canadian pensions investing in Canadian companies: It's even worse than you think

Canada’s eight largest pensions, known as the Maple 8, are world renowned and envied for the Canadian Model. When other countries have looked to establish durable pension institutions, they have looked admiringly at the policy structure for Canada’s big funds.

The Maple 8 funds present themselves as independent, highly sophisticated investors deploying capital with strategic geographic and asset class diversification.

But ironically, while Canada is home base for these world-renowned investors, Canadian companies struggle to access growth capital here at home. 

On a close examination of the Maple 8 funds’ annual reports, we see that the interplay of asset diversification and geographic diversification are really compounding to starve Canadian high-growth companies of growth capital.

It’s impossible to get a complete picture of the pension funds’ holdings, because they do not disclose their investments in ways that allow for clear analysis. 

Typically the funds report broad investment allocations in bonds, real estate, public equity, private equity, and infrastructure.

None of these are a perfect metric for growth capital, but of these asset classes, it’s the private equity figures that most closely fits with venture capital investment and growth equity.

And by this measure, the funds are investing even less in Canada than the top line numbers would make it appear.

For example, the Canada Pension Plan Investment Board says that 12 per cent of their overall net assets are invested in Canada. But when it comes to private equity specifically, CPPIB discloses that only 1 per cent of their private equity asset class is invested in Canada.

The Healthcare of Ontario Pension Plan is an even more extreme example. The fund boasts an admirable 49 per cent of total assets under management invested in Canada. But if you look at the $24.2 billion private equity investments that HOOPP holds, only 1.6 per cent is in Canada.

HOOPP is also illustrative of another trend we see across many of the Maple 8 funds; it’s not just that they aren’t investing much in Canadian private equity, it’s also that their investments in this area have been falling.

In 2015, HOOPP reported 30 per cent of their private equity portfolio was Canadian, but that fell to 11.2 per cent in 2020, and then it kept falling to 1.6 per cent last year.

This matters because every time a high growth Canadian company sells equity to foreign investors in exchange for growth capital, that represents a slice of future wealth creation that will benefit foreign investors instead of Canadians.

And in the most extreme cases, Canadian innovators often get bought up by foreign capital, after they create something valuable, and before they hit their stride.

The Maple 8 pension funds can solve the problem by investing more domestically into Canadian venture and growth capital.