Fund titans well-positioned to absorb near-term market swings
Canada’s large pensions are facing rising losses from real estate investments, according to a sector report by Fitch Ratings Inc., which concluded that fund titans are nevertheless well-positioned to absorb near-term market swings.
“Fitch believes Canadian pension fund investment portfolios will remain pressured by a challenging market backdrop, as the increased cost of debt and anticipated slower growth weigh on private asset valuations,” said Dafina Dunmore, senior director of the ratings agency.
However, she said the funds have “exceptionally strong liquidity,” which will provide sufficient cushion to absorb investment volatility and flexibility to work through troubled investments.
“They are not forced sellers of assets,” Dunmore said.
The ratings agency said it has not seen widespread private credit losses, though defaults are likely to tick up for the remainder of this year and into 2025 given higher debt service burdens for underlying borrowers and slowing growth.
“Pension funds that invest directly in private credit will be put to the test with respect to their workout capabilities,” Dunmore said.
“While further reductions to private equity are expected, Fitch believes the funds continue to be long-term investors in private assets,” the ratings agency said.
Various factors including the appetite for deals led some of the pension funds to become over-exposed to private equity within their larger portfolio of investments. Moreover, private equity plays generally require a high amount of leverage, which works to their advantage in a time of declining interest rates but becomes a drag when the debt is rolled over at much higher rates.
In May, BCI sold stakes in private equity funds to French buyout firm Ardian for more than US$1 billion. Ardian also bought a private equity portfolio valued at nearly $3 billion from Quebec’s Caisse de dépôt in 2022.
And late last year, CPPIB, which invests on behalf of the Canada Pension Plan, sold Ardian a diversified portfolio of limited partnership fund interests in mostly North American and European buyout funds for around $2 billion.